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WE ARE THANKFUL FOR YOU! WISHING YOU AND YOURS A WONDERFUL AND SAFE THANKSGIVING HOLIDAY  
                                                                                                                                        November 16, 2012 

 

People with many interests live, not only longest, but happiest. -- George Matthew Allen

In This Issue
Education
Regional Events
Legislation
Housing May Lift Commercial
Prepare For New Medicare Taxes in 2013
Apartment Market Dynamics
Economic and Jobs Outook Improves
Renter Pool Expected To Keep Growing
Are Traditional Grocer's In Trouble
How To Double Down on Trouble
New Space Option For Small Retailers
Fiscal Cliff?
Warehouse Development May Ramp Up
Multifamily Fundamentals
DSTs Open Options For Pooled Investments
Slow Growth In U.S.. Office Sector

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AN UNEVEN COMMERCIAL RECOVERY 

by Rob Freedman

 

Even as the fundamentals in the residential real estate market improve, the commercial sector is "hobbling to recovery," said NAR Chief Economist Lawrence Yun. Commercial real estate suffered "collateral damage" as a result of the residential collapse even though commercial was not plagued by subprime mortgages and lax underwriting standards that were prevalent with residential sales during the housing boom.


At the Commercial Real Estate Forum Friday during the 2012 REALTORS® Conference & Expo, Yun told attendees the commercial comeback is starting to take hold in transactions involving bigger properties worth more than $2.5 million. Demand for multi-family units is strong, as are price gains compared to the retail and office sectors. He estimated that rental property growth reached 6 million units over the past five years.


Yun pointed out that multifamily is the only commercial sector where rents are outpacing inflation. Apartment vacancy rates have been declining mostly due to young people who cannot obtain a mortgage, as well as families who went through foreclosure.


Commercial lending activity, Yun noted, has been severely hampered by the financial reforms in Dodd-Frank legislation since smaller banks that have handled much commercial activity in the past are far more burdened by the new regulations than larger institutions.


Also speaking at the forum, Calvin Schnure, Vice President, Research and Industry information at NAREIT, echoed Yun's predictions for the apartment sector. "Pent-up demand continues to drive the multifamily sector while new supply falls short," he said. "Market conditions for multifamily have tightened since the housing crisis." (REALTOR® Magazine)

 

NAR'S RPR COMMERCIAL -- FREE BENEFIT PROVIDES ANALYTICS
REALTORS Property Resource® (RPR®) is now available to all commercial REALTORS® across the country and is free of charge.

Commercial REALTORS® have specific requirements related to searching, property data sets, presentation, and customer reporting. The RPR Commercial application provides a single-source point of access for REALTORS® seeking robust, parcel-centric data. Search features include commercial, industrial, lease, vacant land, business opportunities, market potential and business analyses.  

 
Creating your account is simple. Make sure you have your NRDS ID handy, and then visit www.narrpr.com. For more specifically about Commercial RPR, visit here.

 

EDUCATION

The LEXICOLOGY (Word Study) OF COMMERCIAL LEASING 

Wednesday, January 16 -- 8:30 - 10:30 a.m.

Instructor: Bill Hunter

REALTORS® and SAR Members $15/ All Others $20                    

 

We're starting the New Year off right with another exciting and invigorating Bill Hunter seminar! This innovative and extremely informative class will address the fluidity (changes) within our business regarding the terminology and definitions used in commercial real estate lease transactions.

 

Bill will energetically dissect critical words and phrases that are often misunderstood, wrongly used, involve ambiguities or have multiple meanings. To help attendees understand the evolution of these words, audience participation and experiences will be highly encouraged. Time permitting, the following terms and expressions will be covered: 

      • Estoppel
      • SNDA
      • CPI
      •  Mini-Max
      • Going to Market
      • Pre-emptive Rights
      • NNN
      • Operating Expenses
      • Pass-throughs
      • Taxes; Assessments
      • Consequential Damages
      • CAM
      • Temporary Taking
      • Extension; Renewal
      • Addendum; Amendment
      • Unreasonably Withhold
      • As-Is
      • Tenant at Sufferance
      • Integration
      • Offset Rights
      • 3-day Notice
      • LOI
      • Quiet Enjoyment
      • TIs
      • Work Letter
      • Trade Fixtures
      • Joint and Several
      • Change of Ownership
      • Sublease; Assignment
      • Notice of Belief of Abandonment
      • Exclusive Use
      • Co-Tenancy Clause
      • Memorandum of Lease

This is a one-time class. For all those involved in commercial real estate, this is one that you ABSOLUTELY must attend. Bill never, ever disappoints. Increase your knowledge and your professionalism....register today!!!! 


Call Brian at 916-437-1210 to register. Registration form coming soon.  

 

REGIONAL EVENTS 

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

ACRE Holiday Networking
Wednesday, December 5 -- 5:30 - 7:30 p.m.
Purgatory Restaurant & Nightclub on J Street, Sacramento
 
ULI's Real Estate Outlook 2013: Emerging Trends Report
Thursday, December 6 -- 7:30 - 10:30 a.m.
Sutter Club, Sacramento

 

Investment Forum
Tuesday, December 11 -- 7:30 a.m.
R.J. Grins In The DoubleTree Hotel
E-mail mmurphy@tricommercial.com for additional information
  
CREW Holiday Event
Wednesday, December 12 -- 4:00 - 6:00 p.m.
Revolution Wines, Midtown
Call Gery Dough at 916-458-6410

 

LEGISLATION

GOVERNOR PRIORITIES

 

Two days after the election, Governor Brown held a press conference to discuss the results. When asked by reporters, he initially said no tax increases without a vote of the people, but would not commit to a veto of any tax increases sent to him by the Legislature. The Governor also said tax reform should be considered. Governor Brown said the following are his five priorities for next session:

 

1. Calibrate our regulations to balance competing interests

2. Water

3. High-speed rail

4. Education - evaluation, standards, and testing

5. State budget - new budget coming in January (CBPA)

 

STATE ARCHITECT ISSUES DRAFT REWRITE OF ACCESSIBILITY STANDARDS

 

The Division of the State Architect (DSA) has released to the public draft building standards for disabled accessibility in commercial and government buildings. As reported earlier, DSA has decided to rewrite California's Disabled Accessibility Standards, using the Federal Department of Justice regulations as the basis for our state regulations.

 

DSA's rewrite includes amendments to DOJ's regulations where California's current standards are more stringent. Over the past 8 months, we have participated in DSA stakeholder meetings throughout the state and provided comments. On September 25-27, the Building Standards Commission (BSC) conducted a 3-day set of hearings to review the initial proposal. The draft regulations released on Friday (10/26) incorporate the changes suggested by BSC's Advisory Committee. The public has until December 10th to review and provide comments on this regulatory proposal. Click here to read and comment.

 

The BSC is expected to adopt this regulatory package at a 2-day hearing on January 9th and 10th with the changes taking effect statewide on January 1, 2014. (CBPA)

 

A RECOVERY HOUSING MARKET MAY LIFT ALL BOATS -- INCLUDING COMMERCIAL REAL ESTATE 

by Sara Drummond


"When Warren Buffett and Sam Zell comment about distressed single-family homes being one of the best investment opportunities in the market, people tend to listen,"says Ken Wimberley, CCIM, Managing Director of Noble Crest Property Group/KW Commercial in Arlington, Texas. "We are seeing strong sales as a result of investor purchases for single-family residential homes."


Like most CCIMs, Wimberley doesn't work in the residential market, but as a KW Commercial affiliate, he has a strong relationship with its residential division and keeps abreast of housing trends and how they affect the commercial market.


One of the strongest trends to come out of the residential market this year is the investor interest in single-family homes. Home sales are up 6 percent this year, and about 30% of all sales are cash, says Kevin J. Thorpe, Chief Economist for Cassidy Turley, meaning that some investors are parking their money in residential.


From local mom-and-pop investors to private equity funds such as Colony Capital, which owns about 3,600 single-family homes, investors have turned to residential, and for those who got in early, it's beginning to pay off. In September, existing home sale prices rose for the seventh consecutive month year over year, according to the National Association of REALTORS®. That number of back-to-back monthly increases hasn't happened since the height of the housing boom from November 2005 to May 2006, says Lawrence Yun, NAR's Chief Economist. (CCIM) Residential Resurgence

 

PREPARE FOR NEW MEDICARE TAXES IN 2013 

Medicare  

by Stephen Fishman

 
With President Obama's victory at the polls, it is now clear that Obamacare is here to stay. So far, we've experienced only the easy parts of the massive health care law, but starting in 2013, the hard parts will begin to take effect. In particular, two additional Medicare taxes will kick in. These tax increases will affect only high-income taxpayers: married couples with adjusted gross incomes over $250,000, and singles with AGIs over $200,000.


This is a tiny percentage of the population -- only about 4% of all taxpayers earn more than $200,000. However, the one-third of taxpayers who itemize could be affected by the more restrictive limits on deducting medical expenses.


Everyone who works -- whether a business owner or an employee -- is required to pay Social Security and Medicare taxes. Employees pay one-half of these taxes through payroll deductions; the employer must pony up the other half and send the entire payment to the Internal Revenue Service. Business owners must pay all of these taxes themselves. These taxes consist of a 12.4% Social Security tax up to an annual income limit, and a 2.9%  Medicare tax on all wage or net self-employment income.


Starting in 2013, the 2.9 percent Medicare tax will go up by 0.9%. However, this increase will apply only to married taxpayers with wages or self-employment income of $250,000 and single taxpayers with incomes of $200,000. Only the amount over these thresholds is subject to the additional 0.9%tax. (Inman News) Medicare Taxes

 

APARTMENT MARKET DYNAMICS LOOK STRONG FOR NEXT TWO YEARS 

By Mark Heschmeyer


Apartment markets continued to improve across all areas of the country for the seventh quarter in a row, though the pace of improvement moderated, according to the National Multi-Housing Council's (NMHC) Quarterly Survey of Apartment Market Conditions. Still, the NMHC said the outlook is for continued strength in the multifamily sector for the next two years.

 

NMHC's survey measures market tightness, sales volume, equity financing and debt financing, all of which measured at 50 or higher, indicating growth from the second quarter.

 

"Even after nearly three years of recovery, apartment markets around the country remain strong as more report tightening conditions than not," said NMHC Chief Economist Mark Obrinsky. "The dynamic that began in 2010 remains in place: the increase in prospective apartment residents continues to outpace the pickup in new apartments completed. While development activity has picked up considerably since the trough, financing for both acquisition and construction remains constrained, flowing mainly to the best properties in the top markets."

 

As residents continue to lease more apartments at higher rents, investors are pursuing multifamily acquisitions in increasing numbers. According to CoStar Group, multifamily sales are the only property type to report year-over-year gains in sales volume. The total dollar value sold in the first nine months of 2012 is up 20% over 2011 at $53.41 billion vs. $44.62 billion. (CoStar) Apartment Market Dynamics

 

ECONOMIC AND JOBS OUTLOOK IMPROVE 

In October, the U.S. added 171,000 new jobs, many of which were in sectors that drive demand for commercial real estate. In addition, consumer confidence reached a five-year high, leading Cassidy Turley to call for "measured optimism" in its November 2012 U.S. Employment Tracker report.


Despite looming fiscal policy issues, consumer demand for homes, electronics, furniture, and cars has picked up, according to the report. The increased demand has been pushing up factory orders since August, which could force businesses to use some of their record-high cash balances to bolster their payrolls. (CCIM ) Read the Full Report

 

RENTER POOL EXPECTED TO KEEP GROWING 
Between now and 2015, Freddie Mac's Multifamily Research Group forecasts that there will be 1.7 million new multifamily renters due to the sluggish economy, high foreclosure rates, changing demographics, and the struggle of qualified home buyers.


Meanwhile, since 2007, the single-family rental market also has grown, increasing 16% since that time and signaling that rental demand is popular across housing types.


"The research supports the optimism that currently pervades the multifamily market," says David Brickman, Senior Vice President of Freddie Mac's multifamily group. "It confirms that multifamily is a bright spot in the real estate market and the economy more broadly, and it will likely continue to shine for quite some time." (Freddie Mac) 

 

ARE TRADITIONAL GROCER'S IN TROUBLE?  

Grocery Store

by Susan Piperato


Today's grocer market is fiercely competitive, requiring constant innovation to survive, according to panelists from three of the most successful chains -- Trader Joe's, Aldi and Walgreens, which now sells groceries at its pharmacies -- at NREI and RetailTraffic.com's National Net Lease Investment Conference, held in Chicago earlier this month.


Although the traditional grocer used to be an anchor store, that situation is rapidly changing, said panel moderator Matthew M. May, President of May Realty Advisors, based in Los Angeles. He noted that even gas station chains like Kroger in California are adding grocery sections to pull in more customers.


"As the economy has gone south, people have been trying to figure out how to spend their almighty dollar and to stretch it people have been shopping around. That's caused real havoc in the traditional grocery store market," said Michael F. Mallon, President and Principal of Mallon and Associates Inc., a Chicago-based retail real estate firm specializing in grocery stores that is currently a development partner with Aldi. "We've owned this market for 100 years, with 300-plus stores and 70% market share. But in last five years, our market share is down to 30%."


According to Mallon, because there is limited growth in the marketplace, more players coming in and more opportunities for people to buy groceries elsewhere, "That affects value in grocery-anchored shopping centers.... The traditional grocer is in trouble." (NREIOnline) Traditional Grocers
 

HOW TO DOUBLE DOWN ON COMING TROUBLE 

by Meg White


One in eight banks is in real danger. There's a wave of foreclosures coming to the commercial sector. Oh, and that recovery everyone keeps talking about? It's probably going to take a decade.
These are among the troubling pieces of news Gary Ralston, CCIM, CPM, CRE, Coldwell Banker Commercial Saunders Ralston Dantzler Realty in Lakeland, Fla., impressed upon attendees at the 2012 REALTORS® Conference & Expo in Orlando. But his main message was not one of doom and gloom. He was there to explain to commercial real estate practitioners how to take advantage of coming market swings.


Ralston said that the reason for the potential wave of foreclosures is that banks are restructuring commercial loans without attacking the problem of overvalued properties, a practice he called "extend and pretend."


"A great deal of this problem has been pushed down the table," he said. "Just hoping it's going to get better isn't going to fix anything." Ralston said that a sizable chunk of these "pretend and extend" mortgages will be maturing between 2015 and 2017, at which point real estate agents can be in a good position to get involved.


Ralston explained that real estate professionals who are in a position to be "able to organize capital and be able to buy the loan from the bank" have two options in acquiring foreclosed commercial buildings. In cases where the building management or owner is the one losing the money, they can foreclose on the property and own/operate the building themselves. Or, as a financial entity that is not under the same regulations as an insured depository institution, Ralston said the restructuring can be done in a more sustainable, profitable way than the bank could accomplish.(REALTOR Magazine) Double Down Trouble

 

A NEW SPACE OPTION FOR SMALL RETAILERS 

Sanford Nax

 

The recession has been tough on retailers, and tenants kept bailing on Shelly Gantenbein and the 60-year-old 5,000-square-foot building she owns on Folsom Boulevard in East Sacramento.


So she started thinking out of the box. Actually, she carved up the box -- into 12 spaces that she rents to home-based and other small businesses that can't afford a traditional storefront lease.
She charges $500 to $700 per month for the 100-square-foot spaces. She also has eight other areas that artists and others can rent for Second Saturday or other special events -- or any other time -- for $50 per day for up to four days. She also rents out a community room in the rear for classes and other events.


The tenants include jewelry makers, prom dress vendors, and purveyors of bike parts, handbags and scarves, and even food. The building formerly housed The Beat and most recently Mad Cat Bicycles. It will be unveiled Nov. 7 as East Sacramento Mercantile.


Gantenbein said she did the $40,000 makeover after three years of study. "I decided why not invest in small businesses that need help," she said. The makeover also spreads the risk -- if a tenant goes out of business she's got 11 more still paying rent. "I'm not out the whole enchilada; I'm out only 100 square feet," she said. (Sacramento Business Journal)

 

HOW MUCH OF A THREAT IS THE FISCAL CLIFF? 

Fiscal Cliff

by John W. McCurry

 

As the US economy inches closer to January 1, so comes yet another doomsday scare. This one the so-called "fiscal cliff," the ominous package of tax increases and spending cuts tied to a corresponding reduction in the budget deficit. But is it a harbinger of economic calamity, or will a deal be forged to avoid it?

 

Some observers are optimistic about a pre-precipice deal while others are more skeptical.

"They'll solve it and there won't be a fiscal cliff," says Joel Ross, Principal at Citadel Realty Advisors. "You can't have it happen and everyone knows it. At the end of the day if they really do go over the cliff, everyone in Washington gets obliterated. The voters will go nuts. Europe will go nuts. It will not happen." Negotiators won't be starting from scratch.

 

Ross says behind-the-scenes negotiations have been pursued over the past several months between the business community, Wall Street and the Obama Administration having laid the groundwork for possible deals that may take on some aspects of the Simpson-Bowles plan to deal with the national debt. Ross says Democrats and Republicans know what needs to be done, but it's a matter of hammering out a deal in such a way that all involved can save face.

 

Bob Knakal, Chairman of Massey Knakal Realty Services, says going over the cliff would play all sorts of havoc with the economy. Taxes would rise, and that would negatively impact job creation and GDP growth would be slowed. "It would negatively impact every underlying fundamental of commercial real estate," Knakal says. "Layer on top stalled economic growth, and you are heading into another recession. The likelihood of a recession is much higher today than it was a year ago and this would just be another straw."

 

Knakal is hopeful but not quite as positive as Ross that there will be a resolution by the end of the year. He says if real estate deals were negotiated in full public view the way politicians negotiate debt deals, nothing would ever get done. (Globest.com) Fiscal Cliff? 

 
WAREHOUSE DEVELOPMENT MAY FINALLY RAMP UP AS SUPPLY OF BIG BOX SPACE RECEDES 
by Randyl Drummer


Demand for U.S. warehouse space continued to putter along in the third quarter, with companies making fewer leasing decisions in the face of mixed economic signals that include lackluster job growth in manufacturing and other sectors impacting industrial real estate.


However, the lack of robust absorption in recent quarters hasn't stopped developers from dipping their toes back into the warehouse market to fill a heightened demand for big-box warehouse space, with about 47.1 million square feet of total warehouse projects under way in 86 markets, up 3% over last year.


The tepid market response went with an unexciting 17.4 million square feet of positive net absorption of warehouse space in the third quarter, a decline from the second quarter's 25 million square feet -- which itself was revised downward by 10 million square feet -- and down from 36 million square feet at the same time a year ago, according to CoStar's Third Quarter Industrial Review and Outlook.  


The national vacancy rate for warehouses fell by a scant 10 basis points to 9.2% in the third quarter, but is down 70 bps from the same period last year, according to the CoStar presentation, which had to be rescheduled last week due to Hurricane Sandy. (CoStar) Warehouse Development

 

MULTIFAMILY FUNDAMENTALS DO NOT FACE A CLIFF

by Victor Calanog


Much has been written recently about potential risks to overbuilding in multifamily. Demand for apartments will remain strong, and will rise further if economic growth quickens.


Apartment fundamentals have bounced back robustly since the recession ended in June 2009. Despite middling economic growth, the national vacancy rate dropped sharply from a peak of 8% at the end of 2009 to 4.6% in the third quarter of 2012. Vacancy rates that are this low have not been observed since late 2001.


Asking and effective rents have risen for 11 consecutive quarters and in many areas have surpassed previous peaks achieved in the third quarter of 2008, before the fall of Lehman Brothers. Landlords face little pressure to offer concessions given how tight rental markets are in most places.


Construction also remains tight, with less than 37,000 units coming online over the last three quarters of 2012. An additional 18,000 units are expected to open their doors in the fourth quarter; that adds up to about 55,000 units for the year, a slight increase from 2011 but well below the 125,000 annual average from 2000 to 2009.


Earlier in 2012, there were signs that construction would spike in 2013, in the order of 150,000 to 200,000 units. Developers have since postponed many projects to 2014, so that 2013 figures hover closer to 130,000 units-not far off from the pre-recession 10-year average. The "bubble" now shows up in 2014, but if economic growth ramps up by then. (NREIOnline) Multifamily Fundamentals

 

DSTs OPEN OPTIONS FOR POOLED INVESTMENTS

 By Bob Yovovich

 
Finding ways for multiple investors to join forces and buy net lease assets has been a challenge for the sector. The tenant-in-common structure used in the boom years has fallen out of favor. But now Delaware statutory trusts (DSTs) are becoming a popular option for investors.


In real estate, DSTs are formed as private governing agreements under which a property or several properties are held, managed, administered, invested and/or operated for profit by a trustee for the benefit of the trustor. Interest in DSTs has grown over the last decade, and especially following IRS rulings in 2004 that increased its advantages in connection with tax deferral, asset protection, and balance sheets.


Panelists at NREI and RetailTraffic.com's National Net Lease Investment Conference, recently held in Chicago, offered a general overview of DSTs and provided a detailed discussion of how DSTs can dovetail effectively with net lease investments.


The panel discussion opened with Thomas B. Jahncke, Senior Vice President at PassCo Capital, posing the question: "Why are we talking about DSTs at a conference on net lease properties?" He then proceeded to begin to answer the question by outlining the advantages that they can provide.
"Lenders like them because you have one borrower that you are dealing with-the trust-and usually the sponsor is the trustee," Jahncke said. "The investors have the advantage that there is no recourse, no involvement in management."


However, Jahncke noted, there are negatives as well. Investors don't have as much say on the operation of properties. "The sponsor decides when to sell and how to run the properties," he said. "There are tradeoffs, but investors today appreciate the DST for the tradeoffs, more than in the past." (NREIOnline) DST Open Options

 

SLOW GROWTH IN U.S. OFFICE SECTOR

Growth by Carisa Chappell


Amid slow job growth and a struggling economy, office REITs have struggled to gain ground since the onset of the recession. However, despite underperforming the broader REIT market, office REITs are generating stronger returns than a year ago as sector fundamentals improve.

 
Year-to-date total returns for office REITS through Nov. 8 were 12.63%, according to data from the FTSE NAREIT U.S. Real Estate Index Series. During the same time period in 2011, office REITs provided investors with total returns of 1.90%. Equity REITs had returned 16.53% in 2012 through Nov. 8.


Jason Lail, Manager of the real estate research group at SNL Financial, said the sector currently has the lowest vacancy rate since the end of 2009. Vacancies ticked down in the third quarter of 2012 to 17.1 percent from 17.2 percent in the second quarter.


"Based on data from a Reis Inc. report, the rents also rose to $28.23 per square foot in the third quarter from $28.17 per square foot," Lail said. "Year over year, asking rents grew by 39 centers per square foot."


Jobs are expected to continue to play a large role in the performance of the office sector. The U.S. unemployment rate was 7.9 percent at the end of October. "Slow labor market growth in 2012 has led to little new demand for office space, which inhibits office owners from enjoying higher rent levels and has somewhat counteracted the positive effect of minimal new supply coming online in 2012," Lail said. (REIT.Com) Slow Growth In Office Sector