LWR Commercial
Archive for July, 2008
Sarasota Commercial Market Report
Jul 31st
Like most real estate markets in the US today, the commercial real estate market in the Sarasota-Bradenton region is seen as a struggling one these days, compared with other markets across the country. This fact was analyzed according to a new report released by the New York-based analyst, Integra Realty Resources. Although the report says that recovery will be slow, and may not fully happen this 2008, some local experts are disputing the findings, and say that the region should not be lumped together with other weaker markets, such as those in the northeast of the country.
Office And Retail Markets Are Currently Flat, However Some Disagree
The Inegra Realty report, which is annually published for the last 18 years, verifies current market conditions for office, retail, industrial and apartment properties. IRR is made up of a network of independent appraisers and has 58 offices across the country, which includes the Southwest Florida region, Tampa and Naples. The report analyzed and ranked each market it studied as being in one of four stages: recovery, expansion, hyper-supply or recession. In analyzing the office market for 2007, the Sarasota-Bradenton area was noted as one of only three places nationwide to be in the “recession” stage, along with the cities of Detroit and Dayton, Ohio.
Majority of the other markets analyzed were either in the “expansion” or “recovery”stages. The recent report suggests that Sarasota-Bradenton region was not faring all that well with its retail market as well. Although IRR found 71 percent of markets experiencing retail expansion in 2007, the local market was analyzed to have fallen into recession in that category as well, largely in part because of the bursting of the housing bubble. The report adds that Sarasota moved from expansion into recession as the effects of the housing slump were felt.
According to the director of the Institute for Economic Competitiveness at the University of Central Florida, while he agreed with the sentiment that housing was certainly having an effect on the commercial sector, he was a bit skeptical of the report’s conclusions though. According to the UCF expert, “the commercial side is definitely seeing a decline,” referring to the local market. “But for Sarasota to be lumped in with a city like Detroit, that’s a little shocking to me. The underlying economies of those two places are just completely different. The University of Central Florida analyst notd that it’s sometimes hard to know what figures into an analysis like IRR’s, and adds that he would have to take a closer look at their methodology to see how they came to that conclusion.
Some Are Not Surprised At The Report’s Findings
According to local real estate analysts, with more businesses leaving Florida than moving to the state, the commercial real estate sector may be in for a tough and tricky year. The local experts says he was not surprised to see Sarasota-Bradenton’s office market listed as struggling in the IRR report.
Local housing observers say that, “In Sarasota, offices are very flat and will likely be that way for some time”, and that “There’s already more than what’s needed when it comes to office space.”
Some note that when it came to Sarasota-Bradenton market as a whole, there was a long way to go, and most don’t believe Sarasota is on the path to recovery yet in 2008. Many view that new construction across the board is likely to slow, with anything connected to the residential side being especially hard-hit. New condominium projects that were the norm during the boom periods are now proving almost impossible to finance.
Source: http://www.turks.us/article.php?story=20080428122752265
Tough times coming for commercial real estate
Jul 31st
NEW YORK – July 31, 2008 – The U.S. commercial property market will avoid the massive troubles crippling the single-family housing sector but will face hard times in the coming year, according to industry experts at a recent National Association of Real Estate Investment Trusts (NAREIT) conference in New York City.
Overall, the market environment seems to be more stable than everyone feared, leading to predictions that the industry will weather a long but mild recession.
With gas topping $4 a gallon, U.S. consumers are cutting back on everything but the essentials. Even luxury retailers have started to feel the impact, said John Bucksbaum, chairman and CEO of General Growth Properties, Inc., a Chicago-based regional mall REIT with a 180-million-square-foot portfolio.
“In the past couple of years, everybody wanted to trade up,” Bucksbaum said in describing the trend of middle-income consumers dabbling in the luxury sector. “Today, so many of those people are scaling back. It’s all at the margins, but it makes a big difference to the retailers.”
Despite the hit to consumers, most REIT executives reported that leasing activity remains healthy. Discounters, warehouse clubs and supermarkets are benefiting from inflation on food prices. On the flip side, restaurants are hurting, said Craig Macnab, chairman and CEO of National Retail Properties, Inc., an Orlando, Fla.-based single-tenant retail REIT.
This lackluster environment will likely last for another year or so, according to Kenneth Rosen, professor of real estate and urban economics at the University of California at Berkeley. Rosen estimates the economy has entered a recession, but thinks there’s a 50 percent chance it will remain mild.
Despite the broader economic challenges, commercial real estate fundamentals remain solid in part because developers have scaled back on new projects, limiting the amount of new supply. That will provide a buffer against the kind of precipitous price declines experienced in the residential sector, Rosen said.
As a result of the slowdown in leasing and the difficulty of obtaining construction financing, most of the REITs are taking a more measured approach to new development. But the majority of REIT executives expect that they will be able to get through the current downturn unscathed.
“I am optimistic about the long-range outlook, we just have to be patient,” said Milton Cooper, chairman and CEO of Kimco Realty Corp., a New Hyde Park, N.Y.-based shopping center REIT. “I am very hopeful and optimistic that the market will change next year. Whoever is elected president, there will likely be an increase in taxes, which will be good for the dollar. And there will be a push to make America less dependent on oil.”
Copyright © 2008 by Prism Business Information. All rights reserved.
Survive and Thrive In a Commercial Real Estate Bear Market
Jul 17th
The Focus In Commercial Real Estate Right Now is on Finding Value, Not Growth
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All right, you may call me a ‘nattering nabob of negativism’ for labeling commercial real estate as in a bear market, but the way property investors are reading today’s commercial real estate fundamentals is compelling some to revert to a traditional way of doing business: the good-old buy-and-hold.
Mid-year market conditions are clearly pointing to flat rental growth, rising property vacancies and a drought in property sales. That alone may not be enough to constitute a bear market because properties are still experiencing positive net absorption and many markets are still posting price increases.
However, in the cyclical world of commercial real estate, many in the industry identify this as a downturn.
“There is a big difference in buying property in a bull market and hoping prices will continue to rise, and hoping you’re not stuck on the top of that pyramid,” said Daniel Cabrera, senior account executive with Empire Commercial Funding Group in Albuquerque, NM, “and buying property in a bear market knowing prices will eventually rise and that you’re not on the top of that pyramid. Estimating the time of the eventual rise will be done best by those that perform their due diligence.”
“An investor client (in his mid 40s) said to me the other day, “this is the best market for creating wealth I have ever seen,’” said Jerry Anderson, executive managing director of Sperry Van Ness Florida. “I couldn’t agree more. I’ve personally seen markets like this before and in my opinion, most agents that have been “playing matchmaker” with buyer and seller the last five years are clueless about the opportunity.
“Sellers have been spoiled with multiple buyers clamoring to buy at any price,” Anderson said. “Buyers have been spoiled with easy money covering up buying mistakes and lack of market dynamics. And brokers have really been spoiled – list it, throw it out there, get out of the way of the deal and show up and collect your commission.”
“Now ’solution selling’ is in play – solving problems for owners and finding opportunities by truly understanding the dynamics of the local economy for buyers,” Anderson said. “Wealth for your clients and you is created in a down market not an up market. This is the best opportunity we have seen to create wealth in quite some time.
CoStar Group Mid-Year Market Reports characterize market conditions as follows.
Office
- Increasing vacancies: 26 office markets have seen vacancies increase over the past year, while 15 have seen vacancy decrease.
- Rents are continuing to go up: 35 office markets have seen rents go up, while eight markets have seen rents go down.
- The square footage of buildings is off 54% from the same quarter one year ago, dollar volume is off 59% from a year ago, and the total number of transactions is off 40% from a year ago.
Industrial
- Vacancy has been relatively flat: 19 industrial markets have seen vacancies drop over the past year, while 23 have seen vacancy increase.
- Rents are continuing to go up: 31 industrial markets have seen rents go up, while 11 markets have seen rents go down.
- The square footage of buildings is off 38% from what it was one year ago and the total dollar volume is off 39% from a year ago.
Retail
- Vacancy rates are up 10 basis points this quarter, 20 basis points since last year this time: 27 retail markets have seen vacancies increase in the past year, while 15 have seen vacancy decrease.
- Rents continue to go up: 35 retail markets saw rents go up, while eight markets saw rents go down.
- The square footage of buildings is off 46% from same quarter one year ago and the total dollar volume is off 55% from a year ago.
“I agree that demand has stalled and rent growth has slowed,” said Corey Schwartz, president of Serinova Financial LLC in Phoenix. “It’s interesting that I have not seen much movement in cap rates, which I really expected to rise by now. I think investment purchases have slowed primarily because of the inability of buyers to find financing rather than slowing of demand or rents. I have had a number of gold plated buyers cancel transactions and postpone projects because they were not able to find financing or unable to find financing on acceptable terms.”
A Buyer’s Market
However, Schwartz added, “the savvy real estate investor has been waiting for this part of the cycle and is poised to acquire the properties that will sustain his growth in the next cycle. Our strategy is to opportunistically buy everything that we can find that is well located and significantly below its replacement cost.”
“Investments sales seem to be centered on properties that have CMBS loans maturing and people that made bad buying decisions in 2005 and 2006,” said David S. Miller, vice president/national accounts commercial sales manager with CTT in Phoenix. “Targeting those sellers seems to be the most logical way to attack the investment market.”
“In any market condition — bull or bear — it is always a great time to make money. Just ask any of the recent buyers of real estate. Deals are being done because of a realistic seller and an opportunistic buyer, both win because one gets to move on to another investment, while the other gets to acquire another opportunity,” said Harry Looknanan Jr., an advisor for Sperry Van Ness in Port Charlotte, FL.
Stuart Baldwin, principal of American Capital LLC in Fairfield, CT, noted the old saying that there are always opportunities to profit in real estate, they just change with market conditions.
“There will be a tidal wave of workouts and foreclosures from all the bad individual and large-scale mortgages banks are holding,” Baldwin said. “Certainly the massive amounts of capital being raised right now for bad debt/distressed real estate purchases suggests that many see an opportunity there.”
Not Just Any Property
Cash is king was common response we heard from those surveyed when it came to the investment market, as was the focus on primary markets over secondary markets.
“All real estate is certainly not equal,” said Krista P. Black, principal of Smart Hard Money LLC in St. George, UT. “We see a dramatic opportunity in properties with this type of core value as the market continues to talk about all real estate in averages; particularly national averages. Some properties, and some markets, are an excellent bargain if they are in use for, or can be converted to, recession-resistant purposes.”
“We have redefined core value not as what is sellable, because we obviously do not expect sales in this credit market, but rather what rents actually support over the long term,” Black added. “For example, space not only needs to be occupied but must be occupied by recession resistant businesses or be supported by entry-level rents in the case of multifamily. We are not interested in the luxury market, luxury retail or travel-related real estate in this market.”
“Flexibility for the use of the property is probably key as some owners may need to go to plan “B.” This is usually achieved by staying at much lower leverage than we have seen for a long time,” Black said.
Another common theme was to invest in value.
“The best real estate strategy in a bear market is to wait for the price bounce,” said Vince Norris, a partner in Delson|Norris|Fischer in Woodland Hills, CA, “don’t jump in too early, and look at value investing not growth investing.”
“The traditional approach to investments is total return equals growth and yield,” said Brian S. Brennan, director, real estate acquisitions of Allianz of America in Westport, CT. “Now, while growth is taking a holiday, focus on yield. For real estate, that’s traditional asset management leasing, tenant retention, property renovation and/or expansion.”
Work It
Whether buying new or holding on to existing properties, the key many respondents said will be what is done with the property during the holding period.
“If you own it already and you’ve had tenants move out because of the ‘bear market,’ you’d better be sure you’re working cooperatively with the brokerage community to get it re-leased. Consider offering incentives like some free rent, tenant allowance, but hold your rents,” said Nancy L. Yates, vice president of ICORR Properties International Ltd. in Sarasota, FL. “When things turn around, you won’t be stuck with low rental rates and you won’t have to struggle to increase the rates. Always try to have a ‘wait list’ of prospective tenants. Do pre-emptive work — renew tenants early to make sure they are committed to your location. Offer them incentives – no increase for the first year for being a loyal tenant.”
“Bear market means you are offering something else to differentiate yourself, such as amenities, price point, location, etc,” said Cris E. Zenobio of Titan Realty & Construction LLC Plainview, NY. “Good product leases and sells and the capital and credit markets dictate at what prices.”
“If you are in a secondary market get aggressive in your leasing strategy and fill your vacancies,” Zenobio added. “Once you are full with quality tenants, then you can market for sale. But keep in mind what you had to do to lease up the space when you are marketing it for sale.”
Joseph S. Galli, executive vice president and managing director of Consortium Capital, an affiliate of The Bernstein Cos. in Washington, DC, concurred.
“The only tried and true tested bear market strategy is to take this time and look inside at your properties,” Galli said. “Do the things that you did not have time to do when we were so busy. Especially work your tenants and keep them happy — an ounce of prevention is worth a pound of cure.”
Sandy Schonberger, president of Schonberger Associates LLC in Livingston, NJ, summarized it best.
“Buy low and sell high,” Schonberger said. “It is advice that works. Bear markets are cyclical; they don’t last forever. They are re-adjustments that bring inflated prices back to reality. Over a period of time, prices will again increase providing value for the smart buyer.” Source: http://www.costar.com/News/Article.aspx?id=A18CF657583797014CB3AA357FC6DA9A&ref=100
Sarasota Development and the Current Status
Jul 2nd
With vacancies creeping slightly higher, unemployment ticking up and the bottom dropped out of new construction, local unemployment rate is at a 15-year high. Commercial real estate is starting to see rents drop, and leasing for industrial and office space is becoming increasingly more competitive.
With commercial office space in Downtown Sarasota and Lakewood Ranch in double digit vacancies, now is an excellent time for large tenants and users to leverage the market conditions to their advantage. For mid to large sized companies, a 10-15% reduction in their budgeted rent costs could mean the difference between breaking even and being profitable.
For any questions on how a Tenant Representative can help you with your office or commercial space needs in Sarasota or Lakewood Ranch, contact me.
The following excerpt is from the Herald Tribune with more background on changes to the local employment engine.
The hardest-hit areas were the unincorporated parts of Sarasota and Manatee counties and the city of North Port.
That the local construction industry has fallen on tough times is hardly news, but the official July 1 figures released by property appraisers place precise numbers on the downturn.
For instance, new construction in North Port totaled $193 million last year, a 70 percent drop from the $655 million reported in 2006. New construction dropped 62 percent in the unincorporated parts of Sarasota County.
“Construction is a large part of our economy and that’s going to translate into lost jobs and, of course, lost revenues for governments and for businesses,” said Steve Queior, president of the Greater Sarasota Chamber of Commerce.
That cause-and-effect relationship between construction and jobs is seen in Labor Department figures for the area. In the Bradenton-Sarasota-Venice market, construction and mining have lost 8,100 jobs since hitting a peak of 30,300 in September 2006.
That sector has led the surge in unemployment, which hit 5.3 percent in April. The last time unemployment was higher was August 1993.
Sarasota County was particularly favored by dollars from the building boom, passing for the first time the $2 billion mark in new construction in 2005 and surpassing that with $2.3 billion in 2006.
But construction ground to a halt last year, dropping to $1 billion. The fallout was apparent in May 2007 when the county eliminated more than half the jobs in its building department, where applications for building permits are reviewed.
Sarasota County Property Appraiser Jim Todora said he did not think the county’s new construction would top even $1 billion last year. But several condominium projects that were nearly complete in 2006, but were not finished until 2007, pushed the figure higher than expected.
“A lot of this, remember, are carryovers from the prior year,” Todora said. “Sometimes there are properties that are 90 percent done but they don’t go on the roll for another year.”
For that reason, construction was actually up in the city of Sarasota and town of Longboat Key last year. It was down 42 percent, though, in Venice.
In Bradenton, construction was down by more than 50 percent. Charlotte County’s numbers were comparatively better, down 25 percent for the year.
Manatee County also barely clung to the $1 billion figure despite seeing new construction drop by 35 percent.
Based on the first half of this year, the numbers for 2008 will be a lot worse, said Dale Friedley, an analyst with the Manatee County Property Appraiser’s Office.
“My projection right now is we’ll be around $400 million,” Friedley said.
Local governments were already announcing layoffs and having a hard time making ends meet because of plummeting sales tax and impact fee collections. But when property appraisers released their June 1 estimates on what the real estate downturn had done to the local tax base, the news was generally worse than feared.
Charlotte County’s tax base was forecast to drop 22 percent as falling property values led to declining property assessments. Sarasota County’s forecast was a 17 percent drop and Manatee’s was 8 percent. In all, the property tax base for the three counties was supposed to be down $19 billion.
But for some local governments, Tuesday’s numbers held some rare good news. Todora’s June 1 estimate that Sarasota County’s tax base had shrunk 17 percent would have meant the county’s tax collections would be down $41 million next year.
The July 1 number, which is considered a final number and is used to set taxes, turned out to be down only 15.2 percent, which means county tax collections will be down $36 million.
In Manatee County, the new numbers translate into about $700,000 less of a budget hit than the county had expected.
Ed Hunzeker, Manatee’s county administrator, said the county should not add the extra money to its budget since more bad financial news is likely around the corner.
There are still tax appeals filed by local landowners that have not been settled. The county could lose those appeals and the taxes that go with them. Also, state revenue estimates continue “to forecast doom and gloom,” so state-revenue sharing funds are likely to drop, he said.
