Market Trends Online(11)

Market Views

“I believe the overall market has already started to ease. … I'm sure there are going to be some casualties, particularly in what I would call ex-urban, the glass-block commodity office building. … I don't think there's going to be any casualties in any of the first-class office space around the country. The commercial real estate market is going to do terrific no matter what the economy does, short of a depression.” -- Sam Zell, chairman of Equity Residential, in a Bloomberg.com interview

“We do expect transaction volume to pick up in the second half of the year and slowly recover in 2009. The shutdown of the debt markets and slowing economy have moved the commercial real estate market from a seller’s market to a buyer’s market where cash is king and patience, discipline, and conservative underwriting are the watchwords for success.”  -- CapLease, April 2008 newsletter

“Retail rents will suffer the most in Phoenix and Las Vegas while Seattle and San Francisco will see some of the largest gains. Office rent growth in Houston and Seattle will be over 6 percent in 2008. Apartment rents will take the biggest hits in Fort Worth, Phoenix, and Las Vegas.” –- Portfolio & Property Research, 1Q08 Forecast

Retail Still a Draw

The buyer pool remains very strong for assets in this price and size range in today’s market,” said Edward Hanley, CCIM, president of Hanley Investment Group, which sold three southern California, retail centers this spring. Artesia Plaza in Long Beach, Calif., sold for $2.7 million, closing $45,000 above the asking price. The two-tenant center generated 10 offers and sold at a 5.4 percent capitalization rate. The two other centers, located in Corona and Costa Mesa, Calif., sold for $548 psf and $608 psf respectively.

$800 Billion on Sidelines

As much as $800 billion in investment cash is waiting on the sidelines, said Hugh F. Kelly, former economist for Landauer Associates. “Once we understand the magnitude of the risk, I think you’ll begin to see the dam of credit open up,” Kelly said in a speech to the Tampa Bay, Fla., chapter of Commercial Real Estate Women. Life insurance and pension funds will return to the market first, he says, before banks, which are holding out for more favorable market conditions. Now an associate professor at New York University, Kelly said the economy overall is not that bad, citing strong job growth in healthcare and technical fields offsetting losses in housing-related industries. Although Florida lost about 25,000 jobs, 80 percent of the country is maintaining its unemployment level, including most of the Southeast, he added.

Austin, Texas, Defies Market

In one of the few cities where condominium demand is matching increasing supply, construction began in Austin, Texas, on W Austin Hotel & Residences, a $295 million mixed-use project slated for completion in 2011. Almost 40 percent of the project’s residential units are under contract, with another 20 percent in process. The 165-unit project in Austin’s downtown also will include a 252-room W Hotel and a 2,480-seat theater and music venue that will be the home of “Austin City Limits,” TV’s longest-running concert series. Austin city leaders hope to have 25,000 residents living downtown by 2015 and a recent study showed that 70 percent of buyers moving into the central business district do not work there but wish to live there.

18 Percent Office Vacancy Possible Next Year

A predicted loss of 2 million jobs would translate into negative absorption of about 100 million sf of office space, which combined with 94 million sf of new product, will boost the national office vacancy rate to 18 percent by year-end2009, Grubb & Ellis says. That’s an increase of almost 5 percentage points from the current rate of 13.6 percent. The good news is for investors and tenants: Distressed sales will create record buying opportunities and nervous landlords may offer more aggressive terms and concessions to keep tenants in place.

Industrial Snapshot, 1Q08

Market Vacancy Rate (%) YTD Absorption Rents PSF
Cincinnati 6.4 (311,349) $3.72
Inland Empire, CA 8.4 156,806 $6.20
Memphis, Tenn. 16.1 (54,267) $2.70
Pittsburgh, Pa. 12.7 22,825 $4.03
Salt Lake City 3.4 (69,121) $4.94

Source: Staubach Co.

Top 5 Private Equity Real Estate Companies

Company Capital raised 2003-08
(in billions)
The Blackstone Group $19.75
Morgan Stanley Real Estate $16.77
Tishman Speyer $11.36
Goldman Sachs Real Estate $11.19
Colony Capital $10.95

Source: Private Equity Real Estate

Commercial real estate professionals checked out the “ultimate green office” on display at the National Association of Office and Industrial Properties’ first green development conference in Glendale, Ariz. Leadership in Energy and Environmental Design, or LEED, certification of buildings increased nearly 70 percent in 2006, according to a recent NAIOP report. Photo credit: NAIOP

Top Retail Property Buyers

Company/2007 Retail SF Acquired Number of Properties Acquired in 2007
Centro Properties Group/73,603,957 21 properties in 9 states, plus a portfolio of 467 properties in 39 states
Developers Diversified Realty/44,817,416 3 properties in 3 states plus portfolio of 310 properties in 26 states
Simon Property Group/43,430,821 38 properties in 23 states
General Growth Properties/22,049,960 22 properties in 13 states
The Inland Real Estate Group of Cos./10,198,152 47 properties in 20 states plus 3 portfolios: 21 properties in 6 states; 13 properties in 12 states; 16 properties in 9 states

Source: Chain Store Age, May 2008

Mag Mile Property Sells

Chicago’s Michigan Avenue-based Shops at North Bridge sold for $515 million, a lower price than expected, to Macerich Co. The lower price reflects the fact that the mall will face a $5 million higher property tax bill this year when it is reassessed. Nordstrom is the big draw to this 680,933-sf mall developed by John Buck, one of the sellers along with the Westfield Group and a Morgan Stanley real estate fund. The acquisition also includes 1,200 parking spaces and 133,615 sf of office space.

MOBs’ Future Looks Healthy

Despite the credit market crunch, the dollar volume of medical office space transactions hit a new high of $4.7 billion in 2007, reflecting growing investor interest in this healthy office sector, says a Grubb & Ellis report. MOBs are expected to weather the soft economic conditions better than other properties due to the growing demand for healthcare services, especially by an aging U.S. population. In terms of asking rental rates, MOBs averaged 2.8 percent growth annually in the last seven years, compared with 1.3 percent annual growth for traditional office space. California, Texas, Florida, and Illinois accounted for one-third of MOB starts last year, and construction expected to jump 14 percent this year. By 2010, healthcare construction costs could top $60.1 billion, according to an FMI report.