Is The Bottom Near? Forecast Says So.

Tough to say.

I'm of the belief that rents in certain areas of town cannot go much lower at this point. I have a few properties where, after the pass-through expenses are stripped out of the gross rental figure, the owner is maybe taking in $0.50 a foot or even less at the end of the day. Doesn't leave much room for error. And even with these record low rents, tenants are tough to come by. In some of these cases, theoretically, the property is probably worth more vacant than with a credit tenant in place. Sad but true.

Pricing anything is very difficult due to a lack of reliable comps. I get some ridiculous "drive-by" sign calls from people offering $20/ft for halfway decent downtown property. Can't blame 'em for trying, I guess!

Emerging Trends: "The Bottom is Near!" Predict CRE Forecasters
Most Market Forecasters See a Pricing Bottom Next Year, and at Least One Prognosticator Suggests that Transaction Pricing for Institutional Investment-Quality Real Estate May Have Already Bottomed in the Third Quarter

By Randyl Drummer

November 4, 2009

Having reviewed the next round of commercial real estate surveys, forecasts and emerging trends issued this past week for 2010, about the only good news appears to be that the market has hit bottom -- or will soon. Rents and values have continued to fall across virtually every commercial real estate sector and across almost every market.

However, forecasters see the prospect for near-term opportunity once the markets bottom out, bringing a long-expected deluge of loan workouts, write downs, defaults and foreclosures -- along with the time-tested rush by patient, cash-rich investors, who, with some fortunate timing, will be able to tap some very attractive buying opportunities at bottom-of-the-cycle prices.

Also, leasing activity is expected to increase as tenants seek to take advantage of sharply lowered rents, resulting in more potential commissions for brokers, but also likely resulting in more pressure on highly leveraged building owners.

At least five major surveys and forecasts have been released since late last week by such influential industry groups as Real Estate Roundtable, the MIT Center for Real Estate, the National Multi Housing Council and NAIOP. PricewaterhouseCoopers and the Urban Land Institute released one of the industry's most widely watched surveys, the annual Emerging Trends in Real Estate, on Thursday morning.

The surveys tend to confirm the 2010 projections made last month by CoStar and its newly acquired analytics and forecasting advisory firm, Property Portfolio and Research Inc. (PPR), which were among the first forecasts to be released. The office vacancy rate stood at 13% at the end of the third quarter, and CoStar forecasts several more quarters of negative absorption and another 300-basis-point increase in the vacancy rate to 16% as the office market trails what's shaping up to be a "jobless recovery." Strong demand for office space is not expected to return until 2011-12, but when it does recovery should be robust, with the national office vacancy rate expected to fall to 10.5% by 2014 if job numbers begin to pick up as expected, according to CoStar and PPR projections.

Looking ahead, CoStar forecasts that the national industrial vacancy rate will rise from 10.2% in the third quarter to as high at 11% next year, but the amount of negative net absorption -- which approached nearly 150 million square feet year to date through the end of the third quarter -- should taper off over the next couple of quarters. The industrial market will slowly resume leasing activity starting in mid-2010, generating reasonably strong positive quarterly absorption through 2013. Rents, however, likely will remain moribund for two or three more years.

Coming off an idle 2009, the next year will likely rank as the slowest year of the modern era for new development, according to projections covering US market conditions presented by CoStar in a series of webinars last month.

A record 900 people participated in this year's Emerging Trends in Real Estate 2010 survey by PricewaterhouseCoopers and ULI. The results won't do much to either comfort the pessimists or encourage the optimists.

Across the board, investor sentiment was at or near record lows. Survey respondents predicted that vacancies will rise and rents will fall in all property types before the market hits bottom next year. Only apartments rated as a "fair" prospect, with all others sinking into the fair to poor range, with respondents especially bearish on retail and hotels. Development prospects ranged from "dead" and "abysmal" to "modestly poor."

"Not surprisingly, the overwhelming sentiment of Emerging Trends interviewees remains decidedly negative, colored by impending doom and distress over prospects for an extended period of anemic demand and costly deleveraging," the report said.

On the other hand, value declines of 40% to 50% off 2007 peaks will present once-in-a-generation opportunities, respondents said. "A sense of nervous euphoria is growing among liquid investors who can make all-cash purchases” from distressed sellers and banks, said ULI Senior Resident Fellow for Real Estate Finance Stephen Blank.

Debt markets will begin to recover, but loans will be conservative, expensive, and extended only to a lender's best customers. REITs and private equity funds will get into the action, providing loans to battered borrowers at a steep price.

The survey finds near-record lows in investment sentiment in every property type. Only apartments registered fair prospects with all other categories sinking into the fair to poor range. Hotel and retail record the most precipitous falls. Development prospects are “largely dead” and drop to new depths and practically to “abysmal” levels for office, retail and hotels. Warehouse and apartments scored only marginally better at “modestly poor.”

READ THE REST OF THE ARTICLE HERE

Office Tenants in Driver's Seat

Office Tenants Now in the Driver's Seat

Jun 26, 2009
By: Dees Stribling, Contributing Editor

Even before the financial meltdown last fall, most U.S. office markets were going noticeably soft. In particular, vacancies were rising as businesses downsized, reorganized or otherwise felt skittish about committing to any new use of office space. Now that the worst recession in at least a generation is under way, what was once only a worrisome trend for U.S. office landlords is full-blown reality.

Few dispute that current conditions in almost every office market could be called a “tenants' market.” Tenants have the edge now, provided they themselves aren't beaten up so badly by the economy that they can't take advantage of that fact.

Though each major metro market has its own distinct features, the overall numbers are telling. According to Reis Inc., the overall U.S. office vacancy rate climbed to 15.2 percent by the end of the first quarter of 2009, compared to 14.5 percent at year's end 2008 and 12.8 percent during 1Q08. Office-space users vacated nearly 25 million square feet during 1Q09, moving in tandem with the spike in the U.S. unemployment rate during that period. People go, then the space goes, and people are still going.

Moreover, since commercial real estate tends to be a lagging indicator, even if the economy starts to grow again later this year--something of a tall assumption--office landlords might not feel the benefit for quite a while longer than that.

In some ways, this office downturn is like previous ones, Bill Lichwala, president and CEO of Plante Moran Cresa told CPN. “Financially solid tenants are now able to negotiate with a lot of strength,” he said. “At first, landlords resisted lowering rents, and offered more concessions, because lower rents affect the building valuation a lot more.”

But now rents are going down. According to Reis, office rents were an average of 3.2 percent lower in the first quarter of 2009 than a year earlier.

“Landlords simply can't compete anymore without competing on rents,” said Lichwala, whose Southfield, Mich.-based firm specializes in tenant rep. “They can only offer so much in the way of incentives, and that's reached its limit.”

Lichwala pointed out that in one way, however, this office market isn't like previous slumps in space usage. “Previously, landlords needed to be sure that a tenant was creditworthy before a deal would be inked,” he said. “That's normal due diligence, and it hasn't changed. But now tenants need to be as sure of the solvency of the landlords as much as the other way around. It isn't any good to negotiate a sweet concession package if the landlord goes into receivership and can't afford it.”

LINK

A Not So Happy 2009? Yep.

I made the local paper today with an article predicting the year ahead. For perspective, I did fairly well in 2008 but, like a lot of other folks in my business down here, many of us are concerned about the prospects for the year ahead. I don't know if I agree with a 50% drop in values over the year, but I can see some significant price cuts in BOTH lease rates and square-footage selling prices.

From the Sarasota Herald Tribune:

Unhappy new year for commercial Analysts say this real estate sector faces the biggest challenges in '09

By Michael Braga

Published: Monday, December 22, 2008 at 1:00 a.m.

The commercial real estate market has suffered this year as total sales and lease rates of everything from shopping centers to car dealerships have fallen.

But if you think things were bad this year, just wait until 2009.

"The next meltdown we are going to see is in commercial," said Gordon Hester, a Siesta hard-money lender whose customers include both commercial and residential developers. "The value of commercial real estate will probably drop 50 to 60 percent."

Investors began pouring money into commercial real estate in 2006, just after the residential real estate market peaked. Like residential investors, these commercial players abandoned the notion that properties need to kick off enough revenue to cover carrying costs, Hester said.

Instead, they banked on the bet that real estate could be purchased for one price and sold for a much higher price in a relatively short period.

"Now investors are only willing to pay based in returns," Hester said. "For that to shake out, values have to drop."

Unfortunately, the end of the "appreciation model" in commercial real estate coincides with one of the worst economic downturns since the 1930s.

Unemployment is up, consumer confidence and spending is down, and owners of shopping centers, hotels and office buildings are already feeling the pinch.

"After the Christmas season, we are going to see a ton of retailers and restaurants file for bankruptcy or go out of business," said Jack McCabe, a Deerfield Beach-based real estate consultant. "Obviously this will affect shopping centers and strip centers and the office market."

Sales dropping

The deterioration of the commercial real estate sector already is showing up in declining sales.

Only 89 properties in Sarasota County changed hands in 2008 for a total of $131.3 million, a 47.5 percent drop in sales volume from the 109 properties that sold for $250.3 million in 2007.

Office buildings saw the largest drop in dollar terms, followed by hotels and shopping centers.

"The whole thing is being driven by two things: the credit situation, which is nowhere at the moment, and investor confidence," said Stan Rutstein, a commercial agent with Re/Max in Bradenton.

Rutstein pointed to the fact that Nate Benderson, Nathan Forbes and the Taubman Cos. recently announced they were postponing construction of the new University Town Center Mall.

"If developers like Benderson, Forbes and Taubman, who are national scope, are being cautious -- if they don't want to take a risk -- then smaller players are not going to take a risk, either," Rutstein said. "Two-thousand nine is going to be a very challenging year."

Rutstein said that the only way commercial properties are going to move is if sellers come down hard on price. For example, a client who was offered $1.6 million from a bank for an acre near Wal-Mart in 2006, might only get $600,000 for that same property today.

"But there aren't any takers because banks are out of the market," Rutstein said.

The same downward trend is also affecting lease rates for both office and retail space, said Anthony Migliore, a commercial agent with Coldwell Banker in Sarasota.

"Landlords and owners are getting very reasonable," Migliore said. "There was one case in which the owners of an office building in Lakewood Ranch gave one year free rent to the Juvenile Diabetes Research Foundation in return for signing a long-term lease."

Of course, that is an extreme example, Migliore said. But it illustrates the kind of lengths landlords are willing to go to get space rented.

"They may not be able to sell the space, but at least they can get it leased and ride out the storm," Migliore said.

Vacancies on the rise

"If you are a shopping center owner and you evict someone this year, you're crazy," said George Huhn, a Venice-based commercial real estate agent. "Vacancies are going to go through the roof, and everyone will be competing for tenants."

A lot of landlords are opting to carry mom and pop retailers through the bad times with rent abatements, renegotiations of leases and forbearance agreements, Huhn said.

"They're just looking to keep the guy in business, because something is always better than nothing," Huhn said.

Retail sales in Sarasota County were down by nearly $70 million, or 11 percent, in September compared with the same month a year earlier, and that was before the financial crisis really took hold. So it is no wonder that retailers and landlords alike are struggling.

But as in the residential market where foreclosures have led to amazing deals for savvy investors, the collapse of the commercial real estate sector will provide ample opportunities for investors looking for deals.

"Banks already have commercial property available that they have foreclosed on," Rutstein said.

"A good amount of it is dirt that has plummeted in value."

For investors like Michael Averbuch, commercial land represents a once-in-a-lifetime opportunity.

"The biggest game in town is commercial land," Averbuch said. "Banks in Southwest Florida are nothing more than walking corpses. They are sitting on land and developer loans -- most of which are in default, and lot of that land will hit the market this year.

"The stuff is so distressed, that it can't get more distressed."

The Upward Pressure on Cap Rates

As things slow and credit becomes harder and harder to obtain, there's no doubt that buyers are in the driver's seat and will probably remain there for quite some time. As commercial property continues to experience depreciation, investors are demanding better cap rates. Not rocket science, obviously. I don't see this changing for the foreseeable future. From CRED..read on.

With sales activity throttled, property investors expect capitalization rates for the transactions that do close to significantly increase through early next year.

All property types will experience cap-rate gains over the next six months, exceeding the gains of the past year, according to the investors who participated in the latest PricewaterhouseCoopers Korpacz Real Estate Investor Survey. The survey polls REITs, pension funds, mortgage bankers, developers, insurers and other institutional investors.

Regional malls, with a current average cap rate of 6.78%, will see the biggest gain at 47.5 basis points, or 7% of its current base, and suburban office, with a 7.34% average, will see an increase of 44 bp, or 6% of its base. Since last year's third quarter, the suburban office rate increased just 10 bp, while the regional mall rate dropped 8 bp.

The cap rates of all other sectors are expected to increase by 5% each over the next six months.

Office cap rates are expected to increase in all 24 markets covered by the Korpacz study. But in six markets, the expected increase is less that the cap rate gains that occurred over the past year.

The office market with the biggest projected cap-rate gain is Houston, whose 7.27% average is expected to increase 79 bp over the next six months. Its average dropped 45 bp over the past year.

The Manhattan office market's average cap rate, which grew 18 bp to 5.7% over the past year, is expected to increase another 33 bp in the next six months.

While investors surveyed predicted cap-rate gains, they also said their confidence in a near-term recovery of real estate markets is diminishing. The survey's general consensus is that buyers and sellers will remain on the sidelines until credit-markets turmoil subsides.

They also expressed a strong sense that in the coming months, sellers will emerge with properties that are backed by maturing loans and are unable to find new financing. That could be significant since the head of CMBS research at JPMorgan recently noted that the emergence of such forced sellers may be a key factor in helping commercial-property prices fully adjust.

The Korpacz survey respondents also expressed a general sense that the investment slowdown induced by the credit crunch is lasting longer than most expected. "Our six-month recovery projection has been derailed by complete complexity and doubt," said one person surveyed.

The slowing economy and its potential to weaken demand for commercial space is further dragging down investor confidence. "Even all-cash buyers are hesitant about buying because no one is sure about near-term demand," said one respondent.

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