Wednesday, August 11, 2010
Monday, August 2, 2010
Royce Dugan Recommends an Article
Although energy-efficient retrofitting of commercial buildings has the potential to return twice as much in savings to owners and tenants as they require in investments, interest in pursuing retrofits has remained relatively low, dampened by the financial constraints on building owners from the economic recession, and lack of available financing options... Message from Royce Dugan:
Pricing pressure on commercial properties are causing owners to look at gains now available by reduced operating cost. Energy-efficient retrofitting of commercial buildings has the potential to return twice as much in savings to owners and tenants as they require in investments.
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CoStar Group, Inc.
2 Bethesda Metro Center, 10th Floor
Bethesda, Maryland 20814 USA
Tel: 800-204-5960
http://www.costar.com/
Saturday, June 19, 2010
Nashville and Davidson County have positive growth in Population and Job Growth according to IRS Study
http://www.forbes.com/2010/06/04/migration-moving-wealthy-interactive-counties-map.html?preload=47037
Sumner County gains in Population Moving Into the county
http://www.forbes.com/2010/06/04/migration-moving-wealthy-interactive-counties-map.html?preload=47165
Wednesday, May 5, 2010
Scarcity Premium Seen Driving Current Cap Rate Compression - CoStar Group
Scarcity Premium Seen Driving Current Cap Rate Compression
With Little Quality Office Product in Play, Investors Vying Sharply for Low Hanging FruitMay 5, 2010Last year, capitalization rates on large office property sales rocketed from the mid-6 range to the mid-8 range. So far this year, cap rates have reversed course, falling back just as rapidly to mid-7 range. Under 'normal' conditions, this would imply that property values are increasing. So why isn't the commercial real estate industry elated?
Cap rates are a benchmark determined by dividing income by property value. Increasing cap rates typically imply that property values are falling. Last year, no one in commercial real estate doubted that the rapid rise in cap rates reflected an equal rapid decline in property values.
However, this year's decreasing cap rates, which would normally imply rising property values, are being viewed with some skepticism over whether they reflect a long-term trend in values, or simply a short term phenomenon.
According to Fred B. Córdova III, senior vice president / Investment Services Group for Colliers Asset Resolution Western regional team, the current cap rate phenomenon starts with that fact that there is two to three times more capital (debt and equity) in the market than there is product. That factor alone has pushed values up by 20% in three months, he said.
"There is a flight to quality NOI (net operating income) with a rational 'governor' that is price per square foot," Córdova said. "We are seeing some pricing here in Los Angeles (with cap rates) as low as 5% based on market rates. That said, there is a great deal of anxiety out there as to how far cap rates have fallen in the last six months. Foreign money is leading the charge."
According to Córdova, the current imbalance of available high quality office properties and the amount of capital seeking to invest in them has created what he calls a "scarcity premium."
"The market's fear/greed bipolar condition has created a scarcity premium that has pushed cap rates down by as much as 200 basis points, driven asset values up by 20%, for high quality, stabilized assets in submarkets with historically solid fundamentals in just three months," stated Córdova. "The only distressed properties that are coming to market are those with little hope of value recovery for the foreseeable future (more than three years). The most common examples of these are residential lots, followed by broken condo projects, apartments in markets with high unemployment and vacant unanchored retail properties. Neither the mini-bubble on the high end, nor the freeze on distressed asset transactions is sustainable."
Roy March, CEO of Eastdil Secured, also described the bifurcated activity in the current equity market focusing on either "trophy or trauma" assets.
"We began to see investors come off the sidelines in summer of 2009. After Labor Day, the depth of field for those bidders tripled, and we've seen it triple again in the first quarter," March said in comments during a panel discussion this week at DLA Piper's 2010 Global Real Estate Summit in Chicago.
The deepening pool of bidders has increased the certainty of closing deals, with due diligence and closing periods getting shorter. However, that is also putting upward pressure on pricing, he noted.
March echoed Córdova's view on the lack of quality assets coming to market producing a "scarcity premium."
"What we don't know is if this is a sugar high or whether we're going to see this as the new level of pricing," March said.
In the last few months, cap rates have tightened 100 - 150 basis points on the trophy deals relative to transactions focused on yield, he said.
"For non-stabilized assets, basis rules," March added. [Buyers] "are throwing away the yield calculation and looking at how much they're really buying it at, as a discount to either peak market or construction costs. That's drawing a lot of sellers back into the markets."
March said annualized sales volume is up 50% in 2010 versus 2009. Granted, the increase is more of a limbo than a high jump relative to 2009's dismal sales volume. But having said that, and looking at Eastdil's own transaction book as a market proxy, "we think [sales are] going to be at between 2003 and 2004 levels. We think it will be north of $75 billion in volume this year," March said.
March also said that projections for higher interest rates later this year are also driving the current market dynamic.
"There will be a big rush between now and the end of the year to get stuff to market and priced while interest rates are where they are. There's a lot of concern about interest rates going up post-election, and [sellers] want to take advantage of what they know today."
Robert Erlich, president of International Realty & Investment Inc. in Fairfax, VA, has been involved on both ends of deals involving 7% - 8% cap rates.
"I have been involved on two sales the last 11 months -- one as a seller of a multi tenant office building that sold at a 7% cap rate. I feel it sold for such a good price because it was a good location, it was where the buyer / user wanted to be and, with his lease in place, it was 100% leased and producing income. That was a $4.3 million sale," Erlich told CoStar Group. "The other property was a school that I purchased at a 8% cap rate and the reason I paid $7.625 million is that it is in a very good location and, it is 100% leased to a very strong educational tenant. I feel that the education industry is one of the few that have won the battle during the current economy."
However, Erlich does not believe the market has bottomed out for multi-tenant properties. "In this area there are still a lot of buildings that are in real trouble and losing tenants every day. (But,) "I do not think that buyers are getting too aggressive. I think competitive is a better word. There is just not a lot of quality product out there," Erlich said. "I do think that if you own quality, income producing product you are in the driver seat due to the shortage of solid product out there. I have been getting offers for some of our properties at a 6.5%-7% cap rate."
Outside of the "low hanging fruit," though, others in the industry believe negative fundamentals in the office markets are still ruling the office investment market.
David E. Thurston, director, NOIPG and Net Lease Group of Marcus & Millichap in Elmwood Park, NJ, said that the "sales that are closing that are driving the average cap rate to 7% -8% levels, are those that are in high demand and have multiple bidders, (namely) Class A properties in A locations."
Thurston added that if there were more buyers in the market - which there are not -- then more properties would be trading in the 10-12% cap range.
Scott D. Rabin, senior vice president of Edge Commercial LLC in Bethesda, MD, agreed.
"The volume of investment sales and time horizon is too short to see a real trend," Rabin said. "We need to see a sustained period (that is, four quarters or more) a higher volume of transactions before we can make a definitive conclusion. The spread is very thin between the cost of capital and the type of returns being accepted. Rents will need to rise and vacancy rates will need to fall for caps rates to hold on. I believe some buyers are being too aggressive but that most buyers are still seeking cap rates north of 8%."
What follows are additional comments from CoStar Group News readers regarding their take on the current office investment market.
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Friday, April 2, 2010
ISM: Manufacturing jumps, inventories leap up
Sean Murphy -- Supply Chain Management Review, 4/1/2010
A surge in inventories fueled a high growth rate in the manufacturing sector in March, ending the first quarter with a bang, according to the latest monthly report from the Institute for Supply Management (ISM).
According to Norbert Ore, chair of ISM's Manufacturing Business Survey Committee. The index the ISM uses to measure the sector, or PMI, hit 59.6 percent, up 3.1 points from February. This marks eight straight months of increase for the PMI, Ore said, placing the sector's overall health well into "growth" territory. Ore also said the current growth rate is the fastest since 2004.
Ore said the current PMI is impressive, considering the same index registered at 40.4, in contracting territory, at this time last year.
"That's a remarkable story of what's been happening over the past year," Ore said.
In addition, similar indices in Europe and other parts of the world also indicate growth, a sign, Ore said, that the recovery isn't just happening here at home.
"We have basically a reasonably good recovery in global manufacturing going," he said.
Ore said he expected to see the PMI going up, since the New Orders and Production indices got into the 60s in March, but what really surprised him, he said, was the Inventories index. After a 46-month period of liquidation, Ore said the index made a "most unusual" leap upward in March, going up 8 points to 55.3 percent.
"I think it's an indication that we really hit bottom in inventories," Ore said.
Not all the news was positive, but even the bad news, Ore said, wasn't all bad. Prices went up as much as inventories in March, rising eight points to 75 percent. Ore's report said that prices have remained above 50 percent, indicating growth, for the past nine months.
Still, Ore said the numbers are misleading, and not an indication of pending inflation. Many of the goods which have gone up in price the most, he said, were metals.
"I don't think it's a problem yet," he said.
The employment index dropped by a single point to 55.1 percent. Ore called that "noise in the data," and said it didn't mean that employment was about to take a dive. The index, he said, went up 6 points between January and February, and still remains in "growth" territory, despite losing a point in March.
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