Market Trends

Institutional Prices on the Rise

Transaction prices of commercial properties sold by large institutional investors rose by 4.4 percent in 3Q09, according to the MIT Transaction-Based Index, bringing them to 36.5 percent below their mid-2007 peak, according to the National Association of Real Estate Investment Trusts. Given that and a narrowing of the gap between buyer and seller asking prices, REITs soon may start dipping into their amassed capital to purchase distressed assets. By the end of August 2009, REITs had raised an aggregate $24.2 billion in new capital, 34 percent more than raised in all of 2008, according to Jones Lang LaSalle.

Briefly Noted

Hospitality — “If you’re reading about it, it’s already too late,” says HotelNewsNow.com. Although lenders have been slow to take troubled properties to market, the time is now to buy distressed lodging assets as the sector’s recovery may come as soon as this summer. There are 1,248 hotels in distress and values are down 42 percent from the 2007 peak.

Industrial — The Detroit, Houston, and Atlanta industrial markets all saw more than 1 percent increase in availability in 3Q09, while the national rate increased to 12.9 percent from 12.4 percent, according to CB Richard Ellis. Austin, Texas, and Columbus, Ohio, posted the largest decreases in availability at -0.9 percent.

Office — Office-using sectors have lost 2.3 million jobs since 1Q08, according to Jones Lang LaSalle. Austin, Texas, is the only metro area of 35 MSAs tracked without job losses on a year-over-year basis.

Multifamily — This sector could be 2010’s big winner as 70 percent of commercial real estate investors chose multifamily to outperform the other property sectors by as much as 30 percent this year according to the Jones Lang LaSalle Fall 2009 Cross-Sector Survey. That’s a vast difference from a year earlier when two-thirds of respondents predicted a decrease in multifamily activity.

Retail — Big-box retail leasing was up for 3Q09, at least for shopping center real estate investment trusts. Of Kimco Realty Trust’s 3Q09 leasing deals, 66 percent were for big-box locations, according to the REIT. Kimco also saw increased retail leasing in Florida and California, two states hardest hit by the housing crisis.

Retail — Big-box retail leasing was up for 3Q09, at least for shopping center real estate investment trusts. Of Kimco Realty Trust’s 3Q09 leasing deals, 66 percent were for big-box locations, according to the REIT. Kimco also saw increased retail leasing in Florida and California, two states hardest hit by the housing crisis.

Looking Ahead

“Markets like Detroit, Phoenix, Atlanta, Cleveland, and Sacramento, Calif., could be shedding the largest amount of office space in several quarters based on most recent recorded office employment losses.”
— Jones Lang LaSalle,
North America Office Report 3Q09

Advice for the New Year

Sector	Action	Comments
Multifamily	Buy or hold	"Possible shortage of apartments by 2012; buy busted class A condos and class B infill."
Hotels	Buy	"Higher-end business hotels in major markets have most potential to recover sooner."
Distressed condos	Buy	"Beachfront condos in South Florida always bounce back."
Land	Buy	"Buy infill sites in top markets; be prepared to hold five to 10 years."
Industrial	Buy or hold	"Warehouses can recover quickly."
Office	Hold	"Prime properties in 24-hour cities will attract B and C tenants."
Retail	Triage	"Infill grocery-anchored centers and fortress regional malls will survive."
Source: Emerging Trends 2010

Dining Details

Restaurant patrons are much more satisfied — and spend more per minute — when their tables are separated by at least 36 inches from those of other diners, according to a Cornell University Center for Hospitality Research study. Cutting that space in half significantly reduced satisfaction and spending levels researchers found. And apparently removing any reference to money also makes diners happy. In another study, researchers offered diners the same menu with one exception: The prices were formatted differently — $20, twenty dollars, or 20. Of the three formats, restaurant patrons spent considerably more when given the numeral-only menu. Three restaurant professionals, including the head of food and beverage for the Hilton Hotels, concurred with the study, saying that a move to the European style of price formatting increased spending in their restaurants.

Smarter Reading

"In the depths of a major crisis — much like the one we’re in now — is where a principled approach to leadership and decision-making is most needed. … Only by practicing a clear set of principles can we ensure that the recovery is long-lasting and that future business is sustainable." — William W. George, author of 7 Lessons for Leading in Crisis

"The templates and wizards of the past probably took most of us … down a road to ‘really bad PowerPoint.’ … But today … we can make effective presentations with even older versions of PowerPoint — often by ignoring most of the features." — Garr Reynolds, author of Presentation Zen: Simple Ideas on Presentation Design and Delivery

Top 5 Niche Investment Properties

1. Medical office
2. Seniors housing
3. Student housing
4. Infrastructure
5. Urban mixed-use

Source: Emerging Trends 2010

 

Tighten Your Belts

Benefits are on the chopping block for real estate professionals according to a Grant Thornton survey. Real estate executives said they were cutting back on the following perks:

• 63% chopping bonuses
• 58% slicing raises
• 50% reducing stock options
• 42% shredding healthcare benefits
• 32% freezing 401(k) matches

Historic Value Declines

The value of preserving a building’s historic façade has declined, according to an Appraisal Journal article. A study in Savannah, Ga., showed that historic façade easements decreased the sales prices of condominium row houses by 2.85 percent a year, or 57 percent over 20 years. When issued, the easements were valued between 5 percent and 15 percent, in keeping with the Internal Revenue Service guidelines on valuation at the time. However the inability to change protected façades and the increased expense of maintaining them have eaten away at the value, the study suggests. However, property owners still receive tax deductions for initially granting easements.

Worth Quoting

"While the U.S. and European economies represent approximately 50 percent of world gross domestic product, they are not the engines of the recovery. …Based on growth rates, it will be Asia and Latin America that will lead the world recovery."
— CB Richard Ellis Global MarketView, 3Q09

Vacancy Rates: Historical Perspective

	Office	Industrial	Multifamily	Retail
3Q09	16.1%	13.5%	7.4%	12.2%
Historic high	19.1 (2Q91)	11.8% (1Q04)	6.8% (4Q03)	11.3% (1Q92)
Source: CB Richard Ellis-Econometric Advisors

Top 5 Office "Holds"

Percentage of "hold" recommendations for office properties in top metros from 900 survey respondents:

• Chicago - 63.4
• Atlanta - 63.2
• Denver - 61.4
• San Diego - 61.1
• Philadelphia - 57.4

Source: Emerging Trends 2010