Friday, January 27, 2012

NAI, C-III Merger Finalized, Signals Larger Trend

NAI, C-III Merger Finalized, Signals Larger Trend

Timing and Strategy Factor Into Successful Relocations

Negotiating the best lease terms is important in commercial real estate. But Juan Alcácer, an associate professor at Harvard Business School’s Strategy unit, explains why businesses also need to understand the strategic implications of expansion in the article Location, Location, Location, which appeared in the Harvard Business School Working Knowledge forum.
Before committing to relocating, businesses need to evaluate the strength of their available resources, Alcácer says. A move will require management to shift its focus from current business activities, which could slow the growth of a successful company. Another common misstep is blindly following competitors. Alcácer cites the example of companies that now regret their move to China.
Businesses also need to be aware of the signals they could be sending to competitors. Through their location selection, businesses might give competitors information about their operations or an opportunity to poach their employees. Businesses can avoid this problem by choosing a niche location, an approach successfully employed by Pixar. Although most major studios are based in the Los Angeles area, Pixar stayed in its Northern California headquarters after being acquired by Disney.

Thursday, January 26, 2012

C-III Capital Partners Completes Acquisition of NAI Global

C-III Capital Partners LLC (C-III) announced today that it has completed its previously announced acquisition of NAI Global, the largest and premier network of independent commercial real estate firms worldwide.
C-III is led by CEO Andrew L. Farkas, who founded and was Chairman and CEO of Insignia Financial Group, Inc. (NYSE:IFS).
“The completion of this transaction represents a significant step forward in our strategy to build a fully diversified commercial real estate services company,” said Mr. Farkas. “With the NAI Global acquisition, we are gaining the world’s leading commercial real estate network and a tremendous foundation for future growth.  As we begin a new year, we look forward to partnering with the NAI team to provide enhanced services to the commercial and institutional real estate markets they serve as well as continuing to take advantage of other opportunities to grow and expand our platform.”
“We are thrilled to be joining forces with C-III and excited about the opportunity to deliver an even broader range of services to our members and add greater value to our collective corporate and investment clients. We look forward to tapping into their great resources and expertise to help C-III clients strategically optimize their commercial real estate assets,” said Jeffrey M. Finn, President and CEO of NAI Global.
NAI Global will continue to operate as a separate company under its current management. NAI manages a network of commercial real estate firms comprising 5,000 professionals and 350 offices in the US and 55 countries throughout the world.  NAI’s network members provide a full spectrum of corporate, financial, technology and project management services.
C-III commenced operations with the purchase of Centerline Capital Group’s institutional real estate debt fund management and commercial mortgage loan servicing businesses in March 2010.  Since that time, C-III has successfully launched mortgage origination, investment sales and title insurance businesses, and expanded its principal investment, loan origination, fund management and primary and special loan servicing businesses, including acquiring the special servicing and CDO management businesses of JER Partners in August 2011.  In November 2011, C-III acquired two affiliated multifamily property management businesses – U.S. Residential Group and Pacific West Management – which now operate on a combined basis under the U.S. Residential Group name.
Financial terms of the NAI Global acquisition were not disclosed.
About C-III Capital Partners
C-III Capital Partners LLC is a leading commercial real estate services company engaged in a broad range of activities, including primary and special loan servicing, loan origination, fund management, CDO management, principal investment, title services and multifamily property management.  Our principal place of business is located in Irving, TX, and we have additional offices in New York, NY, Greenville, SC, McLean, VA, Chicago, IL, Dallas, TX and Nashville, TN.
About NAI Global
NAI Global ( is the largest network of independent commercial real estate firms worldwide, comprised of over 5,000 professionals in 55 countries in more than 350 offices. NAI advisors work in tandem with our global management team to ensure our clients strategically optimize their real estate assets. NAI offices complete over $45 billion in combined transactions annually and manage 300+ million square feet of commercial space.

Monday, January 23, 2012

McAllen's leaders hold retreat, talk long-term economic development | mcallen, leaders, long -

Mike Blum, partner and managing broker at NAI Rio Grande Valley, a commercial real estate brokerage, met with the City Commission for nearly an hour Saturday morning to discuss a plan for the reservoir.

McAllen's leaders hold retreat, talk long-term economic development | mcallen, leaders, long -

The State of the Investment Environment

Excerpts from December 2, 2011 article by David Lynn, Contributing Columnist for National Real Estate Investor.

The U.S. economy grew in the third quarter at the fastest pace since 2010 with real GDP expanding at a 2.0 percent annual rate, up from 1.3 percent in the second quarter. Household purchases, the biggest part of the economy, increased by 2.4 percent, much stronger than forecast.
In addition, business investment remained robust. Corporate spending on equipment and software climbed 17.4 percent, the most in a year, contributing 1.2 percent to economic growth. This economic growth, along with hope for a possible resolution of the European debt crisis, has eased some concerns of a double-dip recession in the near term.
After a hiring slump in May and June, employers have since increased payrolls by an average of 132,000 workers per month, including 120,000 workers added in November. After little change in the unemployment rate since April, the jobless rate declined to 8.6 percent in November, its lowest point since March 2009, as a result of job gains and a decrease in the labor force.
Driven by both revenue growth and cost-containment, corporations reported a solid third quarter, with profit growth rising by 11.6 percent year-over-year.
Consumer spending has remained strong as households have dipped into their savings. The personal saving rate was 3.5 percent in October, up 20 basis points from September, but it remained at one of the lowest levels since December 2007.
The most recent monthly data suggest the economy is gradually improving, with incomes rising by the most in seven months during October. Retailers reported a strong start to the holiday shopping season over Thanksgiving weekend, with sales during the four-day weekend rising 8.7 percent from a year earlier, according to MasterCard Advisors’ SpendingPulse.
In November, consumer confidence rose to its highest point since July. While consumer confidence continues its monthly improvement, it remains vulnerable to outside political or economic setbacks, according to the Thomson Reuters/University of Michigan Survey of Consumers.
The cost of living in the United States has trended up throughout 2011, primarily due to rising food and gasoline costs. The Consumer Price Index (CPI) declined in October by 0.1 percent over the previous month as a result of lower energy prices.
The U.S. housing market continues to struggle, despite record low mortgage rates and historically high affordability.
Both single family starts and new and existing home sales remain at depressed levels. With an anemic job market and rising foreclosure sales, we do not expect a meaningful recovery in the housing market over the next 12 months.
The S&P downgrade of U.S. debt in August and a worsening European sovereign debt crisis in August and September initiated a drop in confidence globally. As a result, equity markets plummeted worldwide. Driven by a flight to safety, investors bought more U.S. Treasury Bills, and 10-year treasury yields plunged from 2.8 percent in early August to a record low of 1.7 percent in mid-September.
To provide additional monetary stimulus, the Federal Reserve launched “Operation Twist” – using maturing short-term treasuries ($400 billion) on its balance sheet to purchase longer-term treasuries through June 2012. Its intent is to thereby push down interest rates on everything from mortgages to business loans, giving consumers and companies an additional incentive to borrow and spend money.
In response to European debt crisis, six central banks, including the Federal Reserve, recently announced a coordinated effort to provide access to U.S. dollars for commercial banks through temporary U.S. dollar liquidity swap arrangements.
Negatively impacted by rising market volatility, investors became more risk averse, with risk spreads for non-treasury assets widening significantly during the third quarter. Spreads of AAA CMBS over swaps have increased by over 200 bps since mid-August, prompting investment banks to withdraw several large new issuances, at least temporarily, according to Commercial Mortgage Alert.
Commercial real estate fundamentals have generally continued their recovery path, although leasing activity slowed moderately during the third quarter of 2011.
National transaction volume across the five major property sectors totaled $45.4 billion in the third quarter of 2011, 15.3 percent lower than the second quarter but still 38.0 percent higher than the same period one year prior, according to Real Capital Analytics. The firm also reported the average transaction cap rate for all properties over $5.0 million remained unchanged at 7.1 percent during the third quarter of 2011, 10 basis points lower than the same period one year ago.
Looking forward, we think that U.S. economic fundamentals are improving although we are still vulnerable to exogenous shocks from overseas. GDP growth in the fourth quarter could accelerate to 2.5 percent, creating a healthy momentum into 2012.
David Lynn is a managing director, generalist portfolio manager and head of investment strategy for Clarion Partners in New York.

Thursday, January 19, 2012

Real Money: REITs Kick Off the Year Strongly - CoStar Group

Real Money: REITs Kick Off the Year Strongly - CoStar Group

Industry Pros Expect Stable Year for Retail Real Estate

By Elaine Misonzhnik, Senior Associate Editor - Retail Traffic

Even with the positive mood at this year’s ICSC New York Dealmaking conference, seasoned retail real estate professionals expect only moderate growth for the sector in 2012.
“There is so much focus on capital markets and the election, next year is going to be stable, but not exciting,” says Michael P. Glimcher, CEO and chairman of the board with Glimcher Realty Trust, a Columbus, Ohio-based regional mall REIT. “For us, it’s going to be about the balance sheet and strengthening the quality of our tenants. Next year is not going to be very dynamic.”
To be sure, both domestic and international retailers will continue to look for new stores, especially in well-established urban centers in the Northeast, including New York, Boston, Washington, D.C. and Philadelphia, according to leasing brokers including Peter Braus, managing principal with Lee & Associates NYC, and Jonathan Lapat, principal with Framingham, Mass.-based Strategic Retail Advisors.
For example, in the past year, Lapat has seen a high level of activity from quick service restaurants looking to open their first locations in Boston. Braus points to all the European chains that want to use New York as a branding opportunity.
At the same time though, malls and shopping centers in secondary and tertiary markets throughout the country will continue to experience historically high vacancies and stagnant rents in 2012 because of all the space that has been freed up by bankrupt retailers like Borders, Braus notes.
For owners of large retail portfolios, “there won’t be a lot of natural momentum; it’s just going to be more and more hard work,” says Joe Dykstra, executive vice president with Westwood Financial Corp., a Los Angeles-based real estate investment firm that focuses on value-oriented and stabilized retail centers. “Rents are not going up very much, if at all. As leases expire, there continue to be rent rollbacks and to get anything done requires time and patience. It’s two steps forward and one step back. People are still just grinding it out, for lack of a better word, and it continues to be very, very choppy.”
As a result, don’t expect a substantial increase in new retail development in 2012. While people are starting to have conversations about centers that might break ground one or two years in the future, market fundamentals don’t yet warrant the creation of more retail space nationwide. The centers that are getting built tend to be those focusing on value, including outlet centers.
Steven Peterson, president of The Peterson Cos., a Fairfax, Va.-based real estate developer, says he considers himself fortunate because his firm has two centers under construction at the moment, including an outlet center undertaken through a joint venture with Tanger Factory Outlet Centers at National Harbor in Maryland and a hybrid lifestyle center in Virginia that will come with a movie theater and a BJ’s Wholesale Club. He knows The Peterson Cos. is one of only a handful of developers in the country with projects in progress right now.
“There is not a lot of development going on, but the answer isn’t, ‘We’ll get back to you in a year.’ It’s ‘Let’s talk,’” Peterson notes. “The numbers I am seeing at our centers are flat. In a recession, when I see flat numbers, I am okay. Am I worried? I am less worried than I was six months ago or a year ago. But I still think we have three or four years ahead of sluggish growth and it will take time to adjust.”
Investment Blues
When it comes to investment sales, there has been a pullback from the optimism experienced in the first half of 2011. At the beginning of the year, capital seemed to be flowing freely and many investors were beginning to look for acquisition opportunities outside primary markets and class-A properties in order to get higher yields.
But as the volume of CMBS issuance dwindled and traditional lenders have continued to focus on core product, investors looking for class-B and class-C assets have found that sellers have not adjusted their expectations. Many still expect to achieve cap rates for their properties in the 7 percent range, while a more realistic figure would be in the 8.5 percent to 9 percent range, says Dykstra.
Traditional lenders are still not at a point where they feel comfortable underwriting acquisitions of class-B and class-C centers, notes Glimcher. “That’s why most of the money out there is chasing core product. It’s gotten harder, to find acquisition opportunities that make sense since the beginning of the year, says Glimcher. “And there’s a big void between class-A and class-B.”
In fact, even the market for class-A properties might be overheated, notes Thomas K. Engberg, CEO of Loja Real Estate LLC, a Walnut Creek, Calif.-based firm that invests in and operates grocery-anchored shopping centers.
“In the past six months we’ve had a much harder time competing in open bids, and I am not sure the pricing is properly reflecting risk,” Engberg says.
As the months go by, however, and lenders begin to deal with the mounting volume of distressed loans underwritten in 2007, he expects that the market might find more equilibrium and property valuations will come down to more realistic levels.

Wednesday, January 18, 2012

Mortgage rates hit record lows: Freddie Mac

Fixed-rate and adjustable-rate mortgages break records this week

CHICAGO (MarketWatch) — Mortgage rates dropped to record lows this week, with 30-year fixed-rate mortgages falling to 3.89%, its sixth week below the 4% mark, according to Freddie Mac’s weekly survey of conforming mortgage rates.
The mortgage averaged 3.91% last week and 4.71% a year ago.
Rates on 15-year fixed-rate mortgages averaged 3.16% for the week ending Jan. 12, down from 3.23% last week and 4.08% a year ago.
Adjustable-rate mortgages also dropped, with 5-year Treasury-indexed hybrid ARMs averaging 2.82%, down from 2.86% last week and 3.72% a year ago, according to the survey. One-year Treasury-indexed ARMs averaged 2.76%, down from 2.8% last week and 3.23% a year ago.
To obtain the rates, 30-year mortgages and 5-year ARMs required payment of an average 0.7 point, 15-year fixed-rate mortgages required an average 0.8 point and 1-year ARMs required an average 0.6 point. A point is 1% of the mortgage amount, charged as prepaid interest.
“Mortgage rates eased slightly this week to all-time record lows following mixed indicators in the labor market,” said Frank Nothaft, vice president and chief economist, Freddie Mac, in a news release.
“Although the economy added 1.6 million jobs in 2011, which was the most since 2006, the unemployment rate remained historically elevated. The 2009 to 2011 period had the highest three-year average unemployment rate since 1939 to 1941,” he said. The government’s official jobless rate for December was 8.5%.
Nothaft also pointed to the Federal Reserve’s regional economic review known as the Beige Book, released Wednesday. It indicated most industries “saw limited permanent hiring at the end of last year,” he said. 
Amy Hoak is a MarketWatch reporter based in Chicago.

Tuesday, January 17, 2012

10 Tablet Apps for Commercial Real Estate

In CIRE’s September/October 2011 issue, CCIMs discussed how they use tablets to enhance their business. Most commercial real estate professionals who own tablets are familiar with listing-service apps such LoopNet and CoStarGo, but we asked CCIMs to share their favorite productivity apps. Here are the 10 most-commonly mentioned ones.
1. 10BII Calc Financial Calculator ($5.99) – “If the iPad saves you from having to pull your laptop out, this app saves you from having to carry your 10BII calculator,” says Jonathan Epstein, CCIM, of Berger-Epstein Associates. in Allentown, Pa.
2. Dropbox (free) – Debi Carter, CCIM, vice president of Hudson Peters Commercial in Dallas, uses the Dropbox app to access property fliers, video, and pictures on the go. She shares files by saving them to a public Dropbox folder and sending the download links to clients and colleagues.
3. LogMeIn Ignition ($29.99) – Remotely access work files and programs via an iPad with LogMeIn. Users can also remotely log in to their desktop to view Flash Websites, which the iPad doesn’t support. The GoToMyPC and Remoter apps offer similar features.
4. TheAnalyst ($9.99) – Developed by Blyncc, a tech company co-founded by Todd Kuhlmann, CCIM, this app includes lease vs. own analysis and investment analysis tools, financial calculators, and an environmental risk summary report generator.
5. Springpad (free) – This app organizes notes, images, and places that users want to remember and syncs them on an iPad, iPhone, or computer. Springpad also can retrieve product information from a barcode scan and includes location-based features like business and restaurant searches.
6. Google Earth (free) – Commercial real estate pros can use Google Earth to show clients aerial property images. Geo-located Wikipedia articles and user-submitted photos provide additional location information.
7. GoodReader ($4.99) – “GoodReader is an excellent app for storing and opening almost any file,” says Joseph W. Edge, CCIM, president of Sherman & Hemstreet Real Estate in Augusta, Ga. The app works with Microsoft Office, iWork, audio, and video files. It also can be used to view and annotate PDF files. Office² HD ($7.99) andDocuments To Go Premium ($16.99) have similar features, and iAnnotate PDF($9.99) and SignMyPad ($3.99) include a comprehensive set of PDF tools.
8.Penultimate ($1.99) – With“photorealistic” paper designs and a selection of ink colors, Penultimate positions itself as the stylish alternative to other note taking apps. Notes and sketches are organized into notebooks and can be shared as PDFs. For free alternatives, try Evernote or the previously mentioned Springpad.
9. CamCard ($6.99) – Networking pays dividends in commercial real estate, and the business card is the currency of in-person networking. CamCard digitizes and organizes those cards and also has features for adding supplemental information. Contact information can be exported to Excel, which makes it easy to import new contacts to Outlook and other e-mail programs.
10. Air Sharing HD ($9.99) – The iPad has built-in support for printing to any of HP’s 28 AirPrint printers. Printing to a non-AirPrint printer is possible with Air Sharing HD. It has to be networked with a Mac OS X or Linux computer – it’s not compatible with Windows. PrintCentral for iPad ($8.99) is an alternative to Air Sharing HD.

Monday, January 16, 2012

Why You Need a Commercial Realtor

We thought we'd save money by acting as our own leasing agent. That's how we learned--the hard way--what realtors really do.

By Hans Steege |  Jan 6, 2012

A good commercial realtor is worth his or her weight in gold.

To many of you, I may just be stating the obvious. But we learned this the hard way.
Last year my small company needed to relocate to a bigger, better space.  We knew that we would continue to lease, where we needed to be located (generally), how much space we needed, and roughly how much we could spend.

Armed with that information, we figured it would be in our interest, and in the interest of our future landlord, if we acted as our own leasing agent. We could then take the money we saved by not having a realtor and split it with our landlord. That would make us a more attractive tenant, right?

I guess, in a sense, forgoing a realtor did make us a more attractive tenant. When building owners realized we did not have representation, they thought they could take advantage of us. And without a realtor acting on our behalf, we were also often seen as a company that didn’t need to be taken seriously.

We didn’t know any of this in January 2010, when our quest for a new location began. We scoured online listings and drove around acceptable neighborhoods. We even called listing agents directly to see spaces, even though it’s Real Estate 101 that you should never do this. That’s how sold we were on our belief that landlords would share our enthusiasm for saving money.
We looked at many buildings. Some were good, some were bad. We did our own CAD work to figure out if a space would work. (That part of going it alone worked.) The building owners were generally happy to give us CAD data for us to work with, so there was no need for us to work with an outside architect to figure out how we could actually use the space in a prospective building.
By summer, we felt ready to offer our proposals to the finalists. We figured that any of the options would be acceptable, and that we could use each as leverage against the other.

At least, that was our plan until the first proposal was ignored. The other proposals were all replaced by the building owners’ own proposals, which bore no resemblance to what we had drawn up. We started to negotiate a lease for the space that we liked best, but after weeks of going around in circles it was clear that we weren't getting anywhere.

So we bit the bullet and hired a commercial realtor. Thank goodness. We had done a great job of figuring out which space and location would work best for us, but the real value the realtor provided was negotiating the terms of the lease and the build-out provisions.  We didn’t get everything we wanted, but we got a lot more than we would have otherwise. We got a significant rebate to cover build-out costs, reasonable repair terms, and the ability to have dogs in the office. And, of course, the wisdom not to try this on our own next time.

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Thursday, January 12, 2012

QE3 and The Twist

This is an excerpt from the Winter 2011-12 issue (Volume 11 Issue 4) of The Linneman Letter. For more information about Linneman Associates and how you or your company can subscribe to The Linneman Letter, please visit
By Dr. Peter Linneman, PhD
Chief Economist, NAI Global
Principal, Linneman Associates
The Fed recently announced that it will buy up to $400 billion worth of long-term government bonds while selling U.S. government notes. This is yet another hard-line move in a decade of aggressive Fed interventions. While theory suggests that the Fed should temporarily intervene in capital markets in order to stimulate or dampen the economy, what we have witnessed over the last decade is hardly temporary.
For eight out of the last 10 years, the Fed has held short-term interest rates below current inflation, creating negative real short-term interest rates. When done briefly, this may stimulate the economy without excessively distorting capital markets. However, as demonstrated during the Greenspan administration, when done for prolonged periods, this creates enormous capital market distortions. What the Fed has done over the past decade is no different from the price setting done for most goods by the USSR. And as occurred in the USSR, every artificial price generates distortions that snowball over time. Hence the housing bubble, the subsequent crash, and current attempts to re-inflate the sector.
The Fed used quantitative easing (QE1) to create enormous liquidity in the face of a possible liquidity crisis. This was probably the right thing to do at the time, as a shortage of liquidity could have been catastrophic. Unfortunately QE1 did not achieve its intended goal, as the additional liquidity sat on bank balance sheets as excess reserves at the Fed, rather than rippling through the economy as loans. Hence, we witnessed the oddity of a lack of loans in the presence of the greatest liquidity in U.S. history.
The Fed cannot be blamed for failing to foresee that liquidity would go dollar-for-dollar to excess reserves rather than loans. This situation is historically unprecedented, leaving observers of all political stripes at a loss for a coherent explanation. The lack of rules meant that businesses were uncertain about the future and how the game of Old Maid would end, and chose to be very conservative. As a result, banks kept their capital in reserve. And when faced with an attack on “millionaires and billionaires,” the owners of small firms retrenched rather than borrowing to expand. The result has been a lack of lending and a lack of strong job growth.
QE2 poured more liquidity into a system that already possessed stunning levels of excess liquidity. The issue was not that banks did not have sufficient reserves to lend, but rather that banks either refused to lend or could not find credit-worthy borrowers. Pouring more liquidity into the system further increased excess reserves with no impact on economic activity. QE2 was like throwing water on an already extinguished fire. The damaging part of QE2 was that it indicated that the Fed was going to “do something,” anything, adding to economic uncertainty.
Now we come to QE3 and the Twist. QE3 is clearly unnecessary, as banks already have $1.5 trillion of excess reserves, enough to create nearly $10 trillion of loans. The buying of long-dated government bonds while selling short-dated government notes (the Twist) is nothing new, and was attempted in the 1960s, with research indicating that at most, it reduced long rates by 10 bps. So even if it is as effective this time, it will merely reduce long rates from 2% to 1.9%. Such a reduction will have no notable impact. After all, the decline in long bond yields from 3.5% to 2% did nothing to trigger economic activity. While it may lower mortgage rates by a couple of basis points, this will achieve nothing. Too many borrowers have negative equity or zero-balance mortgages. And as our research with Susan Wachter indicated nearly 20 years ago, interest rates are of little importance in terms of borrowing for homes, which is driven by equity cushions and down payment constraints.
Now that 20% down is again the norm, people must save for several years in order to attain the necessary down payment. This is difficult given the high unemployment rate for younger and less educated households. Reducing the long-term interest rate by 10 bps will have no meaningful impact on mortgage decisions.
The Twist is dangerous in that it shortens the duration of U.S. debt maturities at a time when the government should be financing as long as possible due to historically low long-term rates. Every time the Fed buys a long-term government bond, paying for it by selling a short-term government note, the outstanding maturity of debt held by the public shortens. This amplifies the rollover risk facing U.S. government debt, and accelerates the vulnerability to rapid increases in interest rates. Given the uncertainty about inflation and the willingness of China and other foreign buyers to continue to buy our long bonds at 2%, shortening the term structure of U.S. debt simply adds to the uncertainty over the U.S. economy.
Adding to the challenge of interpreting capital markets today is that sovereign debt markets are primarily driven by governments purchasing debt from themselves (central bank purchases) and each other. Well over 50% of all purchases of U.S. Treasuries during the past year have been by the U.S. government and other sovereigns hardly arm’s length transactions. As a result, it is not a free market that is establishing the price of sovereign bonds, but rather government interventions.
We are 60 years old and have never before seen 2% 10-year Treasuries, even though we have seen budget deficits and surpluses, high unemployment and low unemployment, inflation and deflation, Republicans and Democrats, and every imaginable combination thereof. We are unwilling to believe that a 2% yield on 10-year Treasuries is a sustainable long-term interest rate, particularly when U.S. inflation is running somewhere between 2% and 5%, large government deficits exist around the world, and stunning amounts of liquidity make higher inflation far more likely than deflation.
Some argue that we are now like Japan, with near 0% short-term rates and sustainable 2% long-term rates. But Japan’s rates have been supported over the past 20 years by the Japanese Postal system, which covers sustained government budget deficits by a de facto tax, with Postal deposits and life insurance premiums from mom-and-pop Japan used to purchase government bonds at artificially low rates. Of course, the U.S. could require U.S. citizens to buy government bonds for their retirement accounts. In fact, such capital market manipulations are historically common when governments want to maintain artificially low interest rates. But we simply do not see how, for a sustained period of time, long-term interest rates can stay as low as they are today.
The purchase of real estate is a de facto synthetic purchase of a long-term Treasury bond plus a real estate spread. If you are not comfortable with the long-term Treasury rate, you are not comfortable with the purchase of real estate unless the spread is abnormally high. As the CMBS market evaporated after the July S&P debacle, spreads have risen even on high-quality “gateway properties,” once again creating an opportunity in both public and private markets to acquire real estate with some room for error. But you cannot say that trying to assess the right 10-year Treasury yield is “above your pay grade” and only focus on real estate spreads in an environment where 10-year Treasuries are artificially low.
While long-term U.S. Treasuries are the accepted benchmark for the risk-free rate, ever increasing federal debt levels and deficits mean that these instruments are not as “safe” as they were even just a year or two ago. While the S&P downgrade of the U.S. government is silly, particularly in view of the fact that many other countries are still rated AAA despite equally untenable fiscal positions, it is true that risk has increased. A former student told us recently that in the face of weakened U.S. government credit fundamentals, his family was moving its money back to Columbia. This brought to mind the fact that high-quality real estate tends to be the flight-to-safety asset in societies where sovereign debt is not riskless. We learned this lesson in Latin America 20 years ago, when we saw real estate prices rise even as the economy faltered, because capital flowed into the relative safety of real estate. While the U.S. is not as weak as Latin American economies were in the 1980s and 1990s, it is fair to say that it is also not as safe as the U.S. prior to 2008. This is all to say that as the U.S. government bond has become less safe, high-quality real estate spreads should narrow.

Thursday, January 5, 2012

2012: Better? More of the Same? or Total Economic Chaos?

CoStar News Readers Give Us Their Best Bets for What's Coming in the New Year
January 4, 2012

The commercial real estate world this year will look a lot like it did in 2011, according to CoStar newsreaders. 

During the last few weeks of the year, we asked readers to give us your boldest, best predictions that you could take to Las Vegas and put money on. Based on that proposition, readers have decided that the best bets are going to be to 'let it ride,' expecting a continuation of current market trends. 

Among the top expectations: Banks and servicers will continue to jettison the worst performing assets and seek to workout recapitalization opportunities on the better-quality assets. Similarly, institutional property investors will also continue to reposition their portfolios away from secondary markets in favor of core stable assets in primary metropolitan markets. 

Multifamily properties will continue their hot streak as pent up and new demand will keep vacancies low and spur continued new construction and property retrofitting of older other property type buildings. 

And, both U.S. political inaction/posturing in an election year and world economic uncertainty will continue to weigh down true recovery. 

Just how safe are readers playing it? Here is what one reader jested: "It's also possible I will get a year older, well, at least I hope so." 

Hoping that the New Year brings you good fortune and prosperity, here are more of our readers' predictions for 2012; we've saved the boldest few for the very last. 

Playing the Slots: Small Bets with Big Potential

Multifamily investments continue to rule the CRE landscape, investors seeking yield and upside from increasing renter demand and rising rents, in lieu of a continued weakening economy, limited job growth, and increasing global pressures from Europe. Best bets for multifamily acquisition will remain in coastal markets, urban city centers, transit-oriented live/work locations, and markets with solid job growth from tech, energy and health care. 
Kevin Russell, Managing Partner, Gibraltar Commercial Properties, Culver City, CA 

In the industrial market, rental rates will continue to trend upwards in the Miami Airport West submarket with positive absorption continuing. New spec development shall commence after four years of no new construction of industrial product. 
George I. Pino, President, State Street Realty, Doral, FL 

2012 will see continued yet slow incremental improvement in U.S. CRE markets. Secondary markets in Florida, California and Nevada will continue to underperform national averages for absorption and rental rate growth. Those markets hardest hit by foreclosures and high unemployment will continue to lag behind the primary markets through 2012 and 2013, with marked improvement in 2014-15. Institutional owners will continue to dispose of underperforming assets in the secondary markets focusing on primary U.S. and International CRE markets seeing the most growth. 
Jeff Lamm, Associate, Industrial Property Group Inc., Tampa, FL 

Because of the November 2012 elections and the accompanying uncertainty of tax policy, employer costs of health benefits, capital costs in a screwy global market the economy, lack of new jobs, consumer and corporate fear about spending, commercial real estate will remain largely stagnant. 2012 will be a good time to develop a new strategy and train the people who can execute the strategy. The majority of 2012 activity will again center on the sale of large distressed portfolios by lenders and core properties in 24/7 cities. 
Susan Lawrence, President, CEO, Real Estate Strategies Inc., Winter Park, FL 

In 2012 we will see modest to tepid growth while some investors and companies wait to see the results of the U.S. elections and the European Union. Core stable assets will continue to see low cap rates and high demand. Class A apartments will continue to experience strong investor demand and class B and C apartment performance will pick up some pace. Single tenant net lease and medical properties will continue to be sought after assets and cap rates in these sectors will compress in 2012. Office, industrial and retail performance growth will remain stable but low overall with the significant improvements concentrated in areas with strong job markets. Industrial will lead office and retail with improving performance related to e-commerce and lack of recent new construction. 
Michael Bull, President & Founder, Bull Realty Inc., Atlanta, GA 

My 2 cents on this subject is that the worst is clearly past us if you examine the major metrics, and that is corroborated by the sentiment on the street. An uptick in pricing can be seen in almost all markets and asset types, excepting the most distressed assets and locations. However, this optimism needs to be tempered by the fact that the 2007 CMBS vintage loans are all maturing over the next 12 months, and since this vintage entailed the worst underwriting standards, it stands to reason there will be plenty of work left to do for CMBS special servicers. 
A.J. Beachum, Senior Sales Associate Income Property Organization, Bloomfield Hills, MI 

Overall, the investment real estate market will be flaccid in 2012, by-and-large because it's an election year. The best values will be had in the fourth quarter of 2012 and first quarter of 2013, as the meek will be sitting on the sidelines during the regime change. Hub-area industrials will gradually gain strength, spurred on by local government incentives and gradual growth. The Better Buildings Challenge will continue to gain grassroots momentum until Congress finally gets on board. 
Jodi Summers, Founder of The SoCal Investment Real Estate Group, Sotheby's International Realty, Los Angeles, CA 

Urban retail rental rates in Philadelphia will most certainly increase. That will also be the case for the other major metropolitan marketplaces in the U.S. Most residential apartment developers and even select condo developers have continued to adaptively re-use or even build ground up, properties in urban settings. The main factors in this are that hospitals, schools and law firms are jam packed with students, patients, and workers and they continue to grow each year. 
Stephen J. Jeffries, Partner & Co-Founder, Precision Realty Group, LLC, Philadelphia, PA 

For 2012, in Phoenix, I see more transaction velocity in the retail and industrial segments. Rents are at or close enough to a bottom in both of those segments. Prices are starting to match up to the new rent amounts and are under replacement costs in most cases. Investors are starting to feel more confident that if they buy today (or in 2012) that the holding period of a flat/negative cash flow will be at a minimum with good opportunities of improved cash flow in the near term. 
Nicholas L. Miner, Vice President - Investments, Commercial Properties Inc., Scottsdale, AZ 

We anticipate below 1-percentile fluctuations in vacancies for retail, office and industrial as well as multifamily markets. But the multifamily market has gained the game momentum of late and this trend will continue into 2012. There are more and more households becoming lessees - the American Dream is on the move. One enjoyable see saw sector will be the hotel/hospitality market where the tourism industry has suffered significant declines, yet these products are fit for the market fluctuations so there may be some retrofitting to satisfy the growing multifamily appetite. 
Brian Merzlock, Valuation Manager, Williams & Williams, Tulsa, OK 

Black Jack: Riskier but Holding

The 2012 forecast is mired in uncertainty in large extent due to a very high complex emergent world economy adapting to increasing public and private debt of over 80 trillion. With world GDP at just over 50 trillion, the world will be challenged to grow out of this global debt crisis. Both income property and single-family real estate debt remains at a high risk of default in the U.S. for 2012 for debt extended from 2004 through 2007. New debt extended in 2010, 2011 and into 2012 at conservative underwriting will be good investments. Not rosy, but a reality. 
Marc Thompson, Senior Vice President, Manager of Senior Housing and Care Lending Group, Bank of the West, San Francisco 

Functional obsolescence will be the coming opportunity. Arthur Nelson at VA Tech says that huge amounts of existing real estate is functionally obsolete and needs to be rebuilt. His estimates are as follows: 
Type: Existing Amount -- In Need of Replacement 
Residential: 146 billion SF -- 37 billion SF 
CRE: 63 billion SF -- 44 billion SF 
These numbers seem almost unbelievable but the point remains salient. There is a ton of functional obsolescence out there. Whether it's the ranch home, the dead mall or the Main & Main, single-story office building, older product in great locations needs to be upgraded to modern standards. 
Jeffrey DeHart, Manager, S. J. Collins Enterprises, Fairburn, GA 

Look for the government(s) to be the biggest active player in virtually every market in the USA during 2012 as they shed properties and try to right size their respective ship(s). 
Dan Colton, Principal, Colton Commercial, Tempe, AZ 

We will see a "tsunami of product" coming to the market from community banks in 2012. The market will clear itself as supply and demand come into equilibrium in 2013/2014. 
Matt Ochalski, Managing Member, GD Realty LLC, Chicago, IL 

Long Shots: The High Rollers

The election will look increasingly foregone. The Fed will lose control of inflation. Sunk under its low yielding and inflation-pounded T-bill assets, it will be folded into government like the GSEs. Inflation fear causes the public to run from the dollar. When gold tops $3,000 the White House & Senate propose a buy-back program at $1,500 and a renewal of FDR's ban on public gold ownership. House prices take off... 
Charles Warren, Principal, Warren & Warren, San Francisco 

In 2012 Fannie Mae and Freddie Mac will begin to bulldoze excess housing inventory in an effort to support prices and the empty spaces will become community gardens. 
Walter Brauer, Associate, Marcus & Millichap, Encino, CA 

1. Banks will not renew many commercial loans and will begin foreclosing on properties that are poor locations/designs based upon new market realities. 
2. Spike in bank collapses & closures in 2012. 
3. Large, major cities will thrive with new CRE projects: NYC, SF/Bay Area, Chicago, Miami, LA. 
4. Increased density and urbanization of cities, sprawl reduced. 
5. Transit oriented development projects thrive, convenience is the key. 
6. Creative, new mini-cities will spring up in Plains states. 
7. Government finally curtails spending, Feds stop printing dollars and stop propping up stock markets, and the GNP/GDP returns to normal, lower level. 
8. CRE assets decline 20%. 
9. Europe monetary system collapses. 
9. U.S.-based international companies grow substantially. 
10. The working and non-working poor take over empty houses and commercial buildings. 
Terence Kramer, President, Kramer Management Consulting, Scottsdale, AZ