SAR Commercial Report

Some big leases signed in the fourth quarter of 2012 will finally move the office vacancy rate in the Sacramento region down significantly -- with the payoff coming in the first quarter when the tenants move in.

Six deals in the fourth quarter combined for 673,000 square feet, which includes 294,323 square feet by Sutter Health in Roseville and Sutter's 106,592-square-foot lease at Mather Field. Three big state deals totaled more than 210,000 square feet in offices in Natomas, Point West and downtown.

While the new leases weren't signed in time to sway the fourth-quarter vacancy rates, they left many commercial brokerages optimistic for the start of the new year.

"Nowadays we are just happy when the vacancy rate isn't going up," said John Frisch, Senior Vice President and Regional Managing Director in Sacramento of Cornish & Carey Commercial Newmark Knight Frank. "The increase in vacancy stopped going up in 2012. It's a good sign."

The region's fourth-quarter office vacancy rate was 23.44%, nearly identical to the 23.38% rate from the year before, according to Cornish & Carey Commercial Newmark Knight Frank. The office vacancy rate ended 2010 at 22%.

(Sacramento Business Journal)

BE SAVVY WHEN CHOOSING A SITE FOR YOUR SMALL BIZ

Dorsey Kindler

Location is everything when starting a new business. And now may be the best time to lease prime commercial real estate with a minimal outlay of cash, according to Sacramento commercial real estate professionals.

"Rents have dropped considerably because of the stagnant economy," said independent broker Scott Reynolds. "If you're a retailer looking for traffic, don't worry about saving money by going into a strip center. Go for the neighborhood center or mall."

While pedestrian traffic is less of a consideration for non-retail businesses, location is still an important variable. And knowing the area is crucial. You wouldn't open a pricey boutique on Del Paso Boulevard. Nor would a budget-priced attorney want to locate to a pricey downtown office building.

(Sacramento Business Journal)

EDUCATION

Commercial Loan Agreements and Disagreements: Understanding and Negotiating Your Commercial Real Property Loan Next Week!

Wednesday, February 6 8:30 - 10:00 a.m.

Speaker: Kevin M. Dollison, Esquire

Cost: $15 SAR Members/$20 Non-Members

Join us for our newest information-packed course, which focuses on commercial real property loan transactions. Our speaker will dissect a commercial loan agreement and provide practical examples of what a successful loan agreement should entail. Kevin will also clarify the significance and impact of various loan documents and offer recommendations for negotiation with your lender. Finally, typical terms and conditions that can sometimes haunt borrowers well after the loan closing (if overlooked) will be covered. This class will include:

Types of Commercial Real Property Loans & Letters of Intent
Commercial Loan Agreements and Related Documents
Loan Defaults and Enforcement

Making his debut appearance at SAR, Kevin Dollison is a top-notch expert in the field and will share his expertise to help your deals happen with ease and finesse. Make the commitment to your clients and enhance your professionalism. Register today! Call Brian at (916) 437-1210 to register or click here.

Recent Liability Law Impacting Commercial Practitioners

Commercial Lunch & Learn

Wednesday, March 6 -- 11:30 a.m. - 1:00 p.m.

Speaker: Christopher Hanson, Esquire

Cost: $15 SAR Members/$20 Non-Members

This lunchtime event will include a review of cases involving liability for brokers, disclosure obligations to non-clients, insurance coverage and denials for E&O claims, and deficiency liability for borrowers on foreclosed out debt. Time will be allotted for Q & A. One thing is for sure, no matter what the title of the seminar, it won't be boring! Register early by calling Brian at (916) 437-1210. Save your spot and reserve your lunch today! Registration Form

Save the Date!

Review of the C.A.R. Commercial Purchase Agreement with Bob McCormick, Esquire

Wednesday, March 20 -- 10:30 a.m. to 12:30 p.m.

REGIONAL EVENTS

Investment Forum

Tuesday, February 12 -- 7:30 a.m.

R.J. Grins In The DoubleTree Hotel

mmurphy@tricommercial.com for additional information

CREW Awards Program
Thursday, February 14 -- 11:00 a.m. - 1:00 p.m.

Del Paso Country Club

Information and Registration

Sacramento Real Estate Exchange

Friday, February 15 -- 10:30 a.m.

China Buffet in Citrus Heights

Call Ben Couch at (916)989-4652 for additional information

ACRE -- Sacramento Flood Update: Levee Status, Construction/Permits Status & Timing Update

Wednesday, February 20 -- 11:30 a.m. - 1:00 p.m.

The Citizen Hotel

Registration Information

ULI -- "Unlocking Sacramento's Urban Core: Identifying, Connecting & Enhancing the Assets"

Thursday, February 21 -- 8:30 - 10:30 a.m.

Crocker Art Museum

Registration Information

PODCASTS

Transforming and Re-Imagining Suburban Office Stock

What are new and current trends affecting the office market? Hear a discussion with Dr. James Hughes, Dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University discuss a report he co-authored on the forces changing the shape of regional economic growth and its impact on office space. Listen here

LEGISLATION

OVERHAUL OF ACCESSIBILITY REGULATIONS ADOPTED

In an action strongly supported by industry and local government, the Building Standards Commission has adopted a regulatory package that overhauls the disabled accessibility standards for commercial and government buildings and for public housing.

For over twenty years, California has maintained and enforced its own set of disabled accessibility standards, separate of those enforced at the federal level by the US Department of Justice (DOJ). The subtle differences between the state and federal standards have led to costly litigation and prompted the Legislature to take action last year in the form of SB 1186 (Steinberg and Dutton). Among other things, the industry-supported SB 1186 established a prohibition on "demand for money letters" from plaintiffs alleging violations of the federal or state access regulations. The legislation also requires plaintiffs to specify which provision(s) of the code are in question and how the alleged non-compliance prevented their access to the building.

After two days of extensive debate, DSA's regulatory package was adopted unanimously by the BSC. The updated standards will take effect on January 1, 2014 and for the first time, local building departments will be required to plan, check and inspect for compliance with both federal and state provisions.

CBPA/BOMA/CBIA led the coalition of 19 industry and governmental organizations who strongly supported the Building Standards Commission's adoption of DSA's regulatory package. (BOMA)

A 92-YEAR OLD SOLUTION FOR REAL ESTATE INVESTORS FACING HIGHER TAXES IN 2013

1031 Exchanges Offer Full Deferral of the New 3.8% Medicare Surtax Tax and 20% Capital Gain Tax

By Bill Angove

The familiar adage, "It's not how much you make, but how much you keep" rings truer than ever for real estate investors in 2013. Not only have capital gain taxes increased significantly for high earners, but many investors below the top tax bracket face an additional 3.8% surtax on passive investment income like capital gains. Fortunately, IRC Section 1031, a provision which has been in the tax code since 1921, provides critically needed tax relief.

Under the American Taxpayer Relief Act of 2012, the top capital gain tax rate has been permanently increased to 20% (up from 15%) for single filers with incomes above $400,000 and married couples filing jointly with incomes exceeding $450,000. In addition, the new IRC Section 1411 3.8% Medicare surtax on net investment income, which includes capital gains, results in an overall rate for higher-income taxpayers of 23.8% -- a staggering 58% increase from 2012 tax rates!

Four Steps Involved in Determining Capital Gain Taxation

Absent the tax deferral benefits of a 1031 exchange, below is a summary of the four ways investors will be taxed on the sale of an investment property:

1) Depreciation Recapture: Taxpayers will be taxed at a rate of 25% on all depreciation recapture.
2) Federal Capital Gain Taxes: Investors owe Federal capital gain taxes on the remaining economic gain depending upon their taxable income. Since a new higher capital gain tax rate of 20% has been added to the tax code, investors exceeding the $400,000 taxable income threshold for single filers and married couples filing jointly with over $450,000 in taxable income will be subject to the new higher tax rate. The previous Federal capital gain tax rate of 15% remains for investors below these threshold income amounts.
3) New Medicare Surtax Pursuant to IRC Section 1411: The Health Care and Education Reconciliation Act of 2010 added a new 3.8% Medicare Surtax on "net investment income." This 3.8% Medicare surtax applies to taxpayers with "net investment income" who exceed threshold income amounts of $200,000 for single filers and $250,000 for married couples filing jointly. Pursuant to IRC Section 1411, "net investment income" includes interest, dividends, capital gains, retirement income and income from partnerships (as well as other forms of "unearned income").
4) State Taxes: Taxpayers must also take into account the applicable state tax, if any, to determine their total tax owed. Some states have no state taxes at all, while other states, like California, have a 13.3% top tax rate.

1031 Exchanges Help Investors Defer the New 3.8% Medicare Surtax

Under recently proposed regulations, REG-130507-11, taxpayers have received proposed guidance from the IRS that notes: "to the extent gain from a like-kind exchange is not recognized for income tax purposes under Section 1031, it is not recognized for purposes of determining net investment income under Section 1411." [§1.1411-5(C)(i)(2)(ii)]. Although these regulations are not yet finalized, taxpayers may rely on the proposed regulations to be in compliance with Section 1411 until the effective date of the final regulations.

Despite these new tax increases, one aspect of the tax code provides real estate investors with a huge tax advantage. Section 1031 allows property owners holding property for investment purposes to defer taxes that would otherwise be recognized upon the sale of investment property. Savvy investors use 1031 exchanges to redeploy their investment capital into better performing investment properties. An exchange provides a fantastic opportunity for investment property owners to defer all capital gain taxes that would otherwise be owed.

For more information on 1031 exchange related information, call 1-800-282-1031 or email:bill@apiexchange.com. This information is not intended to replace qualified legal and/or tax advisors. Every taxpayer should review their specific transaction with their own legal and/or taxcounsel. © 2013 Asset Preservation, Inc. All rights reserved.

INDUSTRIAL PRODUCTION, CAPACITY UTILIZATION UP

Marked as a "leading economic indicator" in the Federal Reserve Board's repository of statistical data, the central bank's report on Industrial Production And Capacity Utilization sticks out amongst the reams of statistics pumped regularly out by the Fed.

It's little wonder this report is given the spotlight, since counting the national number of items produced (and the capacity to produce them) results in numbers that speak volumes about the current and potential economic health of the country.

More stuff, goes the theory, means more demand, both for the stuff and for the space and infrastructure to move, warehouse and sell the stuff. And of course it's the job of the industrial commercial property sector to match that demand for that space with supply. As far as Fed utterances go, industrial practitioners might not have a more important national report to review than the G.17 Industrial Production And Capacity Utilization. (CommercialSource) Industrial Production

INDUSTRIAL'S TRAJECTORY TO STEEPEN THROUGH '14

By Sule Aygoren Carranza

Already exhibiting signs of recovery, the US industrial market could see as much as 150 million square feet of absorption this year. What's more, next year's take-up could hit 175 million square feet, according to the NAIOP Industrial Space Demand Forecast.

Those figures represent increases of 50% and 75%, respectively, over the 100 million square feet of absorption the industrial sector experienced in 2012. The results aren't really surprising, Dr. Randy Anderson, President of New York City-based Bluerock Real Estate LLC, tells GlobeSt. "Industrial has heated up," he says. "We've been looking at the growth rate and trajectory of the ISM PMI, which is usually a year-out leading indicator of industrial demand, and it's been gradually increasing. We've been watching the Federal Reserve's index of manufacturing output, which is a six-month leading indicator, and it's been strong over the past four to five quarters."

Those factors-combined with some stabilization in the housing market and employment, stronger consumer confidence, a reduced threat of a double-dip recession and forecasted GDP growth of 2% to 3% over the next two years-all spell a healthier economy, says Anderson, who authored the forecast along with Dr. Hany Guirguis of Manhattan College. (Globest) Industrial Trajectory

NEW JOBS ACT LETS SMALL INVESTORS DABBLE IN COMMERCIAL REAL ESTATE

Jobs Act

by Max Raskin

New U.S. securities laws intended to help startup companies raise money are poised to benefit real estate investors as well, allowing individuals to buy stakes in offices and other commercial buildings once off limits to them.

The "Jumpstart Our Business Startups Act" will ease restrictions on investments in closely held companies, including those set up to own commercial property, by people making less than $200,000 a year and with a net worth of less than $1 million. Before the law's passage, such firms could market and sell shares to individuals who exceed those levels, known as accredited investors.

The law, which changed parts of the Securities Act of 1933, will allow non-accredited investors to put $2,000 a year or 5% of their income or net worth -- whatever amount is greatest -- into closely held ventures. While the law went into effect in April 2012, property investors aren't able to take advantage of it yet because proposed investor-safeguard rules are still being worked on by the SEC. The commission missed its own end-of-the-year deadline for drafting the regulations.

Whatever rules they come out with, it has to be less restrictive than they are today. Investing "through friends and family" was one of the few ways for investors to gain access to property purchases before passage of the JOBS Act, said Paul Habibi, a real estate professor at the University of California, Los Angeles. The new law is "something that could work on smaller deals and it definitely has some promise." (CommercialAppeal.com)

NEW RULES FOR CMBS DRAW CLOSER

by Beth Mattson-Teig

The CMBS industry is keeping a close eye on proposed regulatory reforms that could deal a harsh blow to its fragile recovery.

In the wake of the financial crisis, policymakers and regulators have introduced a slew of new and proposed rules and regulatory requirements aimed at banks and other financial institutions-most notably through the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Reforms that have been years in the making are still a work in progress, with the details and timing of the new rules a constant moving target. Yet key issues that will move to the forefront in 2013 are new risk retention requirements, particularly those changes proposed through the Premium Capture Cash Reserve Account (PCCRA) provision.

"The PCCRA is probably our most immediate threat given the fact that we think that rule will come out this year. If that rule stays as proposed, it would have a devastating effect on our industry," says E.J. Burke, Chairman-elect of the Mortgage Bankers Association (MBA) and Executive Vice President and of KeyBank Real Estate Capital & Corporate Banking Services.

PCCRA takes aim at introducing new risk retention rules for CMBS. The fact that the residential mortgage industry received its announcement on the new Qualified Mortgage (QM) rule-which also focuses on risk retention-earlier this month is a sign that regulators will soon be releasing new rules for the commercial sector. The Commercial Real Estate Finance Council expects some form of the final PCCRA rule to be released during the second half of the year. (NREIOnline) New CMBS Rules

COMMERCIAL REAL ESTATE MORTGAGE LENDING IN 2013: CAPITAL COMEBACK?

New numbers from the Mortgage Bankers Association (MBA) tell a tale of heightened loan origination from commercial banks and life insurance companies to commercial property in 2012. Will 2013 mark the return of pre-recession levels of capital to commercial property markets?

Commercial/Multifamily Mortgage Bankers Originations Index published by the MBA shows commercial banks produced their highest loan origination volumes since second quarter 2008. Life insurance companies as a class "have origination volumes greater than before the recession while other lender types are still at below-recession levels" according to a National Real Estate Investor report.

Many market observers believe that both banks and life insurers will have closed 2012 with year-over-year increases in commercial/multifamily originations. A December report from Marcus & Millichap Real Estate Investment Services notes that portfolio lenders have been doing more commercial real estate transactions in 2012 than in 2011. Banks, including national, international and regional companies, accounted for roughly 25.5% of all commercial real estate loans closed last year, according to research by Marcus & Millichap and Real Capital Analytics, while life insurers were responsible for 18.1% of all loans. (NREIOnline)

PRICING STRENGTHENS AS BUYERS EXPAND TARGETS TO INCLUDE SMALLER PROPERTIES, MORE MARKETS

By Randyl Drummer

November brought modest improvement to commercial real estate pricing as investors appeared to put the uncertainty -- temporarily at least -- of the nation's fiscal issues and U.S. elections behind them.

The survey of property pricing for November is based on 929 repeat sales during the month, and more than 100,000 repeat sales compiled by CoStar since 1996, according to the report and its principal author, CoStar Chief Research Officer Dr. Ruijue Peng.

The U.S. Value-Weighted Composite Index, which weights each repeat-sale by transaction size or value and therefore heavily influenced by larger transactions, rose 6.2% over the last year and has now increased 38% from its pricing bottom in 2010.

The strong improvement reflects sturdy investor demand for core markets and assets that have been at the forefront of the pricing recovery for commercial property.

Within the Equal-Weighted Index, the General Commercial segment saw healthy gains in November over the previous year. The equal-weighted measure weights each repeat-sale equally, reflecting the influence of smaller transactions. (CoStar) CRE Pricing Strengthens

BUILDERS BUILD AT FASTEST PACE IN 4 YEARS

Builders broke ground on new homes in December at the fastest pace in more than four years offering a "solid ending to 2012 and a promising start to 2013," according to the National Association of Home Builders.

Housing starts soared 12.1% in December, reaching a 954,000 annual rate and the fastest pace since June 2008, the Commerce Department reported Thursday. Most of the jump was attributed to a 20.3% increase in multifamily construction last month, helping the sector return to a nearly normal production pace by historical standards. Housing starts for single-family homes rose 8.1% in December.

"With inventories of new homes at razor thin levels, builders are moving prudently to break ground on new construction ahead of the spring buying season to meet increasing demand," says Barry Rutenberg, Chairman of the National Association of Home Builders.

Permits for future home building -- an indicator of future building -- also rose slightly in December to its quickest pace since July 2008. Permits rose by the greatest amount in the Northeast by 19%and 6.6% in the West. The Midwest saw a 5.7% decline in housing permits, while the South saw a 3.4% decline in December. (NAR)

3 BIG SOCIAL MEDIA TURN-OFFS

A recent survey by SocialToaster in Baltimore reveals how you can alienate connections on your social networks. To prevent being un-friended, avoid one of these slip ups:

* Repetitive: 51.2% of respondents say that repetition and recounting the same thing over and over will cause them to unfollow someone.
* TMI: 39% say that too much information -- getting overly personal and oversharing -- is grounds for unfollowing someone.
* Poor grammar: 34.1% of respondents said that poor grammar will prompt them to stop following someone. (Forbes)

RETAIL INTO SENIORS HOUSING: A NATURAL PROGRESSION

by Robert Carr

Seniors housing entered 2013 as one of the top property sectors in terms of demand and investment, and now communities, suffering from empty office buildings and storefronts, are starting to take notice.

The seniors housing occupancy rate has risen consistently for the past 11 quarters, hitting 89.1% in the fourth quarter, according to a report by the Annapolis, Md.-based National Investment Center for the Seniors Housing & Care Industry. This success, along with the projected wave of demand expected in the next two decades, is encouraging elected officials and developers nationwide to replace underperforming retail properties with units for the elderly.

Instead of focusing on main road frontage sites, which are typically more costly because such locations often prove successful for retailers, developers are looking at set-back plots where retailers often fail to take root. These sites are generally still close to residential areas, however, and conversion into seniors properties provides an outlet for communities to reuse (and generate tax revenues) from what had been an empty site. (NREIOnline) Retail to Seniors

THROUGH THE LOOKING GLASS -- THE MARKET ISN'T HALF BAD

by Kenneth P. Riggs Jr., CCIM, CRE, MAI

As Americans struggle with the realities of a new normal -- including slow economic growth, a $16 trillion debt load that has prompted new warnings by the major credit rating agencies, volatility throughout the world, and waning job growth- it is hard not to become discouraged about the state of the national economy and the outlook for all investments.

The Federal Reserve has done nearly everything it can to spur growth, and Chairman Ben Bernanke has announced the Fed will buy $40 billion of mortgage-backed securities every month until the job market improves. But monetary policy alone cannot get the U.S. out of the hole it is in, and no matter how much we polish our looking glass, a new fiscal policy is unlikely to appear much different from what we have seen in the past.

Looking to the past gives us our best view of what to expect in the future. With respect to the national economy, Real Estate Research Corp. expects to see the sluggishness we have endured for the past several years to continue. Slow economic growth in the neighborhood of 2%, weak job growth, still-low interest rates, and volatility in the stock market are expected in 2013.

Despite lethargic employment growth, the low interest rates in this investment environment continue to favor safe investments, particularly commercial real estate. CCIM members who responded to RERC's 3Q12 Investment Trends Quarterly survey gave commercial real estate their highest investment rating of 6.1 on a scale of 1 to 10, with 10 being high, followed by a rating of 5.4 for stocks, 4.5 for cash, and 4.3 for bonds. (CCIM) Through Looking Glass

OUTLOOK IS FAVORABLE FOR CANADIAN MARKETS

The Canadian commercial real estate market is expected to remain on a healthy upswing through year-end, according to Avison Young's 2013 Forecast.

The national office vacancy rate in 2012 decreased 0.2% from 2011 to 7.1%. Western markets such as Vancouver, British Columbia, and Edmonton, Alberta, saw a combined vacancy of 6%, faring better than their Eastern counterparts, which reported a 7.9% combined vacancy rate. A shortage of office space is expected in select markets in 2013, as increasing demand and lack of supply put upward pressure on rents. Pressure will ease in 2014 as new construction comes online.

U.S.-based retailers will continue making the trek north of the border in 2013, attracted by low-cost financing and a strong economy. Retail occupancy remains high due to increasing retail sales growth in Canada, as well as U.S. expansion in the country. (Avison Young) Download the complete report

U.S. ECONOMIC CONFIDENCE ON UPWARD CLIMB

by Elizabeth Mendes

Gallup's U.S. Economic Confidence Index improved to -13 for the week ending Jan. 20, from -18 the week prior. Americans' confidence in the economy has improved for three weeks in a row after deteriorating during fiscal cliff negotiations.

The current -13 economic confidence rating is just three points off the post-2008 high Gallup measured in late October/early November.

Gallup's Economic Confidence Index is based on Americans' assessments of current economic conditions and their perceptions of whether the economy is getting better or worse. It has a theoretical minimum of -100 and a theoretical maximum of +100. The index has never been positive since Gallup began tracking it daily in 2008.

Americans' higher level of economic confidence overall comes from their improving perceptions of both index components. The -7 economic outlook rating recorded last week, based on 44% of Americans saying the economy is getting better and 51% saying it is getting worse, is up from -12 the week prior.

Eighteen percent of Americans now say the economy is excellent or good and 36% say it is poor, for a -18 current conditions rating -- up from -23 the previous week. (Gallup)

THE CHANGING WORKSPACE AND ADAPTIVE REUSES

by Dan Rafter

There was a time when employees came to their office each morning and sat at the same desk.

Those days are dwindling, at least according to panelists at the 11th annual Commercial Real Estate Forecast Conference held Jan. 22 in Chicago by Illinois Real Estate Journal, Chicago Industrial Properties and Midwest Real Estate News.

Lisa Konieczka, executive vice president with CBRE, spoke about the growing popularity of free-desking. Instead of employees having assigned desks, they sit wherever it makes the most sense in a given day. If a group of employees are working together on a project, they sit together at desks located next to each other. The next day, these same employees might be working on different projects with different co-workers. They'd then sit at different desks.

And this is just one of the workplace innovations that Konieczka and her fellow panelists cited as helping to spur the growing number of adaptive commercial building reuses throughout the Chicago area. A growing number of companies throughout the city and suburbs are also letting their employees work from home more often. These employees, too, might not have assigned desks.

This might not seem all that significant. But this change in workplace culture means that companies often need less space to get their work done. And when companies need less space, they can often set up shop in buildings that were not originally designed to be offices. They can move their companies to adaptive reuses.

"So many tenants when they are finalizing long-term leases are not planning for more room in the future," Konieczka said. "Instead, they are looking for more flexibility, for the option of being able to use their space in different ways."(Real Estate Journal) Adaptive Reuse