Market Data

Market Trends(8)

Studying Student Renters

No surprise here: College students look for student housing that provides social opportunities as well as a chance to assert their independence, according to “What Do Students Want?,” a National Multi-Housing Council research study. After conducting focus groups at nine universities, researchers found that most students prefer off-campus housing properties with central clubhouse and recreational spaces that promote social interaction. Students also want large kitchens and bedrooms with more storage space as well as properties that lease by the bed and charge one all-inclusive rent. But apartment communities looking to make long-term renters out of students should focus more on customer service. “Students repeatedly said that if they could find a property with the right amenities, affordable rent, and a management staff that treats them honestly and with respect, they would stay for two or three years,” says Jim Arbury, NMHC senior vice president. Student-housing developers and investors looking for more insight can purchase the full study at www.nmhc.org/goto/studentswant.

Top Investment Cities Lack Business Activity

Minneapolis-St.Paul topped the Dow Jones MarketWatch ranking of best business cities, joining nine other thriving secondary metros in the top 10. But a number of busy commercial real estate development and investment markets came in dead last: Las Vegas, Sacramento, Calif., San Antonio, Tucson, Ariz., and Los Angeles were among the bottom 10 cities. Lack of business HQs held them back: The MarketWatch survey measures the number of Fortune 1000, S&P 500, Russell 2000, and Forbes 400 private companies located in the 50 largest U.S. metropolitan statistical areas, along with the concentration of small businesses, employment outlook, and population growth. For example, Tucson has no Fortune, Forbes, or S&P 500 companies, Sacramento has only three from those lists, and some, like Las Vegas, are one-industry towns. Still, given the high prices that office properties have been trading in some of these markets, such a low spot on a business ranking could give investors a reason to think twice.

First and Last Business MSAs

Based on large and small companies per capita, unemployment, population, and job growth

Top Bottom
1. Minneapolis-St.Paul 50. New Orleans
2. Denver 49. Rochester, NY
3. Richmond, VA 48. Tucson, AZ
4. Boston 47. Buffalo, NY
5. Charlotte, NC 46. Sacramento, CA
6. Nashville, TN 45. Los Angeles
7. Washington, DC 44. Detroit
8. New York 43. San Antonio
9. Birmingham, AL 42. Virginia Beach-Norfolk, VA
10. San Francisco 41. Las Vegas

Source: MarketWatch

Briefly Noted

  • Industrial — Albuquerque, N.M., Tampa, Fla., and Portland, Ore., posted the lowest availability rates for 3Q07, with Atlanta, Austin, Texas, and Boston showing the highest, according to CB Richard Ellis.
  • Hospitality — After five consecutive years of gains, lodging occupancy should be flat this year due to the amount of available new product, according to PKF Hospitality Research.
  • Multifamily — “Buy multifamily,” particularly B and C properties, says Emerging Trends in Real Estate 2008, citing Seattle and San Francisco as top investment markets and forecasting a 6.1 percent cap rate for moderate income apartments by year-end.
  • Office — Portland, Ore., Seattle, and San Francisco are this year’s hot office markets, according to Grubb & Ellis senior vice president Robert Bach, who foresees national net absorption at 48 million sf, about 20 percent less than 2007.
  • Retail — More than 1,600 strip centers priced over $5 million were sold in the first half of 2007; however, when REIT and private equity deals are excluded, the number of single-asset centers sold actually declined from the previous year, according to the 3Q07 Korpacz Report.

SEC Seeks TIC Comment

In November 2007 the Securities and Exchange Commission asked for comment on the National Association of Realtors’ exemption request for tenant-in-common transactions. NAR is asking the SEC to allow commercial real estate brokers to receive compensation from TIC transactions without being registered as SEC broker-dealers. The comment period was scheduled to run through Dec. 20, 2007. To read NAR’s request, go to www.sec.gov/rules/other/2007/34-56779.pdf.

Top 5 Self-Directed IRA Investments

1. Investment property
2. Rental property
3. Foreclosures and pre-foreclosures
4. Tax liens and deeds
5. Raw land

Source: Guidant Financial

Advice for 2008

• Buy multifamily
• Buy or hold industrial
• Buy residential building lots
• Exercise caution in office and hotels
• Chill on retail

Source: Emerging Trends in Real Estate 2008

Real Estate’s Richest

Name Net Worth Source of Wealth
Sam Zell $6.0 billion Owns Equity Residential, Equity Lifestyle REITs
Paul Milstein Family $4.5 billion Milstein Properties owns New York offices, apartments, and land
Steven Ross $4.5 billion Founded Related Cos.
Matthew Bucksbaum Family $3.3 billion Founded General Growth Properties
John Sabrato Family $3.0 billion Sobrato Development owns and manages 8.5 million sf in Silicon Valley, Calif.

Source: Forbes

Self-Storage Investment Snapshot

Geographic Region Average Cap Rate (%) Year Change (in basis points) Median Sales Price (PSF)
West 6.9 -30 $82
Southeast 7.3 +40 $83
Northeast 7.5 -40 $96
South Central 7.6 -30 $49
North Central 8.7 +10 $57

Source: Marcus & Millichap

IRS to Examine 1031s

If you or a client has used a Section 1031 tax-deferred exchange recently, hold on to your documentation, as the Internal Revenue Service is stepping up reviews of such transactions, according to a Wall Street Journal report. Urged by a recent Treasury report to do a better job of explaining 1031 rules, the IRS also is revising its reporting forms, publications, and other communications and will conduct an in-depth study of reporting and compliance issues regarding like-kind exchanges. Part of the reason for the attention is the explosion of tax-deferred exchanges in the past decade. In 2004, taxpayers filed more than 338,500 forms for like-kind exchanges, more than double the number in 1998, representing almost $74 billion in deferred taxes.

Hospitality Project Pipeline

Company Luxury Upper Upscale Upscale Midmarket Total Projects
Marriott 11 43 407 204 665
Intercontinental 8 0 151 830 989
Hilton 1 55 266 372 694
Starwood 17 64 89 0 170

Source: Lodging Econometrics

New Reads

Craving Community: The New American Dream, Abecedary Press, $24.95. Todd Mansfield, CEO of Crosland LLC, a southeastern real estate development company, tries to relate his experiences planning and developing Celebration, Fla., to other “new village” phenomena, such as the growth of Starbucks and the creation of online Internet communities. Current Urban Land Institute chairman, Mansfield is considered a social engineering expert in mixed-use and large multifamily developments. From his perspective, we want to live “where everybody knows your name.”

Broken Buildings, Busted Budgets: How to Fix America’s Trillion-Dollar Construction Industry, University of Chicago Press, $25. Although it’s going to be short-term painful, it could be long-term beneficial, says lawyer and author Barry LePatner of the need to end the $120 billion the construction industry wastes annually on inefficiencies. It’s the next industry that will undergo massive change, primarily because the U.S.’s aging infrastructure and need for cheaper, faster buildings will force that change, he says. The adoption of fixed-price contracts and industry consolidation are the means to that end: “Buildings of all types will cost less than they do now, there will be more of them, and they will be of higher quality,” he says.

U.S. Retail Space Additions

Based on sf

Jan. to Aug. YTD % Change
Retail Subsector 2005 2006 2007
Superregional 167.3 -18.1 -54.0
Regional mall 5.3 14.8 28.2
Community center -11.2 57.2 -27.2
Neighborhood center 5.3 14.8 -14.2
Big box/value center 7.9 -12.6 -1.9
Under 30,000 sf 5.6 5.6 -23.4
All retail 2.6 4.1 -10.3

Source: McGraw Hill Construction, ICSC Research

Seniors-Housing Investment Goes Mainstream

Seniors-housing investments are moving out of the niche category as above-average returns and the sector’s growth potential attract a broader range of investors, says Marcus & Millichap. The greatest amount of new construction is occurring in California, Washington, and Illinois, followed by Texas, Arizona, Ohio, and New York.

Sector Average Cap Rate (%) Construction Pipeline Median Sales Price
Independent living 7.8 10,500 units $158,000 per unit
Assisted living 7.7 3,180 units $138,000 per unit
Skilling nursing 12.9 2,600 beds $50,000 per bed
Dementia care 9.0 1,100 units N/A

Source: Marcus & Millichap

Worth Quoting

"The party is over. With the exception of quality product, markets with barriers to entry, and those with a durable rent roll, commercial real estate will decrease 10 percent to 12 percent in 2008. What we’re experiencing now is not a market crash, but merely a return to normalcy."

—Jerry Anderson, CCIM, president, Sperry Van Ness

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