See the article below about the apartment market in the current economy.  We have the ability to analyze these deals and help you determine the quality of  an investment and project potential returns. 

Contact us with your investment objectives and we can search for investment properties that will meet your needs.

Dan Smith

Millridge Commercial Real Estate

919 554-4165

APARTMENTS:

Transaction Volume Rises More in Apartment Than in Other Property Types

Distress is hitting home in the multifamily sector, and as more assets become troubled, the bid/ask spread will tighten in 2010 and cause sales volume to rise quickly. In the last cycle,apartment-sales volume peaked in 2005 (due to the condo-conversion craze), while office,retail, and warehouse sales volume peaked in 2007. This timing, combined with the sector’s shorter lease terms and tumbling NOIs, is resulting in expedited distress. Delinquencies in the apartment market have risen by 590 basis points in the last 12 months as of the third quarter, compared with just 390, 290, and 240 basis points for retail, warehouse, and office,respectively. The typically higher loan-to-value ratios and lower debt-service-coverage ratios in this sector are certainly not helping matters, either, and just as delinquencies are mounting, the vultures are circling. Since apartment investment has been sliding since 2005, there is plenty of pent-up interest in the sector. And if PPR’s client activity is any indication, that interest is growing daily. As of December, 61% of all client activity on the PPR Portal in the last 90 days has been apartment related, and this proportion has been steadily increasing. The apartment sector’s strong drivers going forward (including healthy demographics, an increasing renter pool, and stabilization in the labor markets) are driving investor interest. And, of course, the greater availability of debt in the multifamily sector will propel investment volume through 2010. As Fannie and Freddie continue to finance multifamily loans, apartment investors have a leg up on their other commercial counterparts. But should the GSEs cut down on their apartment lending activity in the second half of 2010, sales volume could certainly take a nosedive.

Exhibit 9). In addition to the pretty rough fundamentals environment through year end, with record high vacancies and plummeting rents, the cap rate question is really one of spreads. Right now, apartment cap rates of around 7% on 10-year Treasuries of about 3.5% equates to a spread of about 350 basis points. As fundamentals improve, cap rate spreads will come in a bit during the recovery; however, given the stimulus and the potential for higher inflation, we expect the 10-year Treasury rate to head towards 5.5% — if not in 2010, then in 2011. Therefore, a 250- or 300-basis-point spread results in cap rates of 8%–8.5%, depending on the market. However, if we handicap this prediction, particularly for 2010, we expect that we are a bit too conservative — i.e., rates could surprise on the upside and remain low, and spreads could come in a bit more than we expect.

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January 2010

vol.14 no. 1

page 14

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Wake Forest named a top U.S. growth city

Triangle Business Journal

Wake Forest is one of the top high-growth communities in the country, according to a ranking compiled by research firm Gadberry Group.

Gadberry, which provides location information and household data for clients such as retailers, on Tuesday announced the top nine cities in its “from 2009” report.

Little Rock, Ark.-based Gadberry evaluated various metrics, including growth in households and income. Wake Forest placed sixth in the ranking. The city grew from 8,150 households in 2000 to 17,803 in 2009, a 118 percent increase, according to Gadberry’s analysis. The average annual household income for Wake Forest increased from $70,148, to $82,771.

The top city was Atlanta suburb Braselton, Ga., which saw its household income increase 67 percent from 2000 to 2009. Houston suburb Atascocita, Texas followed. Texas was well represented with four cities. Besides Wake Forest, no other North Carolina community made Gadberry’s top rankings.

“As a Wake Forest native, I’ve recognized the explosive growth that our community has experienced,” Don Stroud, Wake Forest Area Chamber of Commerce board co-chair said in a statement. “The Gadberry data will give us the quantitative tools we need to continue to draw new development to Wake Forest.”

Published: Sep 22, 2009 03:40 AM in The News & Observer

Mid- Year Review notes from 23 July 2009

 On the 23^rd of July a hundred or more real estate and associated business professionals attended the Mid-Year Space review held by the Triangle Business Journal at the Embassy Suites in Cary, NC. Here are a few notes I took on each section, along with the presenters name and subject.  Please see the attached slideshow from the presentation as a reference.

 Keith Crisco/Keynote Speaker:  North Carolina Secretary of Commerce.  He discussed how North Carolina is aggressively competing for new businesses against neighboring states in the region and how important tax incentives can be.  He also stated that these incentives are tied to performance and the ability of the incoming company to employ the number of people they projected.  So if a company does not employ 90% of their projected number of new jobs, they do not get the incentive for that year.  He also said that there have been 4500 new jobs created in the state since JAN 2009.

Matt Riggs/ Construction Costs: Vice President of Centurion Construction.  Construction costs are down 40% from OCT 2008.   He said there are a number of issues that will cause construction costs to increase in the future: Infrastructure building in China which will effect raw material costs, “Green” building concepts that may be integrated into building code,  the possibilities of companies being required to provide healthcare .

Mike Munn/ Regulatory Issues: Vice President of the John R. McAdams Company.  The proposed franchise Tax for LLC’s and LLP’s has not passed yet.  There has been some development extensions which extends permits for current developments (Bill  SB831).  The Jordan Lake rules became law on June 30,2009 and increase the standards for stormwater management.  The Falls lake rules are under revision and expect to see more changes as a result of the drought of 2007, which also resulted in a tiered water rate which increased water costs.  Expect to see a new term emerge called LID or Low-Impact Development which will be the next LEED.  Expect  to see new regulations that stress the importance of water quality and quantity.

Bernard Helm/Residential Market: Market Opportunity Research Enterprises (MORE).  New home sales down 30-40%.  The average price of a new home is down 8% when comparing 2Qtr 2009 with 2Qtr 2008.  Volume of home sales is down 30% when compared to the peak in 2006/2007.  Many lenders are holding large numbers of properties and many homeowners are holding on to their properties instead of selling right now.  On the positive side the rate of decline is slowing. www.morereport.com for more info and see TBJ SPACE slides.

Amanda Jones Hoyle/Real Estate By the Numbers: Real Estate Reporter, Triangle Business Journal.  The Flex market is stable right now with little increase or decline in vacancy rates with warehouse vacancies increasing.  Office vacancy topped 18% which is the highest it has been in the last 20 years.  Very little new space will be built over the next few years.

Rex Thomas/ Looking Ahead, What’s in Store: Chairman and CEO, Grubb& Ellis/ Thomas Linderman Graham.  Historically recessions have lasted about 3 years, but this is not a normal recession.  The vacancy rates are projected to peak in 4^th QTR 2010 or 1^st QTR 2011 with unemployment rates to increase through mid 2010.  Retail trends are going to change significantly since people have changed their spending habits.  The triangle is expected to emerge from this recession ahead of the National Market with the triangles population expected to double by 2025.  The accolades from National magazines have made this an attractive place to relocate to and start businesses.

Matt Rhoad/ Legal Trends: Lawyer, Smith Anderson.  The legal trends right now are toward more lawsuits and less deals.  There is an increasing importance on comprehensive community planning which tend to drive rezoning approvals.  Matt referred to the city of Raleigh 2030 draft plan (431 pages) that was released DEC 2008 and includes 17 different categories of future land uses and has a future land use map.  There is still some time to influence this plan since it will probably be voted on in SEP 2009.  After the comprehensive plan is voted on their will be an overhaul of the UDO(Unified Development Ordinance) and development regulations.

The metropolitan area is home to more than 1 million people after growing by more than 4 percent from 2007 to 2008. But that is slower than in previous years.

By Kristin Collins, Staff writer

As the national economy lost steam last year, the Raleigh area continued to attract residents, becoming the fastest-growing metropolitan area in the country.

According to census numbers released today, the Raleigh-Cary metropolitan area, which includes Wake, Johnston and Franklin counties, grew by 4.3 percent from July 2007 to July 2008, and is now home to close to 1.1 million people. It well outpaced its closest rival, the Austin, Texas, area, which grew by 3.8 percent.

The national average was just under 1 percent.

The Triangle has been near the top of the nation’s growth chart for more than a decade, as newcomers poured into the area to take jobs in technology, tourism and academia. The resulting building boom, and the jobs that came with it, drew hundreds of thousands of new residents.

Much changed in recent months as the economy fell into a deep recession. While the downturn took longer to arrive in North Carolina, the state’s unemployment rate of 9.7 percent is now well above the national average of 8.1 percent.

Next year’s figures may show a darker picture for the Triangle.

Even this year marks a slowdown for the area, despite its place at the top of the list. The growth rate was nearly half a point lower than the two previous years, when it was 4.7 percent.

The Durham-Chapel Hill metropolitan area, which includes Durham, Orange, Chatham and Person counties, didn’t make the Top 10, but its population continued to swell at a steady 2.5 percent, up slightly from the year before. Just fewer than 490,000 people live in that area.

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CoStar recently reported on alternative tenant uses and strategies for filling vacant retail space.  Of particular interest in this article are the examples of Non-Traditional Tenants that can successfully fill these spaces and the emphasis on creativity and aggressive marketing necessary to target these alternative tenants.

GOVERNMENT USES

Examples: Department of Motor Vehicles, City Halls, Military Recruitment Centers, Libraries

Jones Lang Lasalle retail’s Bemis said there’s a “fairly large trend” of government entities opening in malls. CoStar has recorded at least 100 leases to government entities at retail centers over the last six months. “While they’re not ideal for upscale malls, they are willing to lease those difficult spaces — usually in mall wings that are close to the parking lot,” he added.

EDUCATIONAL USES:
Examples: Satellite Colleges and Universities, Massage / Beauty Schools, Daycares, Youth Private Schools

With the population of those laid-off from their jobs incessantly on the rise, many people choose to “go back to school” during this down economic period. That said, schools are a good candidate to backfill vacant junior anchor or anchor spaces at shopping centers. CoStar has recorded at least 60 university/college/vocational school leases over the last six months, as well as countless preschools/day care centers.

CHURCHES
While those interviewed cited a few examples of churches signing leases as an example of alternative retail tenants, the consensus among those we consulted was that it’s not a widespread trend. CoStar recorded at least 80 leases signed by churches at retail centers over the last six months.

MEDICAL USES
Examples: Doctor’s Offices (Vision, Dental, Chiropractic, General Practice, Pediatrics & More), Medical / Urgent Care Clinics, Outpatient / Physical Therapy, Dialysis Centers, Medical Supply, Hearing Aid Centers

Medical uses are becoming more and more common at U.S. shopping centers. According to Costar Tenant, at least 120 leases were signed in this category at retail centers over the last six months.

RECREATIONAL / FAMILY FUN USES
This category can get interesting. Bingo Halls or Bridge Clubs are not uncommon. Indoor children / family fun centers are also popular as replacement tenants — think bouncy houses, indoor mini-golf, roller skating, bowling, play structures and ball pits, arcades, laser-tag arena, birthday party centers and the like. These tenants are candidates for small spaces all the way up big box spaces. CoStar recorded at least 30 leases in this category over the last six months.

FITNESS USES
While often downplayed by brokers and store owners as “non-ideal”, fitness tenants have become a much more common fixture at shopping centers than in the past, said our experts. This category is widespread, from national and regional chains taking over vacant big box spaces, to local and franchise users opening up specialized fitness instruction spaces (dance, martial arts, personal trainers, and yoga are examples) and weight loss clinics. CoStar has recorded nearly 350 leases in this category over the last six months

SECOND-HAND / OVERSTOCK
Examples: Thrift Stores, Consignment Stores, Second-Run Cinemas, Used Furniture, Used Books/CDs/Video Games, Antiques, used sports equipment, Bakery Outlets, “Scratch-n-Dent” / Overstock item Retailers, Pawn Shops

With tightened pockets, consumers are much more willing to sell, trade, or buy their “gently-used” items; they still want to go to the movies, but are willing to view films that have been out for a while already, sit in older seats, and deal with below-par picture and sound; and being they’re on the lookout for a “great deal”, they don’t mind buying dented cans of food or “irregular” merchandise.

SEASONAL / TEMPORARY
Examples: Mall Kiosks, Holiday Goods Retailers, Annual Inventory Liquidators

With vacancy on the rise, landlords have become more willing to consider signing temporary tenants, as they look to generate at least some income while they continue to search for a permanent tenant. However, the number of potential tenants in this category continue to be limited, said our experts.

“At malls, this is called ’specialty leasing’, and often these tenants can help lead to growth as they’re converted into permanent tenants. However, the specialty leasing world has been hit with the rest of the leasing world in the scramble to find appropriate retailers for space,” said Bemis.

TRADITIONAL TENANTS

Surprisingly, there are still a few traditional tenants expanding, the deals are just fewer and farther between. Some categories continue to plug along with expansion, however.

Discounters are the standout across the board named by all interviewees. Dollar stores (this category is widespread from small shop local and franchised stores to the likes of Dollar Tree, Dollar General and Family Dollar), discount grocers (Aldi, Save-A-Lot, etc), big-box discounters (Target, Wal-Mart), wholesale clubs (Costco, BJ’s, Sam’s Club), and off-price brand retailers (TJ Maxx, Marshalls, Ross Dress for Less, etc) were identified.

Other common uses continuing to sign leases over the last six months include wireless phone/mobile device retailers (at least 350 leases in the last six months), video game retailers (at least 150 leases over the last six months), quick service restaurants (at least 800 leases signed in the last six months), drug stores, wine/liquor/cigar shops (38, 42, and 29 leases in the last six months, respectively), tax preparers, insurance (at least 150 leases over the last six months), real estate/construction (yes that’s right, at least 85 leases were signed in the last six months), hobby/craft retailers (approx. 50 leases over last six months), pet care/supplies (at least 60 leases over the last six months), salons/spas (at least 375 leases signed over the last six months), massage/ acupuncture (at least 80 leases over the last six months), financial services (at least 75 leases over the last six months), beauty supply (at least 80 leases over the last six months), copy/ship, sign makers, rental centers (at least 60 leases over the last six months), and more.

THINK OUTSIDE THE BOX

“Creativity is very important now,” stressed Bemis. As an example, Bemis cited JLL Retail’s work on the Crestwood Court mall just outside of St. Louis. “Half of this center is getting redeveloped in a few years, but in the interim, about half of the space was vacant. We approached the arts community and were successful in turning that vacant space into an artisan community,” said Bemis. At ArtSpace, local artisans rent space for studios where they can work on, display and sell their works; space for art classes, as well as live theatre is also on the premises. While ArtSpace was originally planned as a temporary use, Bemis said it’s caught on in the community and is “keeping the mall very vital and interesting” and as a result, might be considered as part of the Crestwood’s redevelopment plan.

Ralston takes an analytic approach. “I suggest exploring the detailed demographic reports available. Take a look at the NAICS codes for retail and restaurant use and scrutinize each trade and its subsets in order to identify tenants. Then cross-reference that with demographic data on the categories where people spend their money [national per capita averages in comparison to the same in a certain radius of the subject property], to identify uses that are underserved in a certain geography.”

Meanwhile Williams said that calls coming in from their “for lease” signs are “down about 40% nationally, so now it’s really important to use every avenue of advertising, as well as pounding the pavement and canvassing.”

Apartments are best positioned to weather the storm of a slowing economy. High construction costs and condo conversions have reduced new supply and a slowing housing market increases rental demand.

Owners can now flex their muscles with rent increases, and those who bought at high valuations may yet get the last laugh. 

If you’re considering selling, the time to name your price is past, but you’ll find plenty of interest at just-off-peak levels.

However, multi-family performance is highly sensitive to demographic shifts. Plainly stated, people live where they work, and a one-year lease makes it easy to move.  Wake County and the surrounding area is on a steady pace and should come out of the recession faster than most areas of the country.

Areas with declining employment and population will experience an acceleration of those trends, and investors will not acquire properties in such markets without good reason to believe a comeback is in the near future.

If you haven’t already, be sure to visit www.discoverwakeforest.org and subscribe to their news feed as this is certain to be a valuable informational source for businesses and citizens of our town.  Below is their first feed that explains the partnership between Wake Forest Downtown Revitalization Corporation and the Wake Forest Chamber of Commerce:

“By mutual agreement between the Wake Forest Downtown Revitalization Corporation (DRC) and the Wake Forest Area Chamber of Commerce, the Chamber will now assume economic development activities for downtown Wake Forest as part of the Chamber’s overall economic development program.

Downtown economic development was one of five priorities identified at a strategic planning session of the Wake Forest Area Chamber of Commerce this past year and has become an important component in the Chamber’s overall commitment to the Town of Wake Forest to provide economic development activities for the entire community.

“This partnership agreement allows us to have a coordinated and focused effort toward the continued revitalization of downtown Wake Forest and continued strides on the implementation of the Renaissance Plan,” Chamber Executive Director Jodi Ann LaFreniere said.

The Chamber and the DRC will assist and complement each other’s downtown economic development efforts through various roles and responsibilities as they relate to this important function. The Chamber will organize and lead monthly meetings of a separate downtown economic development task force with key stakeholders; continue to plan and manage the annual Economic Development Forum (February 2009); provide structured outreach to both existing and potential downtown stake holders; provide a progress report and prioritization objectives with regard to the Renaissance Plan; distribute a four page quarterly newsletter as a pull-out in the monthly Chamber newsletter; add a downtown section to the economic development web site scheduled for launch in February 2009; and participate in the DRC monthly board meetings.

Both the Chamber and the DRC have a strong commitment to downtown and want to ensure that all plans and opportunities to enhance and protect the economic vitality of downtown are fully realized.”

It is difficult to imagine economic turmoil as a good thing for any business sector, but as markets have steadily worsened this year, the outlook for the green building industry appears to be trending the opposite direction.

November was an exceptionally robust month for the publication of green building data, with more than 10 surveys and reports exploring an array of topics such as worker productivity in LEED buildings, the impact of construction declines, cost premiums and payback periods, and perceptions of the business case for green.

Though polling and research has increased in the past few years, new data has been even more in-demand lately as property stakeholders attempt to gauge how the credit crisis and a full year of recession have affected green building.

Almost universally, the data points to another good year in 2009.

One of the more insightful reports is the “Green Building Impact Report 2008” from Greener World Media, which quantifies the overall effects of LEED on industry and the environment.

In its boldest conclusion, the report said that companies in LEED building have realized annual employee productivity gains exceeding $170 million as a result of improved indoor environmental quality — a cause and effect that has been difficult to quantify. That figure is predicted to jump well into the billions by 2015 as the number of employees in LEED buildings grows more than 10-fold, the report said.

On the industry side, LEED-certified projects have specified more than $10 billion of green materials to date, which has been a boon for the manufacturing sector, according to the study. Environmentally, LEED buildings have cumulatively saved 400 million vehicle miles traveled, 9.5 billion gallons of water and 0.03 quadrillion quads of energy.

The report predicts an overall “flattening” of the rate of LEED growth as it begins to saturate markets, but continued growth in the amount of floor area that is certified. “The current economic situation coupled with increased stringency in the LEED requirements will contribute to an expected slowdown” in LEED growth, the report said.

McGraw Hill’s “2009 Green Outlook” study said green building seems to be insulated from the recession and is growing “in spite of the market downturn.” The value of green construction increased five-fold from $10 billion in 2005 to as much as $49 billion this year, and could triple by 2013 to nearly $150 billion, the study reported.

In Turner Construction Co.’s “2008 Green Building Market Barometer”, more than 80 percent of real estate executives said they would be “extremely” or “very likely” to seek LEED certification for new projects in the next three years. And at an Ernst & Young roundtable of construction company financial executives, 99 percent of survey respondents said interest in green development would increase next year, or at least remain the same as it is this year.

For the second year in a row, architects said that sustainable design is being driven by client demand, which is in turn being driven primarily by perceived energy savings and marketing benefits. More than 20 percent of architects also said that “market demand” was motivating clients to build green. Only 10 percent said that was a factor last year.

Nearly three-fourths of architects polled were concerned that clients are still not willing to pay cost premiums for green design, although according to a new global study written by sustainability expert Greg Kats, premiums for new buildings average just 2 percent.

Called “Greening Buildings and Communities: Costs and Benefits”, the report found that most green buildings cost less than 4 percent more than conventional buildings, with the greatest concentration of premiums in the 0 percent to 1 percent range.

As a CoStar study revealed earlier in the year, key indicators of building value such as occupancy, sale prices and lease rates tend to be higher in green buildings than in conventional buildings, the Kats study reported.

It also said that green buildings reduce energy use by an average of 33 percent, and that cost savings from energy efficiency would more than offset the green development premium, often in five years or less.

Kats said those factors have made green buildings remarkably resilient to the economy. “The deep downturn in real estate has not reduced the rapid growth in demand for and construction of green buildings. This suggests a flight to quality as buyers express a market preference for buildings that are more energy efficient, more comfortable and healthier,” he said.

That notion is not lacking for supporters.

Nearly 70 percent of corporate real estate executives responded that sustainability is a “critical business issue” in a survey by Jones Lang LaSalle and corporate real estate trade group CoreNet Global in a recent survey, which is up almost 20 points from last year.

(CoStar)

Tuesday, Oct. 7, the Wake Forest Planning Board again continued the public hearing about a special use permit for Wake Union Place, the major shopping center planned for the former Parker-Hannifin site on Wake Union Church Road adjacent to Capital Boulevard. The plan calls for Wake Union Church Road to end at the southern edge of the center site. A new street, not named, will turn west beside the Sleep Inn, then turn to the north adjacent to the St. Ive’s subdivision and end at the northern edge of the property. In the future, plans are to extend it north to Jenkins Road. A second street, running east and west, will connect the first street to Capital Boulevard at the existing traffic signal. Twelve retail stores in a strip design and five out-parcels were shown during the two community meetings. The plan does include the two-acre site for the west side fire station between Kearney and the new unnamed street, with access only on the unnamed street. The center is a project of Wake Forest developer Jim Adams, Interface Properties of Boca Raton, Fla., and the national firm Weingarten Realty Investors.

Clearing is nearly complete and construction is underway for the second and third phases of Wake Forest Crossing shopping center on Capital Boulevard. Kohl’s department store will be the anchor for this new section. Lowes Foods is the anchor for the first phase. When complete, there will be a second entrance/exit on Stadium Drive west of the seminary cemetery.

There is also clearing and construction underway for Gateway Commons shopping center at the intersection of the N.C. 98 bypass, Jones Dairy Road and Wait Avenue. Lowes Foods and Ace Hardware are the announced tenants.

On Nov. 8, 2007, the planning board recommended approval of an increase in the height of the hotel developer Daryl Cady plans for La Scala on Star Road just north of Living Word Family Church. Plans are for a 60-foot high, four-story, 90-room hotel near the road facing a 28,800-square-foot office building. Behind those buildings will be a large ballroom/convention building.

The Wake Forest Planning Department is also reviewing the master plan for La Scala phases two through four on 85.5 acres along Star Road. It includes 239,200 square feet of office space, 375,250 square feet of retail space and a 40,000-square-foot hotel. The zoning is highway business.

Within the next few months Shuckers will have new owners and will move to Heritage Shoppes on Rogers Road. The moving date depends on construction.

Fallcreek Construction has begun construction of the building for the future Mellow Mushroom at the corner of South Main Street and Wake Drive. Several large trees on the lot will be saved.

What was Todd’s will soon be Forestville Commons, or it will be as soon as owners Williams Hicks and others can work out the building design features with Assistant Planning Director Ann Ayers. The plan is to echo or reflect the design of the Forestville Baptist Church next door. There will be a convenience store with gasoline sales plus seven retail bays in a flex building.

Officials with Franklin Academy Inc. recently held a meeting with neighbors in the Flaherty Farms subdivision and the Wake Forest Planning Department is reviewing the construction plans for the new Franklin Academy High School. The school is slated to open next July and will eventually house 500 students.

Construction for Bob Luddy’s newest private school, Thales Academy at the end of Heritage Trade Drive, is nearly completed.

The planning department has issued a development permit for a miniature golf course at The Factory.

Assistant Planning Director Ann Ayers still does not have the complete plans for a Walgreen’s drug store in the southwest corner of the N.C. 98 bypass and South Main Street (U.S. 1-A). The developer does have state Department of Transportation approval for a right-in, right-out access to the bypass.

Some of the national stores said to be looking at Wake Forest are J.C. Penney, Marshall’s and T.J. Maxx.

The Wake Forest Planning Department is reviewing building plans for an Aaron Rents Furniture at Wake Pointe Shopping Center (Wal-Mart).”

(The Wake Forest Times)