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                                                                                                                                            October 5, 2012 

 Hear the meaning within the word. -- William Shakespeare

In This Issue
Regional Events
Energy Commission Workshop
Presidential Election Guide
Owners/Users Snap Up Office Buildings
CRE Escaped Recession Collapse
Apartment REITS are Outperforming
Office Vacancies Decline
Strip-Mall Revival
Debt Rally Is Welcome News
Net Lease Properties Are Hot Commodity
Economic Downturn Cut Architecture Firm Revenue
Terrorism Risk Insurance
Growing Restaurant Chains Flock To Malls
Canada: One Nation & 2 CRE Markets
Investors Return to Tokyo
Hotel Construction Sees Comeback


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by Randyl Drummer 


Neither the continuing rise of Internet commerce nor the bumpy economic recovery will scuttle an expected rebound for retailers and shopping center owners, panelists agreed in an upbeat industry assessment at the ICSC Western Division Conference held recently in San Diego.


Reflecting a cross-section of disciplines -- from lenders to developers to chain store operators and mall owners -- panelists were clearly optimistic about the prospects for the sector over the next couple of years, fueled by a potent combination of strengthening tenant demand, retailer expansion and rising occupancies amid little new construction.


Meanwhile, low interest rates are likely to bring tremendous and sustained investment capital for acquisition and eventually, new retail development, experts said at the conference.


"We have issues, but as an industry, our best days are ahead of us," said panel moderator Patrick Donahue, Chairman and CEO of mall owner Donahue Schriber. "There seem to be tremendous capital flows into real estate, so there will be tremendous investor interest ... capitalization rates will likely remain low and maybe go lower."


"Retailers have flushed out a lot of the dead wood, and we've got solid retailers that are reinventing themselves. The next two to three years should be very productive if you have capital, product, and the people to execute," Donahue added.

(CoStar) Cycle Swings Upward



by Sanford Nax

Real estate economists and analysts have scaled back expectations for expansion of the U.S. economy and underpinnings of commercial real estate, but continue to forecast robust single-family home sales, the Urban Land Institute reported.

The survey conducted between August 21 and September 14 projects a 2% gain in gross domestic product in 2012 and 2013, and then climb 2.9% in 2014. The unemployment rate is projected to fall from 8.1% to 7% during the same period. Job creation should increase from 1.8 million this year to 2.4 million in 2014. All projections are less optimistic than they were six months ago, the institute said.

The more modest gains in employment caused analysts to scale back on office vacancy projections, while the retail sector should pick up steam and the industrial market is expected to expand slightly -- leading to lower vacancies. (Sacramento Business Journal)



The Power of Strategy -- Mastering 1031 Tax Deferred Exchange Concepts

Wednesday, November 7 -- 8:30 - 10:00 a.m.

Instructor: Bill Angove

REALTORS® and SAR Members $10/ All Others $15                    


In this popular class, Bill will enlighten participants in the many important advanced aspects of Internal Revenue Code Section 1031.  The class is comprehensive and covers all pertinent regulations and recent developments in the tax deferred exchange realm. His class is always entertaining and demonstrates Bill's knowledge as a qualified intermediary. The following items plus much more will be highlighted:  

  • 1031 Tax Updates
  • Vesting
  • How Long A Property Should Be Held
  • Seller Financing
  • Reverse & Improvement Exchanges
  • Parterships & LLC Issues
  • Like-Kind Property Options (Including Vacation Homes)

 Call Brian at 916-437-1210 to register or use this form.



Investment Forum
Tuesday, October 9 -- 7:30 a.m.
R.J. Grins In The DoubleTree Hotel
E-mail for additional information

ACRE Annual Luncheon Featuring "Residential Development -- The Next Wave"
Wednesday, October 17 -- 11:30 a.m. - 1:00 p.m.
The Citizen Hotel, Sacramento

BOMA Networking Luncheon Featuring Mayor Johnson

Thursday, October 18 -- 11:30 a.m. - 1:00 p.m.
Hyatt Hotel at 1209 J Street in Sacramento

Registration Information


Sacramento Real Estate Exchange

Friday, October 19 -- 10:30 a.m.
China Buffet in Citrus Heights
Call Ben Couch at (916)989-4652 for additional information

ACRE's Annual Developer Showcase
Friday, November 16 -- 5:30 - 8:30 p.m.
Hyatt Regency, Sacramento
Registration Information Coming Soon



If you own or manage commercial real estate, this bill has huge, positive ramifications for your business. ADA reform measure, SB 1186 (Steinberg/Dutton), which will curb lawsuit abuse regarding the Americans With Disabilities Act (ADA) while promoting increased compliance with disabled accessibility building codes, was signed by Governor Brown.

This bill is being hailed as the most comprehensive and significant reform to California's ADA Law. It passed the Legislature by a two-thirds vote. Currently, California has 40% of the nation's ADA lawsuits but only 12% of the country's disabled population. Among other things, this measure: prohibits pre-litigation "demands for money" by attorneys; puts into place new provisions to prevent "stacking" of multiple claims to increase statutory damages; reduces statutory damages and provides litigation protections for defendants who correct violations; and establishes priorities for the California Commission on Disabled Accessibility that promote and facilitate disability access compliance. The CalChamber and CBIA did the heavy lifting on this bill, as well as several others. (CBPA)




Governor Brown has signed an industry-sponsored measure, AB 1612 (Lara; D - South Gate), which requires government agencies to provide an estimated cost and benefit of compliance when proposing new residential building standards is sitting on the Governor's desk. Although the bill currently applies only to residential projects, the commercial real estate industry is very supportive of the measure, as it will force state regulators to start considering the impact of their decisions not just on the economy as a whole but on individual homeowners and businesses. (CBPA)




The Environmental Protection Agency has further delayed its plans to propose and then finalize a Lead Renovation Repair and Painting (LRRP) rule for potential lead-based paint hazards in commercial and public buildings.

By Dec. 31, 2012 the EPA will announce a public hearing to gather info on renovation activities and possible lead hazards in commercial buildings, and will hold the public meeting by July 31, 2013. NAR's efforts thus far, through letters to EPA and oversight from the Hill, have resulted in a significant delay in EPA's issuance of new regulations -- particularly because NAR has stressed the point that the agency lacks data on the nature and extent of lead-based paint hazards unique to commercial buildings. (NAR) Additional Information 




On Monday and Tuesday, October 8 and 9 in Sacramento, the California Energy Commission is holding a workshop to solicit input on the structure and direction of the future of energy efficiency programs for residential and nonresidential existing buildings -- better known as the "Energy Efficiency Program for Existing Buildings."

Industry input is imperative as recommendations regarding the requirements of these regs are intended to develop a program to achieve greater energy savings in the state's existing buildings. Achieving these goals will potentially require enormous efficiency improvements in both building construction and in the number of electric devices they contain.

Materials for review and more information about this effort can be found at the following website.
Sacramento representatives will be present at this meeting; however, it is very important that as experts and practitioners you provide them with overall and technical comments on these proposed rules. If our industry does not provide comments, these mandatory rules will potentially be written by individuals with no practical experience managing commercial properties. To participate directly, please pass along any comments you have to be included in the industry response to Matthew Hargrove.



CCIM Institute is pleased to offer the 2012 Election Guide on Commercial Real Estate Issues. As an organization, they do not support candidates or political parties. The guide is intended to be a resource to help voters make informed decisions prior to election day on Nov. 6, 2012.

This side-by-side comparison of the presidential candidates includes some of the issues most pertinent to the commercial real estate industry. The information collection process was solely through legislative staff research and analysis of the candidates and/or political party. View the Election Guide here.



by Sanford Nax

Real estate agents say more small business owners are capitalizing on relatively low real estate prices, motivated sellers and low interest rates to buy property rather than lease.

Such is the case in Roseville, where a medical group bought a 3,650-square-foot office building at 902 Cirby Way for $614,000. The buyer intends to operate a pediatrician office, said Tom Bacci, a Voit Real Estate agent who, along with colleague Jon Walker, represented the seller, Wells Fargo Bank. Another example is on Sun Center Drive in Sacramento, where a medical-billing company bought a 31,680-square-foot building for almost $2 million. Cushman & Wakefield handled that deal.

"Owner/users are especially active in the buying market as they take advantage of competitive pricing on higher-quality properties," Walker said. Health-related businesses are particularly active, and are leading the the way, especially in Roseville and Rocklin, Walker added.

The residential real estate market is showing signs of strength, but the commercial sector, with the exception of health care, is struggling. Voit's agents in Sacramento have directed six office lease or sale transactions totaling almost 47,000 square feet in the last several months and are seeing vacancies shrink in Roseville and Rocklin, but traction is still slippery.

"Office is a little more of a wild card," said Tyler Boyd, Voit's market research analyst. Meanwhile, single-family home starts, which have been near record lows, are projected to increase from 530,000 this year to 800,000 in 2014. Analysts expect home prices to increase 3.2% this year, 3.9%  in 2013 and 5% in 2014.

(Sacramento Business Journal)

by Jim Mark

Everyone has talked extensively about the recession and the impact on residential and commercial real estate. The residential market's problems are well documented and the resulting impact on the economy was devastating.

The commercial side of the market has been a little trickier and has not played out as many thought it would at the beginning of the "great recession."

The commercial sector did not fold like many thought it would. Both rents and occupancy decreased, but not in the same proportion as in past recessions. Tenants seemed to be "right sized" prior to this downturn and, unlike previous slowdowns, were not caught with huge amounts of excess space. Buildings did not get caught with huge vacancies as many had predicted. Across the nation we have seen rents start to "crawl" back to near pre-recession levels.

Commercial building prices did not collapse. Over the first 24 months the number of buildings sold dropped 90 percent from the highs in 2007 and 2008. Prices dropped as well, but this was a temporary phenomenon as the sellers were not willing to part with their buildings unless they absolutely had to sell. (Portland Business Journal)  Recession Collapse


by Bendix Anderso

The recovery has been very kind to real estate investment trusts (REITs) that focus on apartments, according to the latest report from Moody's Investors Service.

"We expect another four quarters of solid credit performance," says Chris Wimmer, Vice President for Moody's. He credits strong fundamentals for the good times, including high occupancy rates. On average, net operating income for apartments REITs has grown 5% year-over-year in each of the last six quarters, according to Moody's.
The stock market has responded accordingly. Stock prices for apartment REITS are now more than triple their lows in the real estate crash. That's much better than the improvement in the S&P 500, which has merely doubled, according to data from Marcus and Millichap.

So far, REITs have been using their money carefully. "The REITs have been judicious in their use of capital, funding new investments with equity or proceeds from the sale of older non-core assets," according to the Moody's report. "Additional supply will not become a widespread problem or a threat to REIT credit profiles in the near term... although growth will begin to level off." (NREIOnline) Apartment REITS



bOfficey George Ratiu

Broader job growth has been slowing through the half point of the year and going into the third quarter. Many companies have also put expansion plans on hold, waiting to see what happens in the national and local economies. Professional and business services have provided a silver lining to the trends, maintaining demand for office space on a positive curve.

Net absorption of office space-a measure of demand-is projected to be 7.6 million square feet in the third quarter, and close the year at 24.1 million square feet. In response, completions of new office buildings have been trailing behind, constrained by the tight lending conditions of the post-recession financial landscape. Supply of office space is likely to total 5.7 million square feet in the third quarter and 13.7 million square feet for 2012.
With a projected gap of 10.3 million square feet between demand and supply of space in 2012, vacancy rates have been declining. Office availability for the third quarter is expected to decline to 16.1%. The downward trend is moving national vacancies towards 16.0% by the end of the year. The local markets with the lowest availability rates are Washington, D.C., with a vacancy rate of 9.4 percent, New York City at 10%, and New Orleans, 12.8%. At the other end of the spectrum, Detroit, Phoenix and Las Vegas continue to slog it through rates above 25%. (Economist Outlook) Office Vacancies



by A.D. Pruitt

Strip-mall owners are dusting off projects that were shelved during the economic downturn, thanks partly to the expansion of discount chains like Wal-Mart, Target and Family Dollar.

Until recently, development has been sluggish in the retail sector, which has faced persistently high vacancy rates because of competition from Internet shopping and overbuilding during the boom years. Only five million square feet of new retail space was developed over the past 12 months nationwide, according to the International Council of Shopping Centers.

That is minuscule compared with the nearly 200 million square feet of retail space developed in 2006 during the peak of the market, according to ICSC. But activity is picking up.

Regency Centers, a subsidiary of Blackstone Group, recently revived mothballed shopping-center projects in suburban areas. Some are even pursuing new ground-up development. These projects are moving forward partly because some of the companies already owned the land or were midway through construction when the downturn hit. (Wall Street Journal) A Strip-Mall Revival


By Al Yoon & Eliot Brown

Commercial real estate lenders and borrowers are scrambling to capitalize on one of the strongest rallies in the debt markets since the financial crisis.

Buyers of commercial mortgage-backed securities are accepting yields on new issues as narrow as 0.85% point above an interest-rate benchmark, the lowest since 2007. They have accelerated their demand in the past few weeks because of the Federal Reserve's latest round of quantitative easing, which has ignited a firestorm of demand for riskier assets.

This higher demand for commercial-mortgage securities is enabling lenders to make more debt available at better terms to property owners. To be sure, the financing-parched commercial-property industry still faces a huge mismatch between supply and demand.

But the gathering strength of the CMBS market is welcome news considering the securities backed 40% of all commercial real estate lending at the market's peak. The market all but vanished during the early years of the downturn and has struggled to keep up with competition from banks and insurance companies during the recovery. (Wall Street Journal) Debt Rally


by Elaine Misonzhnik

September proved to be a busy month for the single-tenant net lease sector. Within a 24-hour period on Sept. 6, Realty Income Corp., an Escondido, Calif.-based REIT specializing in net lease properties, bought American Realty Capital Trust, which owns 501 mostly net lease buildings, for approximately $2.95 billion; then Lexington Realty Trust, a New York City-based REIT, announced it was acquiring a portfolio of net lease office and industrial properties from its joint venture with Inland American for $480 million.

As Nicholas S. Schorsch, Chairman and CEO of American Realty Capital, puts it: "You've got an asset class that's very durable, with no capital expenditures, long-term leases, corporate credit tenants and no operating expenses. So it makes it particularly appetizing as an investment profile. But more importantly, you've got interest rates that are historically low right now, so it's a very good dynamic-you can get very strong returns, while maintaining honest leverage."

The mega-transactions taking place indicate that institutional investors' voracious appetites for quality net lease assets have met with a dearth of supply and skyrocketing valuations on one-off deals, says Randy Blankstein, President of the Boulder Group, a Northbrook, Ill.-based real estate services firm focused on the net lease sector.

"Today it's very difficult to assemble large portfolios and buying whole companies is much easier from that perspective," Blankstein says. "You are not really buying the companies per se, you are buying portfolios, and I think you are going to see more of that." (NREIOnline) Net Lease Properties 



Since the beginning of the recession in early 2008, architecture firms have collectively seen their revenue drop by 40% and have had to cut personnel by nearly a third. Despite a national recovery from the recession in 2009, construction activity continued to spiral downward, according to the recently release 2012 AIA Firm Survey, now available for purchase at the AIA Store.

Total construction spending levels, which exceeded $1 trillion in 2008, fell to under $800 billion in 2011. As a result, gross revenue at architecture firms declined from more than $44 billion in 2008 to $26 billion by 2011, a 40% decline over this three-year period.

Such a significant reduction in firm revenue produced a comparable reduction in employment. Construction payrolls peaked in early 2007 and steadily declined through mid-2011 due to the housing downturn. Since then, there has been very little recovery. Positions at architecture firms have generally followed the path of the broader construction industry. Due to the heavy reliance of architecture firms on nonresidential construction activity, payroll positions continued to grow through mid-2008. But at that point they dropped sharply through early 2011 and have not recovered much since. Between 2007 and 2011, more than 28% of positions at architecture firms disappeared, more than erasing the 18% increase in architecture positions seen during the 2003-2007 upturn.

Other key finds from the 2012 AIA Firm Survey:

  • S Corporations are the most common legal structures at firms
  • The number of LEED APs on staff nearly doubled in the last three years
  • The share of firm billings from renovations, rehabilitations, additions, and other construction projects increased substantially in the last three years
  • More than two-thirds of international billings in the last three years were from projects in Asia, the Middle East, or Latin America (Architecture Digest) Architecture Firms See Revenue Drop

by Linda St. Peter 

We still live in an uncertain world and continue to fight the war on terror. Conflict in many countries across the Middle East and North Africa has increased political and social tensions, factors that suggest terrorism risk will be a constant and potentially growing threat for years to come. It is in the interest of America's economic security to ensure that as much of our commercial real estate industry is covered by terrorism insurance as possible.


Through my experience working on some of Connecticut's most significant commercial real estate projects over the past several years, I personally understand the vital importance of terrorism insurance to accomplishing the economic goals of Connecticut. I can tell you that if the terrorism insurance program were to expire, many of my firm's community development projects would not be possible.


It is no secret that immediately after the horrific 9/11 terrorist attacks, terrorism insurance coverage was virtually non-existent for commercial property owners. Only when Congress enacted the Terrorism Risk Insurance Act (TRIA) in 2002 did coverage for terrorist attacks resume.


TRIA established a public-private, risk-sharing partnership that allows the federal government and private insurance companies to share losses in the event of a major terrorist attack. Originally enacted as a three-year program, TRIA has been reauthorized by Congress twice. In 2005, Congress passed the Terrorism Risk Insurance Extension Act. The most recent extension - the Terrorism Risk Insurance Reauthorization Act of 2007 - extended the program through Dec. 31, 2014.


Today, there is concern that the uncertain future of TRIA may cause insurance prices to fluctuate. Further, this uncertainty may prompt insurers to drop terrorism coverage if a reauthorization of the program is not in place by the end of 2014. This became evident in 2005, when private insurers became more reluctant to offer terrorism coverage due to uncertainty regarding the program's extension.


Ultimately, the uncertainty of insurance pricing impacts our net operating income and the value of our properties. The potential unavailability of this coverage at the end of 2014 will impact our financing agreements and potentially hurt the fragile commercial real estate market. (MortgageOrb) Terroris Risk Insurance 



Restaurantsby Julie Jargon & Kris Hudsonant


Circuit City locations, Home Depot parking lots and excess space in Sears stores are finding new life as restaurants in a sign of how the sluggish economy is reshaping the commercial landscape.

The dearth of new-mall openings, coupled with an increase in spaces that have been vacated by struggling or defunct retailers, has presented a new opportunity for the few restaurant chains that are still expanding. Restaurants' push into shopping centers is at its highest point in at least seven years, according to real-estate research company CoStar Group Inc. Of new leases signed so far this year in U.S. shopping centers, 15.8% were for eateries, CoStar found, up from 11.1% in all of 2009 adding a total of 15 to 20 restaurants a year to the 165 malls it owns across the U.S.

The share of Chipotle's new restaurants that go into existing spaces increased to about 70% during the past three years, says a spokesman. He cites "significant slowdown in new development" across the country. "Shopping malls have stopped their lifestyle extensions, developers have largely stopped building two-tenant and multi-tenant buildings, and available takeover spaces have increased along with the economic slowdown," he says. (Wall Street Journal) Growing Restaurant Chains 




It's all about western Canada. You take western Canada out and we would be going backwards. Canada is one nation but these days it looks like two commercial real estate markets.

There is the west where demand continues to soar, aided but a booming resource market, and then there is the east, which continues to tread water as it attempts to keep a lid on vacancies.

"It really is black and white," said Ross Moore, National Research Director at CB Richard Ellis Canada, which will release its third quarter results next week showing a stark contrast between everything west of Ontario and the rest of the nation.

On the key measure of the amount of space absorbed by businesses in the third quarter -- considered the ultimate barometer of demand -- the west wins handily. In the third quarter the west absorbed 621,275 square feet of space while the east was a negative 154,872. Year-to-date about 3.2 million square feet of demand have been absorbed out west compared to about 682,000 in the east. The numbers are mirrored in the industrial space segment of the market. In the third quarter western Canada absorbed almost 4.5 million square feet while the east was negative 400,000. Year-to-date, the west has absorbed 8 million square feet of industrial space to the 2.7 million to the east. (Financial Post) Canada's Two Markets



by Kosaku Narioka

Hungry for yield and a safe haven amid Europe's woes, foreign investors are returning to an asset they once shunned: Tokyo property. Investors from Singapore state-investment firm Temasek Holdings Pte. Ltd. to Goldman Sachs Group Inc. are hoping Tokyo office rents, which have fallen for four years on the back of the global financial crisis, will rise as vacancy levels drop.

"We are positive about the Tokyo market," said Ian Hally, Chief Executive of Asia Pacific Real Estate at Aviva Investors, the fund unit of U.K. insurer Aviva PLC. He noted that vacancy rates are beginning to stabilize or even fall in some parts of the city. Another appeal of the market is that prices aren't as volatile as those in Singapore or Hong Kong.

In addition to stabilizing vacancy rates, land prices in some urban areas have begun to rise, which has some investors betting that it is only a matter of time before demand for offices also increases. Land prices rose in the April-June period over the previous quarter in 33 of the 150 urban areas surveyed by Japan's Ministry of Land, Infrastructure, Transport and Tourism. That is up from 22 in the previous quarterly survey. And rents in some grade-A Tokyo buildings rose this year for the first time in four years, the same survey showed. (Wall Street Journal) Tokyo Property Market



by Kris Hudson

Hotel construction, which dropped sharply during the economic downturn, has staged a modest turnaround, buoyed by building booms in New York as well as in small towns crowded with workers drilling oil-shale formations.

In the past four quarters, construction starts for U.S. hotels are up 32% by room count from the same period a year ago, and new-project announcements are up 22%, according to Lodging Econometrics, which tracks the hotel industry globally. Fueling the construction rebound are rising occupancy and room rates at U.S. hotels since 2009 and a willingness by more lenders to make hotel-construction loans, typically the most volatile and risky of commercial real-estate classes.

The average U.S. room rate of $105.53 in the first seven months of this year marks a 6.6% increase from the same period in 2009, according to Smith Travel Research. Average occupancy increased in the same span by nearly seven percentage points to 62.3%.

The pickup in hotel construction is a mixed signal for the industry. Although it is viewed as a sign that developers are confident about the economy's prospects and about consumers' willingness to travel, some owners of existing hotels worry that too many new hotels can lead to lower room rates in the future. (Wall Street Journal) Hotel Construction Up