Market Trends Online(14)

Bear Market Predicted

A survey of 332 top commercial real estate executives revealed decidedly bearish attitudes toward the market in the coming year, according to real estate law firm DLA Piper. In the company’s October survey, only 31 percent of respondents described their outlook as bullish for the next 12 months, down from 78 percent in the company’s April survey. Answers show the credit crunch’s marked affect on commercial real estate:

  • 63 percent of respondents have been involved in deals delayed or canceled because of the credit slowdown;
  • 27 percent report witnessing an increase in loan defaults; and
  • 61 percent say it will take nine to 12 months for the market to stabilize itself from the effects of the credit crunch.

Private Equity Buyouts Suffer

The credit squeeze has sent private equity investors walking away from deals, to the tune of $202 billion, more than double last year’s figure, according to Seventy-six deals have been abandoned this year, compared with 55 deals amounting to $98 billion a year ago.

3Q07 CBD Office Snapshot

Market Sales price ($/psf) Cap rate (%)
Atlanta 185 6.6
Boston 405 5.6
Cleveland 115 9.0
Denver 192 7.2
Houston 145 6.4
Milwaukee 225 7.5
Phoenix 124 6.6
Portland, Ore. 145 6.5
Sacramento, Calif. 340 6.5
Seattle 347 5.8

Source: Colliers International

World REIT Snapshot: Top 5 Countries

Market Capitalization (in millions)
U.S. 381,914
Australia 112,428
France 74,820
United Kingdom 57,763
Japan 49,052

Total Rate of Return - Capital and Income (%)
Singapore 72.9
South Korea 42.6
Japan 42.4
France 37.6
South Africa 37.3

Source: Ernst & Young

Rent Growth Scenarios 3Q07-3Q08

Apartment New York 5.3%, San Francisco 5.25%, Seattle 4.6%
Office Austin 9.2%, San Jose 9.1%, Boston 8.4%
Retail San Francisco 6.2%, Washington, D.C. 4.8%, New York 4.7%
Warehouse Inland Empire, CA 4.2%, Jacksonville 4.1%, Orange County, CA 3.8%

Apartment Detroit -1.5%, Orlando -0.7%, Tampa -0.6%
Office Detroit –4.0%, Cleveland -3.4%, Columbus -2.3%
Retail Columbus -0.6%, Cleveland -0.2%, Phoenix -0.1%
Warehouse Austin -3.4%, Dallas-Fort Worth -3.2%, Phoenix -2.7%

Source: Property & Portfolio Research

Winning by Anger: How Emotions Help Negotiators

Displaying emotions can sometimes help a negotiator, said Stanford Graduate School of Business professor Margaret Neale, at a conference for business executives. Emotions can be powerful pieces of information, she said, citing a study that showed negotiators who displayed anger during the process created more value than unemotional negotiators. She also counseled “to make the first offer because of the power of anchoring,” offering the advantage of defining the starting point. Waiting for the other side to make the first offer only makes sense “when you honestly believe that the other side dramatically values the object of the exchange at a much higher rate than you do,” she said.

Investors Like to Follow the Crowd

Despite the wealth of investment information available today, peer pressure has a lot more to do with investment decisions than people may think, according to two Stanford University finance professors. It’s kind of like high school all over again, according to Peter DeMarzo and Ilan Kremer, who found that even people who know a stock is overpriced will purchase it rather than risk doing something differently than their peers and losing out entirely.

“We might classify behavior based on relative wealth as ‘irrational,’ but in choosing similar, risky portfolios, investors are actually doing what makes sense to them,” Kremer says.

“If everyone loses his or her money together, it’s perceived as not as bad as if just you lose alone,” DeMarzo says. “Investors fear being poor when everyone around them is rich.”

9 Investment Ideas for the New Year

1. Seek good real estate with bad capital structures.
2. Buy distressed loans.
3. Hold core properties.
4. Focus on 24-hour megacity markets.
5. Concentrate on operations.
6. Buy public REITs.
7. Buy broker, homebuilder, and mortgage company stocks.
8. Use demographic strategies.
9. Staff up the workout teams.

Source: Emerging Trends in Real Estate 2008

Top 10 Employment Growth Cities

Out of 200 largest MSAs, ranked by ability to create and sustain jobs

1. Ocala, Fla.
2. Wilmington, N.C.
3. Riverside-San Bernardino –Ontario, Calif.
4. Phoenix-Mesa, Scottsdale, Ariz.
5. Orlando-Kissimmee, Fla.
6. Naples-Marco Island, Fla.
7. McAllen-Edinburg-Mission, Texas
8. Provo-Orem, Utah
9. Las Vegas-Paradise, Nev.
10. Raleigh-Cary, N.C.

Source: Milken Institute

Under Construction: Seniors Housing

Number of Units Locations
2,000+ California, Illinois, Washington
1,000 – 1,999 Arizona, Ohio, New York, Texas
500 – 999 Colorado, Idaho, Indiana, Kansas, Florida, Maryland, Massachusetts, New Jersey

Source: Marcus & Millichap

The Jenny Lind suite is in the Willard Hotel, an Intercontinental flag in Washington, D.C.
Credit: Intercontinental Hotels

Hospitality Companies to Benefit from Strategy Switch

Major hotel companies can look forward to a few years of significant fee income growth, a benefit of industry strategy change in the 1990s when the four major brands switched from owning hotel real estate assets to branding and managing, according to Lodging Econometrics. The move created a greater number of brands at multiple price points and generated a hotel building boom. More than 5,000 hotel projects were in the planning or construction pipeline at the end of 3Q07, a 47 percent increase in project counts over the peak in 1999. Marriott, Hilton, Starwood, and Intercontinental have between 20 percent and 26 percent of guest rooms in new hotels, which will generate greater franchise fee income. LE predicts that new room openings will top 135,000 in 2008 and 165,000 in 2009.

CiCi’s Pizza Buffet operates 600 stores nationwide.

Some Buffet Chains Still Expanding

Nationwide, the number of all-you-can-eat buffet restaurants has fallen, but three companies are still on a growth trajectory looking for space in shopping and power centers, according to Retailing Today. Buffets, Inc., owner of HomeTown and Old Country Buffet merged with Ryan’s Restaurant, owners of Ryan’s Grill and other brands, and now is the largest U.S. buffet restaurant chain with 650 units. The company plans to re-initiate its franchise program, opening six to 10 new outlets a year. The company prefers freestanding or end-cap locations of 9,500 sf to 11,000 sf, near power centers and regional malls. California and Florida are targeted for initial new growth. Golden Corral, which has 481 units in 41 states, plans to open up to 150 stores in the next five years. The company prefers sale-leaseback deals on freestanding pads of 8,000 sf to 12,000 sf near big-box power centers. CiCi’s Pizza Buffet is the fastest-growing buffet concept, opening more than 150 stores since 2005. The company operates 600 units in 29 states and plans to open 80 new stores in 2008, with hopes of doubling its size in the next five years. The mostly franchised chain operates relatively small stores, only 4,200 sf, and considers in-line locations in shopping centers.