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                                                                                                                                            October 19, 2012 

 

A wise man will make more opportunities than he finds. -- Francis Bacon

In This Issue
Education
Regional Events
Legislation
Real Estate Forecast 2013-2014
Healthcare Reform Sparks Interest
CRE Escaped Recession Collapse
Apartment REITS are Outperforming
Office Vacancies Decline
Land Sales Rising
Debt Rally Is Welcome News
Net Lease Properties Are Hot Commodity
Terrorism Risk Insurance
Strong Demand And Low Inventory Prop Up Q3 Seniors Occupancy
Investors Return to Tokyo
Apartment Owners Add Canine Amenities To Lure Tenants
European Banks Seen Selling Assets
Momentum In Canada Continues To Build

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COMMERCIAL VACANCY RATES ARE IMPROVING, BUT PROGRESS UNEVEN 
by Sanford Nax

 
The consensus among commercial real estate agents is that the worst of the Sacramento region's real estate downturn is past, with at least slight improvement in the retail, industrial and office sectors. But the recovery is spotty at best.


The office market is showing slow and steady improvement with three consecutive quarters of net gains, according to a report by CBRE Inc. This year, about 190,000 square feet more office space has been leased than lost, but the overall vacancy rate remains high at about 23.3%.


East Sacramento is lowest at 8.3% and the Campus Commons neighborhood is highest at 33.2%. At 29.3%, the Roseville/Rocklin area's vacancy rate also is high, but has dropped from the 30% range for the first time since 2008. That will decrease even further with this week's announcement that Sutter Health is leasing the former Hewlett Packard Co. regional headquarters and occupying 295,000 square feet. (Sacramento Business Journal) Commercial Vacancy Rates

 

SMALL BIZ SALES ON UPTICK IN CALIFORNIA 

by Mark Anderson
 
More businesses sold in the month of September in California than in the same month for the previous five years, according to the BizBen Index.

 

Some 1,232 deals closed in September, up nearly 23% over the 1,004 transactions in September 2011, according to the index.

"This is an encouraging sign, but it would be premature to say that the lagging marketplace where businesses are bought and sold is finally improving," Peter Siegel, Founder of BizBen.com, which produces the BizBen Index, said in a news release.


The rate of entrepreneurs buying businesses in California "has yet to recover from the precipitous drop in activity" following the banking crisis in 2008, when "it became so difficult to borrow money," he said. Additionally, business owners have been reluctant to sell when their companies have diminished values in this down economy.  (Sacramento Business Journal)

Diminished Values

 

EDUCATION

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.

 

REGIONAL EVENTS

IREM Mixer
Thursday, October 26 -- 5:30 - 7:30 p.m.
McCormick & Schmick's, Roseville
 
CREW November Luncheon -- Can't We All Just Get Along
Tuesday, November 8 -- 11:30 a.m. - 1:00 p.m.
The Firehouse Restaurant, Sacramento
 
Investment Forum
Tuesday, November 13 -- 7:30 a.m.
R.J. Grins In The DoubleTree Hotel
E-mail mmurphy@tricommercial.com for additional information

 

Sacramento Real Estate Exchange

Friday, November 16 -- 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

IS THE APARTMENT SECTOR COOLING?

The apartment sector posted its smallest vacancy decline in nearly two years, according to Reis Inc., a real estate research firm.


"For nearly two years apartment landlords have been able to boost rents and fill their buildings as Americans, either burned by the housing bust or unable to get a mortgage, turned to renting instead of owning a home," Reis News reports. "But rent growth ultimately depends upon significant job growth and rising incomes, and during the third quarter neither have come through."


The national vacancy rate inched down from 4.7% to 4.6% in the third quarter, which is traditionally one of the strongest quarters of the year, Reis reports. The dip was the smallest since the recovery began in early 2010.


"I think the market is getting so tight at this point that further declines in vacancy not supported by strong economic growth are just not going to be possible," said Reis Head of Research & Economics Victor Calanog.


Still, average asking rents continue to rise, inching up 0.8% in the third quarter to $1,090 per month, Reis reports. New York posted the lowest vacancy rate in the nation of the 79 markets that Reis tracks, and posted the highest average rent of $2,990 per month. (Realtor Magazine)  Apartment Sector Cooling?  

 

REAL ESTATE FORECAST 2013-2014 FOR COMMERCIAL PROPERTIES 

Commercial real estate will improve marginally in 2013. New construction activity will inch upward, opePrivate Office Constructionrating income will be a little better, and property values will level off. Later, in 2014 or 2015, operating income and prices will both rise, triggering increased construction.


The recession clobbered occupancy of office, industrial and retail space, which pulled rents down. Landlords suffered from lower revenues. In the slow recovery, new construction dwindled to nearly nothing. Current need for additional square footage was nil, and those developers who wanted to build for future demand found that lenders were hesitant to take much risk.


The current situation is that leases are dribbling in, generating small increases in occupied square footage. The current pace of construction is not only lower than in the boom, but well below historic averages. We know that given even middling economic growth, we'll eventually need to build at a much stronger pace. However, the high vacancy rates that are a legacy of the recession will limit new construction through 2013 at least.


Property values have done quite well despite lackluster tenant growth because of low interest rates. If one thinks of a valuation as future earnings discounted by some interest rate, then lower interest rates lead to higher property values. The best mortgage rates have been obtained on excellent properties: good cash flow and good tenants. For such deals, interest is so cheap that it's almost free. Properties of lower quality have a much narrower range of financing choices, resulting in higher interest rates. High quality commercial properties have appreciated by six percent in the past 12 months, with lower rates of gain for other buildings. (Forbes)  Forecast For Commercial Properties 

 

HEALTHCARE REFORM SPARKS INTEREST IN MEDICAL OFFICE 

The Supreme Court's recent affirmative ruling on the Patient Protection and Affordable Care Act reduces uncertainty among healthcare executives and could set the stage for increased medical office space demand, according to Marcus & Millichap's 2012 Medical Office Research Report.

 

However, new caps on Medicare spending growth are expected to put pressure on tenants' revenues and slow the pace of rent growth. "Nonetheless, owners of better-quality, performing medical office properties should enjoy stable returns over an extended period, as tenants tend to make significant investments in improvements and on-site equipment, discouraging relocations," the report says. (CCIM)  

 

CLASS-C APARTMENTS STRENGTHEN 

by Bendix Anderson


The last shall be first, according to the latest August apartment markets report from Axiometrics Inc. The multifamily research firm finds that effective rents for new leases at class-C apartment properties grew faster on average than at class-A and class-B properties.


 "We call it the filling in effect," says Jay Denton, Vice President of Research with Axiometrics. "Now that occupancies are getting better, class-Cs are getting some pricing power."


Overall, apartment rents continue to grow more slowly in the third quarter of 2012. Nationwide, apartment rents grew 3.7% on average over the last 12 months --down from 4% in the second quarter. "For five consecutive quarters the annual rate of growth-while still positive has slowed," according to Axiometrics. Average rent growth peaked at 5.1% in the second quarter of 2011. Axiometrics has now lowered its 2012 full-year forecast for effective rent growth to 3.6%, though it expects the rate to bounce back in 2013 because of improving job growth and renter household formation.

 
"We think we are in for a pretty stable run -- average 4% rent growth for the next three years," says Denton. This rent growth is still significantly higher than inflation, which makes it a pure bonus for property managers. Denton calls the slackening speed of rent growth "moderation ... back towards what a long-term growth rate would look like." (NREIOnline)  Class-C Apartments

 

DESPITE SLOW RECOVERY IN CRE, INNOVATION IS KEY TO LONG TERM GROWTH 

The U.S. commercial real estate (CRE) recovery, although slow, is visibly improved in fundamentals, capital availability, asset pricing and transactions, according to Deloitte's recently released Commercial Real Estate Outlook: Top 10 Issues in 2013 report.


While the global economic slowdown continues to hinder development, CRE players are finding growth in alternative mechanisms such as technological innovation.


According to Bob O'Brien, Vice Chairman and Deloitte's real estate sector leader, "Overall, we are seeing recovery in commercial real estate activity; however, the pace of recovery is likely to be more modest across several property types until the broader economy picks up. Sustainability is gaining a lot of traction in the real estate industry, and there is renewed interest in foreign investment, especially in emerging markets. In addition, investors from emerging countries like China are looking to the U.S. for stable investments."


O'Brien continued, "It is critical for CRE players to aggressively adopt technological innovation, like cloud computing, analytics and social media, to spur growth and maintain their competitive edge."

 
To see the top 10 issues in commercial real estate in 2013, click here. (Wall Street Journal)  

 

COMPANIES BULK UP AS HOMEBUILDING BEGINS TO RISE 
by Sanford Nax
 
As homebuilding increases, so too does work for those who serve the industry. Engineers are preparing more tract maps, cities are issuing more permits and land owners are selling more property.
 
Tony Frayji of Frayji Design Group, for example, is slowly expanding his business after cutting employees. He has hired a planner and an engineer in the last three months in anticipation of more growth.
 
"We may not need them 100 percent right now," he said, "But we need to position ourselves. It is an optimistic but cautious move."The demise of the housing industry clobbered engineering firms such as Frayji Design Group. Frayji's company went from 45 employees to seven. He's back up to 10 employees as the industry hopes this recovery is sustainable.
 
Some businesses can't yet afford to expand. The worst housing crisis since the Great Depression depleted bank accounts, forcing companies -- and cities -- to do more with less. "Everyone will stretch as far as they can, and then see what happens at the end of this year," Frayji said. (Sacramento Business Journal) Companies Bulk-Up
 
LAND SALES RISING FOR FIRST TIME IN SEVEN YEARS 

Land  by Mark Heschmeyer


Spurred by a strong multifamily market and a stabilizing single-family market, land sales are (finally) on the rise again. 


Through the first six months of this year, CoStar has tracked nearly $11.9 billion in land sales compared to $9.9 billion for the same time last year -- a 20% increase. Data collection for the third quarter is not yet completed, but already year-to-date sales are also well ahead of the first nine months of last year. 


To be sure, while the pace of activity is picking up, the total volume of sales is nowhere near the the peak market activity in 2006 when land sales totaled $62 billion a year. But on a pace that could see more than $23 billion in sales this year, 2012 is likely to be the first year since 2005 that the volume of land sales will have increased year over year. In addition, the volume is getting much closer to the 5-year average of $27.8 billion in sales annually. (CoStar) Land Sales Rising

 

BAY AREA REAL ESTATE RECOVERY CREATES PROPERTY TAX APPEAL OPPORTUNITIES 

by Cris K. O'Neall


The uneven recovery of the Bay Area real estate market over the past year has created opportunities for real estate owners to challenge their property tax assessments. Areas that have experienced the strongest growth, as well as markets in which the recovery is lagging, may be ripe for challenges to property tax assessments.

 
Under California's Proposition 13, property taxes are based on the purchase price paid for a property or on the cost of constructing the property. Thereafter, Proposition 13 caps value increases (and property tax increases) at 2 percent annually.
 
When property values decline, Proposition 8, the bookend to Proposition 13, requires county assessors to reduce taxable property values below Proposition 13 value caps to reflect current market conditions. As real estate values recover following a downturn, assessors restore taxable values back to Proposition 13 levels.


Over the past year or so, core Bay Area markets (primarily San Francisco and the Silicon Valley) have experienced strong growth in market rents and declines in capitalization rates, particularly as compared to other Bay Area real estate markets. Because of the brisk recovery in core markets, county assessors have aggressively moved to restore 2012 values, determined as of Jan. 1, 2012, back to Proposition 13 levels. (NREIOnline) Bay Area Recovery Creates Tax Appeal Opps
 

 

GUTSY INVESTORS ARE PROSPERING

by Eliot Brown 

 

As commercial-property values continue to rise in major cities around the U.S., gutsy investors who bought office buildings, hotels, stores and apartments when the commercial real-estate market hit bottom following the recession are making huge profits by selling them.


Values of top-quality properties, which fell 38% in the early years of the downturn, are now within 4% of the record highs hit in 2007, according to an index by real estate research firm Green Street Advisors Inc.
 
The increase in values is being fueled largely by ever-lower interest rates, which has made debt financing cheaper and helped push up demand for real estate by investors searching for investments with good yields.

 
At the same time, more credit is becoming available. At the beginning of the year analysts projected that $30 billion to $40 billion of new commercial mortgage-backed securities would be issued in 2012. Now some analysts are saying the figure could rise as high as $45 billion. (Wall Street Journal) Gutsy Investors Prospering 

 

RESEARCH ANALYZES LAND INVESTMENT RISK 

Real estate investors and mortgage lenders can benefit from recognizing the "inherent volatility" of land prices, according to an economic letter and research report issued by Stephen D. Oliner, Senior Fellow at UCLA's Ziman Center for Real Estate and senior economist for the UCLA Anderson Forecast.

 

For instance, at the height of the 2006 real estate boom, U.S. land (excluding farmland and land held by the government) had an estimated value of more than $17 trillion and represented about 40% of the value of commercial real estate and housing in the U.S. While a great share of that value deteriorated in the subsequent real estate market crash, UCLA's research examines the huge swing in land value over the recent cycle, indicating that land is indeed a high-risk investment.


The report advises that "lenders in all metropolitan areas should be conservative in lending against land value, especially after a large run-up in land prices. In addition, metro areas in which land represents a large share of property value are especially susceptible to booms and busts in real estate markets." (CCIM)  

 

STRONG DEMAND AND LOW INVESTORY PROP UP Q3 SENIORS OCCUPANCY 

Senior Residence by Robert Carr


Occupancy in the seniors housing industry is inching closer to the 90% threshold, moving up 20 basis points to 88.8% in the third quarter, according to a report released today by the National Investment Center for the Seniors Housing & Care Industry (NIC).


The report data was collected through the non-profit's NIC MAP data analysis service, which tracks more than 12,600 properties on a quarterly basis in the 100 largest metropolitan markets. This is the 10th straight quarter that occupancy has increased, rising from the cyclical low of 87% in the first quarter of 2010, according to the report.


Chuck Harry, NIC's director of research and analysis, says the industry is still far from the peak of the 91.9% occupancy seen in the second quarter of 2006. However, he says he sees occupancy hitting the 90% mark by early 2014.


"We're probably more than a year away from that level," Harry says. "We'll likely see movement up by 20 basis points per quarter for the next few quarters."Harry cited numerous reasons for the slow growth of the industry, with the sluggish housing and investment market topping the list. Both home prices and interest rates are down, and they typically serve as anchors that seniors could count on to help pay community fees. (NREIOnline)  Strong Demand Low Inventory

 

WHAT YOU NEED TO KNOW ABOUT INVESTING IN REITS 

by Dan Weil

 

Real estate investment trusts, or REITs, have outperformed both stocks and bonds in recent years, making this alternative asset class an essential component for any investor's portfolio, experts say.

A real estate investment trust represents the pooled funds of many investors, which are used to buy and manage income-producing properties. REITs trade on public exchanges, just like stocks. They invest directly in properties and are required to pay out at least 90% of their taxable income as dividends to shareholders. 


"Investors should absolutely have them somewhere in their portfolio," says Philip Martin, REIT Strategist for Morningstar in Chicago. "They are known for their dividends, but somewhat underappreciated in their growth component."

 

Some REITs, such as those that own office buildings, have cyclical ups and downs in line with the economy. In contrast, other REIT sectors, such as health care, have a more steady financial performance.


REITs offer diversification to your portfolio, as they're often uncorrelated to stocks, though they have become more correlated over the past nine years, says Mark Senseman, an investment specialist at Strategic Wealth Associates. Experts recommend allocating 5% to 15% of your portfolio to real estate investment trusts, depending on your risk tolerance and time horizon. (Fox Business) What You Need To Know About Investing

 

APARTMENT OWNERS ADD CANINE AMENITIES TO LURE TENANTS 
by Dawn Wotapka


Rental-apartment complexes throughout the country are replacing "No Pets" signs with dog parks and washing stations as they look for new ways to attract and retain tenants. While national statistics on no-pets policies aren't available, landlords and others throughout the industry say complexes are getting pooch-friendly these days as they deal with changing demographics and increasing competition from new construction.


Mark Humphreys, an architect who designs apartments for several of the nation's real-estate investment trusts, says 75% of the communities he designs include dog parks, up from 15% three years ago and zero a decade ago. The average size, 1,500 square feet, has more than doubled in the past three years, he says.

dogpark
Other landlords that used to only permit small dogs are adopting new warmer and fuzzier policies. For example, Landmark Apartment Trust of America, which owns more than 10,000 units in the Southeast, no longer limits dogs to no more than 10 pounds. "We could continue to say 'no' and lose them to our competitors," said Jay Olander, Landmark's Chief Executive. (Wall Street Journal) Apartment Owners Add Amenities 

 

EUROPEAN BANKS SEEN SELLING ASSETS  
by Anita Likus

European banks are expected to increase the volume of commercial real estate assets they bring to market as they prepare for new European Union capital requirements.

Banks are under pressure to reduce their property portfolios further under increased regulation. The so-called Basel III rules, which take effect next year, require banks to hold more capital against loans secured on commercial property.
 
Brokers and consultants who work closely with banks say that many of them have expanded their internal loan-workout teams and are restructuring real estate on an asset-by-asset basis. "We expect more workouts of loans and sales in the next few years," said Ajay Rawal, Senior Director at financial-services advisory firm Alvarez & Marsal, which advised the Spanish government on the design of the country's new asset management company, and helped the Irish government to set up its national asset management agency.

"The U.K. and Germany have seen a lot of activity from banks selling loans and assets because there is investor interest in the assets; Ireland has seen more portfolio sales and workouts as the banking system goes through restructuring and Spain is also an active market," Mr. Rawal said.

The increased activity is good news for investors who have been waiting for several years for European banking institutions to open the floodgates and start dumping distressed loans and properties. Until now, there has only been a trickle of asset sales despite the hundreds of billions of euros of commercial-property assets European banks have on their books. (Wall Street Journal) European Banks Selling Assets

MOMENTUM IN CANADA'S LARGEST BUSINESS CENTRES CONTINUES TO BUILD 
CanadaThe continued strength in Canada's real estate industry, along with the expectation of low interest rates in the medium term, should provide added appeal for investors looking for income-producing commercial real estate properties, according to BMO Economics.

The report notes that real estate development and management have been leading sectors in Canada's economy, both on the residential and commercial sides. Additionally, the industry has been an important driver of small business. Of the 5.2 million people in Canada employed in small business in 2011 -- firms with less than 100 employees -- 775,000 worked in the construction and real estate and rental industries.

"After a severe and protracted market downturn in the 1990s, the commercial real estate industry in Canada has been characterized by cautious development and prudent lending practices," said Earl Sweet, Senior Economist and Managing Director, BMO Capital Markets.

Mr. Sweet noted several factors that make the sector attractive for investors:
  • Supply is limited, with vacancy rates lower than historical norms across segments in many cities.
  • Risk-averse operations have helped to improve balance sheet performance of developers, construction firms, and real estate professionals.
  • Robust corporate performance -- along with lending discipline -- have maintained the quality of real estate loans at a high level.
  • Ultra-low interest rates have supported real estate development and prices in Canada. (Marketwire) Canada's Momentum