Posts Tagged ‘Commercial Real Estate Investing’

DECLINE IN COMMERCIAL REAL ESTATE SECTORS APPEARS TO BE SLOWING

Tuesday, August 25th, 2009

Distressed properties reflect struggling market fundamentals


Commercial real estate closed the first half of the year with weakened fundamentals and a slow pace of transactions amid difficult economic conditions.  Demand for commercial properties dropped precipitously, bringing down prices and rents.  In addition, maturing commercial debt was met with little available credit, leading to a jump in delinquencies and distressed properties.  As space flooded the market, vacancy rates have been rising across the board.  And while the economic decline is showing signs of a slowdown, commercial real estate continues to face strong headwinds.


Commercial real estate activity has suffered from a severe credit crunch for commercial sectors, sustained job losses and weak consumer spending, although the decline appears to be slowing.  A forward-looking indicator shows commercial real estate will remain weak into 2010, but recent actions by the Federal Reserve should improve some flow of capital into commercial lending, according to the National Association of Realtors®.

The Commercial Leading Indicator for Brokerage Activity declined 1.3 percent to an index of 101.5 in the second quarter from a downwardly revised reading of 102.8 in the first quarter, and is 13.7 percent below the 117.6 recorded in the second quarter of 2008.  The index is at the lowest level since the first quarter of 1994; NAR’s track of the commercial leading indicator dates back to 1990.

Lawrence Yun, NAR chief economist, noted the pace of decline moderated, but the leading indicator has fallen sharply and quickly from the peak, suggesting much lower business opportunities for commercial real estate practitioners engaged in leasing, sales and property management.  “The reduction in commercial real estate activity is expected at least through the first quarter of 2010.  Any meaningful recovery is not likely to occur before the second half of next year.”

The decline is driven by falling industrial production, far fewer jobs requiring office and retail space, a fall in durable goods shipments, much lower personal spending, lower retail and wholesale sales, and a negative return on commercial investment.  

“With the economic recession likely coming to an end within six months, a recovery in commercial real estate may soon follow,” Yun said.   “The office sector requires job growth to fuel the demand for additional space, the industrial sector needs a rise in production and the retail sector is tied to consumer spending.  Multifamily housing – the apartment market – often performs in reverse to trends in home sales, but can improve if there is sufficient household growth.”  

The Society of Industrial and Office Realtors®, in its SIOR Commercial Real Estate Index, a separate attitudinal survey of more than 650 local market experts,2 also suggests a lower level of business activity in upcoming quarters.  Most respondents are seeing sales prices that are lower than replacement costs, and 96 percent report deep rental discounts and increased tenant concessions.

The SIOR index has declined for 10 consecutive quarters and stood at 36.0 in the second quarter, compared with a level of 100 that represents a balanced marketplace.

Realtors® Commercial Alliance Committee chair Robert Toothaker said it is crucial to improve the availability of funds for commercial loans.  “Properties with positive cash flow have had trouble finding financing to roll over debt, transactions are essentially at a standstill and new development is virtually nonexistent in most areas,” he said.

“Commercial loans are mostly short term, and without ready financing even the most experienced commercial players can get into trouble.  The Fed’s recent decision to extend the TALF program for commercial mortgage backed securities beyond the end of 2009 is highly welcome because the flow of liquidity to commercial real estate will be critical for a sustainable economic recovery,” Toothaker said.  “However, unless there is a tremendous short-term recovery in the CRE markets, we expect the Fed will be revisiting the issue of another extension of the TALF program early in 2010.”

Bond yields on CMBS rose following the announcement by the Federal Reserve on August 17 that it is extending TALF lending for existing commercial securities through March 31, 2010, and for newly issued CMBS through June 30.

Looking at the broad market, commercial vacancy rates continue to rise while rents decline, according to NAR’s latest COMMERCIAL REAL ESTATE OUTLOOK.3  The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail and multifamily markets.  Historic data were provided by Torto Wheaton Research.

Yun projects the unemployment rate to peak around 10.4 percent in the fourth quarter, then gradually improve as 2010 progresses.  “We will need sustained economic growth before many employers have enough confidence to expand the job base and create new demand for space,” he said.

The gross domestic product should contract 2.9 percent in 2009 before growing 1.5 percent next year.  Inflation, as measured by the consumer price index, is forecast to decline 0.5 percent this year before rising 2.0 percent in 2010.

Office Market

The office sector continues to suffer the most from job losses, which reduces the demand for space.  Vacancy rates will probably increase from 15.5 percent in the second quarter to 18.8 percent in the second quarter of 2010. In the Triangle market, office vacancy is substantially higher than the national average, posted at 18.49% according to Triangle Business Journal’s SPACE survey.

Annual rent in the office sector is projected to fall 14.1 percent this year and 10.0 percent in 2010 after a 0.4 percent decline last year.  In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is estimated to be a negative 75.0 million square feet in 2009 and a negative 47.2 million next year.

Industrial Market  

The contracting global economy has constricted the industrial sector.  Vacancy rates are likely to rise from 13.0 percent in the second quarter of this year to 15.0 percent in the second quarter of 2010. Triangle warehouse vacancy is trending higher than the national average as well, posted at 19.78% as of the end of the second quarter.

Annual industrial rent should fall 11.4 percent this year and another 11.7 percent in 2010, after declining 0.8 percent in 2008.  Net absorption of industrial space in 58 markets tracked is seen at a negative 300.0 million square feet this year, and a negative 112.0 million in 2010.  Because much construction in recent years was customized to meet specific industrial needs, many obsolete structures remain on the market.

Retail Market

Given a pattern of weak consumer spending, the retail vacancy rate is forecast to edge up from 11.7 percent in the second quarter to 12.9 percent in the same period of 2010.  Average retail rent is likely to fall 6.1 percent in 2009 and 4.9 percent next year; it declined 2.0 percent in 2008.  Net absorption of retail space in 53 tracked markets is expected to be a negative 25.9 million square feet this year and a negative 3.6 million in 2010. Largely due to restraint in speculative building on the part of retail developers, the Triangle market is faring better than the national average in the retail sector, with vacancy posted at 8.81% as of the end of the second quarter.

Multifamily Market

The apartment rental market – multifamily housing – is facing higher home sales by first-time buyers, but also is experiencing increased demand from families who have lost their homes.  Multifamily vacancy rates should slip from 7.4 percent in the second quarter of 2009 to 7.1 percent in the second quarter of next year.

According to the National Association of Realtors’ overall forecast for commercial real estate, this industry will continue to face negative absorption, increasing vacancies for all property types and declining rents. Commercial debt continues to pose a major threat.  Extension of TALF funds for commercial lending should provide liquidity, particularly in the CMBS market.  Investments may rise due to distressed properties and lower prices.

Tags: , ,
Posted in Commercial Real Estate Investing, Market Data, North Carolina Commercial Real Estate News, Raleigh Commercial Real Estate News, Real Estate Industry News | No Comments »

Spring 2009 RCA Report

Monday, June 29th, 2009

The Next Shoe to Fall Before Recovery

By Lawrence Yun, PhD.,  CHIEF ECONOMIST NATIONAL ASSOCIATION OF REALTORS

The commercial real estate landscape is precipitously unraveling.  The delinquency rates on commercial loans are still low by historical standards, but are rising steeply.  The increased defaults, unlike homeowners who could not pay their higher resetting mortgage payments, are often occurring even though payments are being made on a timely basis.  Lenders are labeling loans as ‘nonperforming’ because of a perceived decline in mark-to-market collateral value, and demanding that borrowers come up with cash to cover the short-fall.

The credit crisis has also essentially shut down the issuance of commercial mortgage-backed securities.  With capital so scarce, property purchases have all but dried up.  Investment in  office properties was down 75% in 2008, retail investment fell by a similar amount, while industrial investment fared relatively better … if we can use the term … with a 58% downfall.

On top of the credit-crisis and market-to-market accounting-induced defaults, commercial market fundamentals are turning sharply for the worse.  By 2010, the cumulative job cuts could reach 6 million, which would be roughly equivalent to a situation in which everyone who had a job in Illinois at the start of the recession now found themselves on the unemployment roll.

The national office vacancy rate will jump to 17% by year’s end from 13% in 2008.  The industrial vacancy rate could rise to 13% from the under-10% rate of just two years ago.  The retail sector will also feel the pain of a 14% vacancy rate, up from 9% at the start of the recession.  As a result, rents will fall by 5% to 8% in these property sectors in most metro markets.

The sector that is holding up decently is the multifamily sector.  With home sales at12-year lows and foreclosure rates rising, the demand for rental units has held its ground.  The apartment vacancy rate is expected to stay close to 6% with rent growth to rise by 2% in 2009.

How do we get out of this jam?  First, a massive government stimulus package was already passed in late February.  The $787 billion package, a mix of tax cuts and government spending, is by any measure HUGE.  The efficiency and efficacy of the components are questionable and debatable, but the vast scope of the stimulus package assures that there will be economic turnaround before year’s end.  The economy may even be able to squeak out a gain as early as the third quarter.  That will steadily help on the mob front and on net absorption going into 2010.  Low interest rates and the Federal Reserve pumping liquidity into frozen markets, such as directly buying commercial mortgage-backed securities and small business loans, will also help unclog the credit market.

The baseline forecast, however, is:

·         The economy will pop positive from the fourth quarter;

·         The GDP to expand 1.7 percent in 2010;

·         The unemployment rate, after peaking near 10 percent, will steadily slide down next year;

·         After no rise in consumer price inflation this year, inflation will only rise by 1.2 percent next year;

·         There is little inflation threat – both despite the massive liquidity pump and government spending, and because of continuing excess slack in the economy – which will permit the Fed to keep the rates low through the end of 2010;

·         The 10-year Treasury yield rising to a possible 4 percent by then will not hamper recovery;

·         Cap rates, which had been widening in recent quarters to Treasury, can remain at a comfortable 6-7 percent, thereby preventing property values from collapsing.

A pessimistic turn of events is the debt market’s inability to handle the federal deficit of nearly $2 trillion.  What is China does not buy U.S. debt?  What if inflation pops once the velocity of money picks up?  What if the credit crunch continues despite all government efforts?  The economy, after a short term boost, could easily sag again.  Once that happens, there may not be a public appetite for more government stimulus.  There may not be financial market appetite to take on excessive government debt.  A sagging economy with no further feasible stimulus is a receipt for disaster.  Because of this possibility, in my view, the massive government stimulus package of 2009 is a one-time shot at getting the economy right.

In the optimistic scenario, a strong resurgence of consumer confidence will push the economy to grow at a faster than normal pace, while strong job gains and fewer on the unemployment dole will quickly trim the federal budget deficit.  The stock market could turn markedly higher from a relaxation in mark-to-market accounting, which NAR has been advocating.  Another source of rising consumer confidence will be the end of home price declines.  The home buyer tax credit is an added incentive to jump into the market.  As buyers enter, housing inventory will get trimmed and home prices could stabilize in many parts of the country by the year’s end.  Home price stabilization will mean no further bleeding of bank balance sheets and no further destruction of housing equity.  Banks will lend more and consumers will hit the malls.

On a hopeful note, we are already seeing a rather strong recovery in home sales in the hard hit markets of California, Arizona, Nevada, and Florida.  Buyers are fighting over knocked-down home prices.  It appears that once a few buyers get in on the game, other are following.  Sales are doubling in California with frequent occurrences of multiple biddings.  A tipping point has evidently been achieved,  Will other states follow a similar recovery path?

 

 

 

 

Tags: , , ,
Posted in Commercial Finance and Lending, Market Data, North Carolina Commercial Real Estate News, Real Estate Industry News, Trends, Wake Forest Real Estate News | No Comments »

Six Real Estate investing Tips

Monday, June 15th, 2009

 By Steve Gillman

The following collection of real estate investing tips will probably have a few things that you already know. That’s okay. There will be a few you haven’t heard before as well, and in any case, we sometimes need to be reminded of what we know.

1. Find an agent with the right experience. When selling real estate, drive around and see what else is for sale in the same area. Look particularly at the name of the agents on the signs. The agent whose name shows up the most in your neighborhood will likely know best how to price and market your property. You can also do this by looking through real estate guides to find those agents who are either active in your area, or with your type of property.

2. Make low offers correctly. When making a low offer that may offend a seller, let him know that it isn’t personal, that this is just what you need to make the deal work for you. You can include a list of concerns or of things that you will have to repair, to justify the lower price. If you have a choice in a situation like this, it may be better to let the agent present the offer without you. It can be tough for a seller to hear you say anything bad about his property in person. A list of concerns is less personal, and less likely to offend him - which makes it more likely that he’ll seriously consider your offer.

3. Look for “extra” opportunities. When flipping a house, you might normally look for fixer uppers that can simply be “put into good shape” and sold for a decent profit. But if there are “extra” opportunities that other investors aren’t seeing, you can make even more. These are things like a full basement that can be converted into living space, or attic space that can be made into a bedroom or office, or an extra lot that can be split off and sold without reducing the value of the home much.

4. What to do when rentals won’t produce cash flow. People often buy rental houses, duplexes, and even four-plexes for homes, thinking they are “investing” as well. They pay according to personal values, so these properties can be priced well beyond where they would produce cash flow. Apartment buildings, on the other hand, are priced according to one thing more than anything else: net income. The lesson? When you can’t make cash flow with small rental properties, think bigger.

5. How to find motivated sellers. Real estate investors will often talk about the importance of “motivated sellers,” but how do you find them? When searching newspaper classified advertising, pay attention to the wording. “Need to sell,” “Must sell,” and “Will look at all offers,” are the usual indicators, but you can look at the rental ads too. “Must have a good job,” may indicate a landlord who is tired of tenants and ready to sell. Searching county records for out-of-state owners is another way.

6. Don’t rely on appreciation. If you are planning on rising real estate values as your primary way to profit, you’re speculating, not investing. Recent drops in values in many areas show the flaw in this strategy, but also keep in mind that transaction costs can be up to 10% of the sales price, so you have to have a big increase in value just to break even. Enjoy any appreciation as a bonus, but buy based on the cash flow, a plan to increase the value (fix and flip), or some other well-thought-out plan for profit. This may be the most important of these real estate investing tips.

 

Tags: ,
Posted in Uncategorized | No Comments »

What to Look Out for in Commercial Real Estate Listings

Friday, April 24th, 2009

Article by; Dan Ross on www.articlesbase.com

Choosing to buy commercial property is a big decision. You require a high level of investment and have to ensure that you don’t make a costly mistake. A number of websites provide commercial real estate

properties for sale. These lists are regularly updated. One can search these lists to gain a general idea of the quality of the properties that are available within a given budget. The prices of commercial real estate typically vary according to their location, size, and quality of construction. If you are planning to invest in commercial real estate, you should look at these lists these lists. Looking at these lists requires a great degree of skill, as it is important to read between the lines to uncover the true value of a listing.

Find out how many Commercial Property Listings there are in your local area

Your first step should be to find out what the best locations to buy commercial properties are. Often you will find that certain areas will have a high density of commercial real estate for sale, be wary of such pockets lest you find yourself buying a ticket aboard a sinking ship. Although it may cost you more money at times, make it your mission to find an area where companies such as your own have a proven track record of doing well.
Once you find an appropriate property from a commercial real estate listing, perform a thorough inspection before you buy Commercial Real Estate. While you may feel that a thorough inspection is not necessary as you are not going to be living there, this could not be further from the truth, as this is a business premises inspection it is just as prudent to thoroughly examine as a residential property.

Are you Buying Commercial Property in a Rural or Urban Setting?

When you look at a commercial real estate listing, the type of development where you are purchasing commercial real estate is very important, for instance if you are in a rural setting then you will be looking for very different features than if you were looking for a ware house for sale in an urban setting. Another thing to consider if you are in a rural setting is the cost, you can expect to pay lot less to be in a less developed area but if you are in a more developed district, especially a retail shop for sale or lease inside the city center you can expect to pay a premium.

Will you be buying this Commercial Property to rent out?

It is also important to consider whether you are buying commercial property for your company to actually move into, or whether you are going to rent it out to someone else. If your goal is to own the commercial property to let, then don’t get hung up on want you would like to see when buying commercial real estate, rather find out what the widest possible market is looking for in a commercial property for lease and acquire something that fits that description.

What are the tenant’s assets and liabilities?

It is a good idea to obtain a financial statement from the potential tenant that is occupying the space that you buy. The financial statement will list the tenant’s assets and liabilities. This will give you a good idea of how financially stable the tenant is. Would you like a tenant with $0 cash in the bank, a negative net worth, and credit problems? The answer is of course, no. Once again it’s surprising how many commercial investment property owners don’t do this and find out after the fact that it’s something they shouldn’t have done in the first thing. Now, this is all pretty easy as long as you do a good job of checking out the tenant in the first place.
While on the face of it a commercial property listing may appear straightforward, it is important to dig deeper and find out more before signing on the dotted line. Don’t be afraid to ask the right questions. Only when you are absolutely sure that all your questions have been answered to your satisfaction, you should proceed with the purchase.

Millridge Commercial Real Estate specializes in guiding people through these questions.  If we do not have the answers we have the experience to know where to go to find the answers for your needs.  Most commercial transactions are unique in many ways, so keep this in mind when deciding how to proceed.  Feel free to contact us anytime.

 

Tags: ,
Posted in Uncategorized | No Comments »

Commercial Property: The Zoning Gamble

Friday, April 24th, 2009

Keeping this in mind, a savvy investor can use this to his advantage if he can formulate a real estate investing strategy that helps him find residential properties and then resell them as commercial properties. Imagine earning a 100% or greater return on your investment. It can be done, if you have the patience of Job and know where to find the right properties.

The first step in any real estate investing venture is to locate a property that has the potential to earn a great profit with little risk involved. While there is more risk associated with finding residential properties and then selling them as commercial properties, you can minimize this risk with a lot of research and pre-planning.

In order to find a property that is likely to be rezoned commercial in the near future, you need to study a community and become familiar with its zoning history. Many sprawling communities have annexed property faithfully as the business section of the community has grown. Spotting this trend and scooping up cheap rural properties that will soon be zoned as commercial properties is a great real estate investing strategy.

Look for properties located on the main drag of the community close to the commercial zone line. Avoid communities that have become stagnant. Instead look to communities that are experiencing phenomenal growth. This growth is bound to bring in new businesses and they will have to build somewhere. Hopefully they will build on your property.

In some communities, there are residential properties sandwiched in between commercial properties. When it comes to real estate investing, this deal is as sweet as it gets. The residential property will be zoned as a commercial property. The only questions are when this will happen and if you can talk the current homeowner into selling.

Once you have found the ideal property, you can go about marketing it in two different ways. You can first get the property rezoned and then market it to businesses or you can market to businesses and let them deal with the rezoning issues. Obviously rezoning the property yourself will result in a wider profit margin.

To rezone a property for real estate investing purposes you will need to approach the governing council of the community and receive a favorable vote on the issue. Be sure to have a solid business plan made up highlighting ways that the rezoning will enhance the community. The council will care little about how much money you will make from the deal, but will be greatly interested in what businesses have expressed an interest in moving into the community. Show them how rezoning the area will make them money, and they will likely approve the proposal.

As you can imagine, not all of these ventures go as planned. Be sure that you have an exit strategy such as reselling the house as a residential property if the zoning issue can’t be resolved. “Millridge Real Estate brokers are familiar with rezoning requirements of the various governmental entities in the markets we serve. While this can be an overwhelming process, we have the knowledge and experience necessary to help you navigate through it. Contact us today if you have questions about how rezoning a property can create value for you!”

Article Source: http://www.realestateinvestmentarticles.net

Tags: , ,
Posted in Uncategorized | No Comments »

If Possible, Invest Now for Big Returns

Monday, February 23rd, 2009

If you are fortunate enough to have money to invest in real estate during these trying times, deals are here to be made.  Home prices are low, land is a little cheaper (in certain areas), people are losing jobs and needing to get out of the financial strain of this market. 

If you are looking for a good investment opportunity; land, homes and commercial buildings in the Northern Wake and surrounding counties please feel free to contact us at Millridge Real Estate.

Tags: , , ,
Posted in Commercial Real Estate Investing, Uncategorized | No Comments »

Land Purchased for Proposed Southern Franklin County Hospital

Monday, January 19th, 2009

Check out the link below of a potential land opportunity around the growing Southern Franklin County (Youngsville) area.  We have land FOR SALE all around this site.  If you have any questions feel free to contact Tim Gupton at Millridge Real Estate, LLC. Click on the link below to see a potential investment opportunity.

Adjacent Land to Proposed Franklin County Hospital Site

Tags: , ,
Posted in Uncategorized | No Comments »

Five Facts of 1031 Exchanges

Monday, October 13th, 2008

1. You can buy or sell from anyone you wish.  It does not have to be a swap, but there are regulations on how it is handled.

2. You do not have to buy the exact same type of property. For example, you could exchange an apartment for an industrial building.

3. An exchange does not have to be simultaneous. Taxpayers have the ability to complete an exchange on a delayed basis so long as they purchase replacement property within 180 days of selling their first relinquished property.

4. Simply put, taxpayers can buy replacement properties for a lesser amount and put cash in their pocket, so long as they don’t mind paying some taxes.

5. A qualified intermediary is essential to completing a valid exchange. Basically, the IRS disqualifies any person or entity from acting as an intermediary, if that individual has had an existing business relationship with the taxpayer within the past two years.

Tags: , ,
Posted in Commercial Finance and Lending, Commercial Real Estate Investing | No Comments »