Market Trends

Briefly Noted

• Hospitality — Hotel transactions are down 48 percent from 2006’s peak activity with only 668 deals closing by the end of 3Q08, according to Lodging Econometrics. Average sales price per room for properties larger than 200 rooms is $115,030, 31 percent lower than last year, and $73,793 for smaller properties, down 10 percent from 2007.

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• Industrial  — Self-storage fundamentals are weakening, according to Merrill Lynch’s 2008 semiannual self-storage broker/lender survey. Brokers expect rental rates to decline 40 to 50 basis points through 2Q09, with occupancy rates declining 15 to 20 bps.

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• Office — Sublease space increased to 91.5 million sf nationally in 3Q08, the fifth consecutive quarterly increase and the highest level since 1Q05, according to Grubb & Ellis. Washington, D.C., Chicago, and northern and central New Jersey each claim between 6 million and 7 million sf of shadow space.

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• Multifamily — Seniors-housing independent-living and assisted-living occupancy rates have declined for five quarters, posting 240 bps and 180 bps drops respectively since a 1Q07 peak, according to the National Investment Center for the Seniors Housing & Care Industry. Tampa, Fla., Miami, Denver, Sacramento, Calif., and Phoenix experienced the largest independent-living occupancy declines.

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• Retail — “Pray for retail,” said Jonathan Miller, principal author of PricewaterhouseCoopers’ Emerging Trends in Real Estate 2009, which listed Washington, D.C., Seattle, and New York as top retail markets. But survey respondents ranked retail just slightly higher than residential housing in terms of investment and development prospects for this year.

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White Stag Block in Portland, Ore., won the National Housing & Rehabilitation Association’s 2008 award for best sustainable/green historic rehab. The association honors real estate redevelopments that are funded through the federal historic rehabilitation tax credit program. The $37 million renovation also garnered a LEED gold rating. Current tenants are the University of Oregon’s architecture program and United Fund Advisors. Photo credit: White Stag/Sally Painter

Old McDonald Has a Gold Mine

Amid the sinking values of offices and shopping centers, the value of farmland increased almost 9 percent in the past year according to the National Agricultural Statistics Service’s 2008 summary. The average cost of an acre stands at $2,350, a record high, and $190 higher than 2007. The average acre price has almost doubled since 2002. Despite a slowing economy, encroaching development continues to push farmland prices higher, particularly in the Northeast, which has the highest price per acre of any region.

Farmland Real Estate

Source: NASS, USDA

Window Shopping Returns

Tough economic times have hit U.S. malls hard as retailers go belly up or buckle down on expansion plans. But shopping center companies such as General Growth Properties, Developer Diversified Realty, and the Westfield Group are masking all those vacant storefronts. Due to technological advances, advertisers can turn vacant street-level or mall windows into larger-than-life displays, ranging from high-definition video projections to vinyl overlays. Diversified plans to install 75 digital and static ads in major market retail centers across the country and has plans for empty secondary and tertiary storefronts as well. Flat advertising rates ranging from $1,000 to $8,500 per month don’t exactly replace lost rent, but in today’s economy, every penny counts.

Workplace Design Affects Profits

As companies strive to improve productivity and reduce expenses, office space build-outs may garner more interest from company execs than carpet choices and paint color, according to a recent workplace survey. Companies that provide effective knowledge learning workplaces see up to a 14 percentage point profit growth over companies with less effective work spaces, according to the Gensler 2008 U.S. Workplace Survey. Employees engaged in knowledge work spend about 48 percent of their time in “heads-down” desk work and the rest of their time in collaborative, learning, or social modes, which require more-open floor plans, the survey reports. While nearly 36 percent of the average office space is unsuited for knowledge work, offices that provide collaborative as well as focused work spaces also improve employee retention and satisfaction.

Office Supply Outlook, 3Q08

Markets with most new construction

Source: Jones Lang LaSalle

Guide to Green

New LEED Standards Introduced

An update of Leadership in Energy and Environmental Design standards will become effective this year, according to the U.S. Green Building Council. LEED 2009 will include regional credits for commercial buildings as well as extra points for specific priorities in a particular environmental zone. In addition, the credit rating system has been revised to reflect climate change and energy efficiency as priorities. For more information on LEED 2009 visit www.usgbc.org.

Green Remains a Corporate Consideration

Despite the economic crisis, sustainability remains on the front burner for more than 400 corporate real estate executives surveyed by CoreNet Global and Jones Lang LaSalle. Sixty-nine percent of respondents said sustainability was a critical business issue in 2008, compared to 47 percent who said it was critical the previous year. More than 70 percent claimed sustainability and energy were site selection factors for corporate offices and facilities. In addition, corporations are paying more attention to green workplace strategies such as locating near mass transit and designing brighter, healthier offices to improve employee satisfaction and reduce turnover costs.

California Mandates Energy Reporting

By 2010 California owners of commercial buildings must disclose energy usage and Energy Star ratings to potential buyers, tenants, and lenders, according to a state mandate signed into law in October 2007. Beginning this year, the state is compiling energy-use information on all nonresidential buildings that includes a year’s worth of utility data provided by utility companies and building information such as square footage, operation hours, and tenant usage habits. Eventually the Environmental Protection Agency’s Energy Star Portfolio Manager will benchmark the data as Energy Star standards. Commercial property owners are not required to make the information public, but local experts expect it will become part of standard real estate listings.

Smart Reads

"Only when you consciously confront your brain’s shortcuts will you be able to imagine outside of its boundaries,” says Gregory Berns, author of Iconoclast: A Neuroscientist Reveals How to Think Differently. Huh? Exactly, says neuroscientist Berns: You have to get beyond your comfort zone to truly think outside the box. Our brains are “lazy pieces of meat” that take the shortest route to remembering — reusing the same neural pathways to recall a sunset or rethink an idea, basically relying on past experiences. The only way to think creatively is to develop new neural paths, which means using novel stimuli — a new piece of information or an unfamiliar environment. So don’t curse the current economic clmate — thank those Wall Street titans for giving you an opportunity to chart new neural pathways.

Tough Love Year

Commercial real estate is nowhere near bottom, according to a dire Emerging Trends in Real Estate 2009 report from the Urban Land Institute and PricewaterhouseCoopers. With delinquencies and foreclosures still at historically low levels, a sharp rise in those activities is expected, which, along with 15 percent to 20 percent property value declines, could make 2009 the industry’s worst year since 1991–92.

“Commercial real estate was the last to leave the party, will feel the pain in 2009, and may be the last to recover,” says Tim Conlon, partner and PWC’s U.S. real estate sector leader. “It’s hunkering down time where the initial winners will be companies that can out-lease and out-manage through these tough times,” according to one anecdotal response. The report puts the recovery in 2011, after private real estate markets correct, debt capital starts moving, and the economy improves.

Best Advice for 2009

• Invest in publicly held REITs — they will lead the recovery.
• Focus on 24-hour coastal cities: Seattle, San Francisco, and Washington, D.C., are the top three investment markets.
• Buy or hold multifamily, hold office and hotels, and buy residential building lots, but be prepared to hold.
• Purchase distressed condos in urban areas near transit.

Source: Emerging Trends in Real Estate 2009

Hiring Trends Down

Responses of 1,066 executives worldwide

Source: The McKinsey Quarterly

Retailers: It’s Not Just Selling That Counts

As sales slump, retailers’ gut responses are to cut staff — but not so fast, says Harvard University Assistant Professor Zeynep Ton. Her research correlates increased staffing with increased profits. Why? Because greater number of employees allow stores to remove poorly selling merchandise and stock shelves with new goods more quickly, resulting in a 3 percent to 4 percent sales increase.

National Retail Vacancies, 3Q08

Source: Reis

Fighting the Fear Factor

Small-business owners are taking lots of deep breaths these days, trying to quell the mounting anxiety of the times. But often, small companies overlook how much they have going for them, according to Jeffrey Hull, an executive coach and psychotherapist recently profiled in the New York Times. Small businesses tend to be “more creative and more flexible” as well as able to “act more quickly,” he says. Hull offers six tips to “shift yourself out of a fear-based operating mode”:

1. Acknowledge your fear.
2. Respond to the fear with calm deliberation.
3. Refocus efforts on your business’ strengths.
4. Reframe the story by looking for new opportunities.
5. Maintain a work-personal life balance.
6. Seek out feedback about potential blind spots.

Top 5 Hotel Pipelines, 2Q08

The U.S. is home to 43 percent of the world’s hotel projects.

Source: Lodging Econometrics

Financial Crisis Moves to Main Street

Nearly 7 percent of the U.S. workforce is employed in the finance, insurance, and real estate sectors, putting nearly 9.8 million people at risk of being downsized. And they don’t all live in New York City: Plenty of Main Street communities have sizable FIRE sectors.

Towns Hardest Hit by Financial Crisis

Source: Business Week

Execs Count on Foreign Investment

Lack of financing remains the greatest concern among the 424 commercial real estate executives who responded to DLA Piper’s 2008 state of the real estate market survey. The majority don’t expect securitized lending to return to previous levels until at least 2011, and 16 percent say it never will return to previous levels. More than 50 percent of respondents expect foreign investors to be most active this year, with 25 percent looking to private equity for transactions. In addition 62 percent see the market coming back in 2010, but 22 percent don’t expect good news until 2011. Here are their market picks for this year.

Most Attractive Opportunities in 2009

1.Multifamily
2.CBD office
3.Industrial
4.Retail
5.Hotel
6.Suburban office

Source: DLA Piper

Industrial Availability Index

Source: CB Richard Ellis

Top Multifamily Markets

The following markets posted the most-improved annual effective rental rate growth in 3Q08. However, as a whole, the U.S. apartment market had the smallest increase in annual effective rent since 2004.

Source: Axiometrics

Will Lenders Lend?

An October 2008 survey of commercial lenders asked: Do you plan to make loans available to real estate buyers in 2009?

53.5% - No lending planned in 2009

23.6% - Construction and permanent loans

19.3% - Permanent loans only

3.6% - Construction loans only

Environmental Data Indicates Regional Variations

A downturn in Phase 1 environmental assessments — a standard pre-closing activity for many commercial real estate transactions — indicates the U.S. South Atlantic region is experiencing the strongest transaction slowdown, while the Northeast is experiencing the greatest growth.

Phase 1 Assessments

Source: Environmental Data Resources

Online Market Trends is written by Sara Drummond, managing editor of Commercial Investment Real Estate.