Global demand for distressed commercial property soars

PropertyWire.com TUESDAY, 30 AUGUST 2011

Global demand for distressed commercial property increased dramatically in the second quarter of 2011 and is expected to outstrip supply in the next three months, according to the latest report from the Royal Institution of Chartered Surveyors. Over 80% of the countries surveyed in the RICS Global Distressed Property Monitor reported heightened levels of interest from specialist funds in the second quarter with three quarters of these reporting even greater levels of demand than last quarter. Indeed, in over half of the countries covered, the net balance figure for second quarter demand for distressed property outstrips the comparative number for the third quarter expected supply, most noticeably in Japan, China, Singapore and Hong Kong. Investor demand rose most dramatically in Japan and Hungary this quarter, where net balance scores moved from +6 to +68 and +3 to +64 quarter over quarter, respectively. In Italy, Poland and Russia agents reported noticeable shifts in sentiment with demand swinging from negative into positive territory. The survey does, however, suggest that the supply of distressed property continues to outstrip demand in some countries, most noticeably in the Republic of Ireland, Italy and the UK. The RICS Global Distressed Property Monitor is a quarterly report that reveals trends in 25 commercial property markets across the globe. A distressed property is defined as a property that is under a foreclosure order or is advertised for sale by its mortgagee. Distressed property usually fetches a price that is below its market value. An increased rate of distressed properties entering a country's market can be seen as a negative economic indicator while a decrease may signal recovery. Property professionals in the majority of countries surveyed expect the level of available distressed property to rise in the next three months. Ireland, Spain and Italy have the highest readings for the levels of foreclosure, while Brazil, Malaysia and Russia have the lowest. Interestingly, agents in South Africa report a dramatic shift in sentiment and now expect a substantial rise in distressed property for the third quarter, in contrast to the negative net balance score posted in the firs three months of 2011. ‘It is interesting to see agents reporting such a dramatic rise in investor appetite for distressed assets, quarter over quarter. To some extent, this may be seen as an encouraging development reflecting a measure of confidence in the outlook for the real estate sector despite the softer tone to the macro news flow,’ said RICS chief economist Simon Rubinsohn. ‘However, it needs to be borne in mind that the results are very country specific with generally negative numbers coming from those markets where the economic pain is most intense,’ he added. In the UK the expected supply of distressed property in the third quarter looks set to far outweigh investor demand as supply continues to increase at an even faster rate and investor demand contracted slightly this quarter. This is despite the Bank of England's stance on keeping interest rates at just 0.5%. The current uncertainty regarding the economic picture should mean the Monetary Policy Committee continues to sit on the policy sidelines for some time to come giving some breathing space for the property sector. Investor demand fell in Brazil this quarter, from a net balance of 0 to one of -23. Looking ahead, agents expect the supply of distressed property to fall dramatically in the coming quarter as well, in contrast to last quarter's expectations for increased listings. That said, the real estate market still remains firm with capital values generally thought likely to rise further over the coming months. Levels of distressed property coming to market in China are still expected to decline in the third quarter, although somewhat less so than the previous quarter, with net balance scores moving from -34 to -20. Looking ahead demand for distressed property is still expected to far outstrip supply in this country which is consistent with the projection for further price gains in the commercial market. According to the survey, demand for foreclosed property in India looks set to surpass expected levels of supply in the third quarter with demand from specialist funds appearing to rise dramatically in quarter two. Meanwhile, the pace of supply is anticipated to rise only slightly. Property professionals in Russia anticipate a continued decline in the level of distressed property for the third quarter, albeit at a slower pace than in seen previously. In contrast, agents report a full scale positive swing in investor demand as net balance scores moved from -11 in Q1 to +17 in quarter two. It therefore looks likely that distressed property prices in this country will stabilise over the course of the coming quarter. Spain witnessed a rather strong surge in investor demand this quarter, moving from a quarter one net balance score of +24 to +56. Portugal saw an even stronger surge in the rate of demand, however, as net balance scores moved from +4 in quarter one to +53. Both Spain and Portugal are in the top five in terms of expected levels of distressed property supply for the third quarter of 2011, however, with net balance scores of +70 and +60, respectively. Not surprisingly, therefore, property professionals in both countries report that expected third quarter supply will outstrip current levels of demand by specialist funds, which could add to the existing downward pressure on prices.

What is a Full Service Lease in Commercial Real Estate?

What is a Full Service Lease in Commercial Real Estate? 

Whether you’re looking for office, retail, or industrial space for a startup business or to expand your existing business, it’s important to understand the costs associated with commercial real estate before you sign on the dotted line. When it comes to cost, your commercial real estate agent can tell you the average lease costs in the area you’re looking at and explain "What is a Full Service Lease in Commercial Real Estate?" Certain high-traffic or otherwise more desirable areas will cost more than less desirable areas. In addition to asking what the cost is per square foot, it’s important to find out what is included in the total price. Are there any common area maintenance (CAM) costs, such as for maintaining courtyards, entryways, and the like? Within the space itself, does the cost include just the basic “shell” (white walls and concrete floors) or more? Are you responsible for property taxes, property insurance, utilities, or trash collection?

Costs associated with most commercial real estate leases can be broken into three areas:

• Base Rent
• Nets (NNN)
• Electric and Janitorial

How these costs are charged to the tenant can be also be broken into three catagories:

- Triple Net Lease, referred to as “NNN” (in a triple net lease), represents the three major “net” costs: property taxes, property insurance and common area maintenance (CAM).

- Modified Gross Lease, referred to as "MG" is where all (or part) of the above nets are included as part of the base rent.

- Full Service Lease, referred to as "FS" is where the base rent, the nets, electrical and janitorial are included in one price per square foot lease rate. 

Here are more details of the Three Main Lease Types:

Triple net lease: A triple net lease requires a tenant to pay a low lease rate while also paying other costs associated with operating and maintaining the space. In fact, with a triple net lease, the landlord will also pass on utility costs that are not separately metered, as well as all costs related to common area maintenance (CAM). These so-called CAM charges include all expenses involved in maintaining common areas such as water/sewer, trash, restrooms, landscaping, parking lots, fire sprinklers, the roof or anything that all tenants share.

Modified Gross/ Modified Full Service Lease: Unlike a triple net lease, this agreement includes one, two or all three of the Nets as part of the base rent. It’s important not to assume what’s included and to ask your commercial broker what part of the nets have been included or modified. Typically a modified gross lease will include all the nets in the base rent but not electric or janitorial.

Full Service Lease: This agreement is where the base rent covers all costs of taxes, insurance, maintenance along with the utilities and janitorial. The tenant pays a pre-determined lease rate each month and there are no pass-through expenses for operating expenses. A pure full service lease is the best of all worlds for a tenant, particularly for a medical office tenant. The tenant only has to write one check per month, and the amount only goes up incrementally over time with the normal progression of rent.

Monthly rent typically rises about 2 to 3% per year (although that’s negotiable). The tenant doesn’t have to worry about getting hit later for extra costs such as utilities, and the landlord handles all of the maintenance so the tenant can focus on growing their business.

  

Benefits of a Full Service Lease

The nice thing about a full service lease is in the event the costs for the insurance, taxes, or CAM charges were to go up, this expense would not affect your locked in lease rate. Likewise, the downside of a full service lease is that if expenses go down, those savings are passed on to the owner. Also, because electric and janitorial are included in the full service lease, you do not have to worry about managing these costs.

 Source: Phill Tomlinson's Blog

Contact Phill Tomlinson regarding "What is a Full Service Lease in Commercial Real Estate?",the current market, your property or any questions you may have about commercial real estate.