Research Report Stimulates Commercial Real Estate Thoughts.

The economic and research team at Cassidy Turley do an incredible job and their analysis, insights and writing are great! We realize that we are biased because they are our colleagues but we are very proud of their work and we learn something every-time we read one of their reports.  They have done it again with the recently released US Multi Family Forecast Report, Summer 2013.

We wholeheartedly recommend that you read it not only if you are interested in apartments as an investment or in that sector of the real estate but also because of the broader insights it illuminates on the commercial real estate market. Here are the kinds of questions that this report review that we feel are applicable to most investment real estate:

• ·      What happens when a recovery gains velocity?
• ·      How difficult it is to make returns when cap rates fall so low?
• ·      The importance of demographic and demand analysis?
• ·      Trends associated with debt; at the household or business level as well as at the acquisition, underwriting and financing level?
• ·      Investor perceptions on the differences between Gateway Markets and Secondary or Tertiary Markets?
• ·      Chasing yield? (A lot of owners/investors in the Sacramento Region hope this will happen.)
• ·      What are the impacts of recent interest rate increases?
• ·      How about the correlation between interest rates and cap rates?

We found this to be a thought provoking research report that stimulates many insights.  Here is an example on how they quantified the differences in Gateway, Secondary, and Tertiary Markets.

 U.S. Multifamily Market

Average Asking Cap Rates

	Class A Core to Core + Product	Class B Product	Class C Value-Add Product
1st Tier Marketplaces (Gateway)	4-6% Range	6-7% Range	7% or More
2nd Tier Marketplaces	5-7% Range	7% or More	8% or More
3rd Tier Marketplaces	6-8% or More	8% or More	9% or More

As you look at that table ask yourself if there is enough yield difference to buy an A Building in a small town for example Stockton or Fairfield vs. a “C Building” in San Francisco or San Jose?  If Rents are growing rapidly in the Gateway City but maybe the recovery isn’t underway with any velocity and therefore the landlord doesn’t have much if any pricing power, which will give you better returns?  Is the spread high enough to take the risk on a particular property or in a particular community?

These are very interesting times. For investors, both buyers and sellers there is much to consider and there will probably be winners and losers. Thanks to the research and economic folks for helping point out many of the variables that need to be considered. 

Also, we want to point out that the report then drills down into regional markets; Northeast, South Atlantic, South Central, Midwest, West-Mountain and West-Pacific. And here in California they highlight activities and trends in Los Angeles, Oakland-East Bay, Orange County, Sacramento, San Diego, San Francisco, and San Jose.

You can download and read the report here.  If you want to talk about it please give us a call and we would be happy to discuss or put you in touch with the researchers and authors of the report.

http://www.cassidyturley.com/research/market-reports/market-report/mktid/133/interior/1

 

  

National Office vacancy report provides opportunity to improve vocabulary; Enervated

The office vacancy rate for the nation remains high, at 17% and the rate of improvement has slowed.  REIS the real estate analytics and data provider who is considered one of the best firms in the real estate market information business just released a new report for the 2^nd Quarter of 2013. 

The major news is that there is very little velocity and activity in the market that is absorbing the vacant space. We need job growth! On a year‐over‐year basis, the vacancy rate fell by a scant 30 basis points or 3/10^th’s of 1%.  With the labor market unable to generate significant office‐using employment, REIS describes demand for space as remaining enervated. According to the dictionary that is a verb of Latin origin that means “to deprive of force or strength; destroy the vigor of; weaken.”  It is also synonymous with enfeeble, debilitate, sap, exhaust.  (To us that sounds either “tired” or a “bottom without a recovery”?)

Without even modest demand, the decline in the national vacancy rate will not accelerate. National vacancies remain elevated at 450 basis points above the sector's cyclical low, recorded in the third quarter of 2007 before the recession began that December. Rents are still nearly 8% lower than they were before the recession.

REIS also reported that there is little to no new demand for space in existing buildings in the market. Clearly, the market is favoring new space at the expense of old space at this juncture. Nonetheless, it is somewhat heartening to see a bit of an increase in new construction activity. Nationally developers have not delivered as much new space since the second quarter of 2010 when many projects were completed only because they had been started before anyone fully grasped the magnitude of the Great Recession.

REIS reported that rents both asking rents and effective rents grew but at a rate of 40 basis points, 4/10ths of 1 %.  At these levels of rent growth and tepid or “enervated” space demand existing building owners are not likely to see pre-2008 office rents for many more years.

You can read more at http://www.calculatedriskblog.com/2013/07/reis-office-vacancy-rate-unchanged-in.html#T55zPEiiW7xlAxoi.99

To hear a good summary, in about 4 minutes, see this video that features Victor Calanog, PhD, VP and Economist of REIS. ( He points out that SF, San Jose, New York and Houston are the bright spots) You can watch a brief video of the REIS Office Market Report here: http://player.vimeo.com/video/67819803

Take 20 minutes to be inspired by the power and strength of words.

We want to encourage everyone to take 20 minutes and watch the speech delivered at the United Nations on July 12^th 2013.  Get yourself a few Kleenex and be prepared to see the pure embodiment of resiliency, forgiveness, courage, inspiration and hope.  July 12^th was declared by the United Nations to be “Malala Yousafzai Day”.

  http://www.washingtonpost.com/posttv/world/malala-yousafzai-addresses-un-youth-assembly/2013/07/12/bac9a6c6-eb1b-11e2-a301-ea5a8116d211_video.html?wpisrc=nl_most

You will recall that about a year ago there was terrible news of a barbaric act of terrorism perpetrated on a 15 year old student; a girl student in Pakistan who was shot point blank in the head on her way home from school.  This was an intentional act intended to bring fear in an attempt to try to stop girls and their families and teachers from providing education to female children.  That act of brutality was perpetrated upon Malala Yousafzai.

Here is a link to the speech that Malala delivered yesterday.  Seeing her standing composed, resolved, recovering, and speaking “truth to power”. She reminds all of us whether we are old or young, man or woman, and regardless of religion or economic class, that the pen is mightier than a sword. That words and books can defeat guns and terrorism. That standing up for what is right and important is our obligation and is the obligation of leadership. That education and equal opportunity is a basic human right. 

This young woman reminds us what a difference one person can make. You will certainly want to share this video with your friends, your spouse or significant others, with your siblings, and with your daughters and sons.  Enjoy!

http://www.washingtonpost.com/posttv/world/malala-yousafzai-addresses-un-youth-assembly/2013/07/12/bac9a6c6-eb1b-11e2-a301-ea5a8116d211_video.html?wpisrc=nl_most

Hot As Blazes... The Temperature not the Real Estate Economy.

Hot As Blazes… Hope that you are keeping your cool.

Here in the Sacramento Valley we are facing unbelievably hot weather.  Hopefully it doesn’t last much longer.  Temperatures are triple digit, yesterday was 107 degrees—third day in a row higher than 100 degrees and more of the same are forecast for the coming week. Any conversation with clients or colleagues begins with a monologue and dialogue about the weather and the heat.  We are sure that it is going lead to increased political discussions about climate change, carbon taxes, and what are we as a society going to do about it?  This kind of heat is almost unbearable… Also we are sure that others and ours productivity suffers in this kind of heat.

Coincidentally discussion about the heat has found its way into our real estate publications and commentaries.  Our colleague, Garrick Brown, the Research Director for Terranomics and Cassidy Turley, had a great newsletter out on July 1, 2013, in which he points out that “Heat Waves are Not Good For Sales”.  He didn’t come right out and predict that it would shave a point or two off our GDP but he does point out that it is probably bad for business.

Brown went so far as to justify writing about the weather in a Retail Newsletter by asking: “So why the weather report in the middle of a retail newsletter?”  Weather impacts retail sales. And, unless you sell ice cream, yogurt, swimming pools or air conditioners (and a few other products) that impact is likely to be negative. Seven of the ten hottest summers on record have been recorded since 2000. 

Each year for the past four years, we have also experienced a summertime swoon in the general economy. As this has happened, we have had relatively clear-cut causes that we could target; skyrocketing gas prices, policy debates eroding confidence, etc. But we have generally also seen summer retail sales go a little bit soft each year as well. Garrick’s retail newsletter and all of our Terranomics research reports can be found linked here.  http://www.terranomics.com

More about Heating Up and just as Coincidental, our firm Cassidy Turley just issued a 37 page Research Report, aptly titled, What’s Hot in Commercial Real Estate, Summer of 2013.  Here is a link to the entire publication. Check out the graphic of a cityscape sculpted into the top of a melting Popsicle. http://sites.cassidyturley.com/Corporate/WhatsHotinCRE/#1

The report is a good macro overview about the economy and the commercial real estate sector. In addition the report has regional snapshots on many markets within the country.  Page 30 of the report is on Sacramento and It points out that Sacramento is the 24^th largest market by size in the USA and that our population has increased by 33% in the last 25 years.  

Of particular interest is an insightful article on how hard it would be to measure the detrimental impacts that our region would have faced if we had lost the Sacramento Kings and if they would have moved elsewhere.  Also, there is promise and potential with new and renewed interest in downtown development as a result of the King’s staying and planning the development of a new arena where  the old K Street Mall is located. Here is a link to that article. http://sites.cassidyturley.com/Corporate/WhatsHotinCRE/#30

In conclusion try to remain cool and calm and carry-on.  The weather is hot but the economy is so-so.  Hopefully, both will improve soon!  

Be Calm & Carry On...SF Fed's Comments on Economy & Interest Rates

The Economic Recovery seems to be proceeding but new fears have emerged, as demonstrated by the huge sell off in the “bond market” and rising treasury rates.  Federal Reserve Chairman Bernanke spoke last week and his remarks tended to rattle many observers. Some have characterized the Fed’s approach towards “tapering “ is actually more of a “tightening”.  But did the Chairman really say what he meant to?  Or did observers over-react?

Just today, Monday July 1,2013 the Federal Reserve Bank of San Francisco posted a publication to subscribers that is a transcript of, John Williams, President and CEO of the Federal Reserve Bank of San Francisco, and member of the FOMC, to the Sonoma County Economic Development Board in Rohnert Park, California, on June 28, 2013. William’s remarks were entitled; The Economic Recovery: Past, Present, and Future

His remarks about the past include. “It’s now been four years since the recession ended. Recessions are never pleasant, but this one was especially grim. Think back four years to June 2009. The housing market had collapsed. The unemployment rate stood at 9.5% and was still rising. Consumers and businesses were deeply shaken. And the stock market had plunged nearly 40%.”

For the present Williams indicates. “The US economy is well into a period of sustained growth… we’ve come a long way …from a peak of 10%, the unemployment rate has dropped to 7.6%. Households and businesses have regained much of their lost confidence. And finally, the housing market is springing back to life. Although things have improved quite a bit, the economy has not rebounded from this recession as fast as we hoped. Growth has proceeded in fits and starts, and the overall pace of recovery has been moderate at best.”

For the Future; Williams forecast is.  “I expect the unemployment rate to fall to roughly 71⁄4% at the end of this year and drop to about 63⁄4% by the end of 2014. Economic growth is likely to be sluggish in the current and next quarter, reflecting federal spending and employment cuts related to sequestration. It should pick up later in the year. For 2013 as a whole, I see inflation-adjusted GDP growing about 21⁄4% and picking up to around 31⁄4% in 2014”

Williams, and the SF Fed then specifically attempt to address the Fed’s policy on Tapering and Interest Rates.  “Of course, the economy’s increased momentum has raised questions about when the Fed will cut back, and eventually end, its asset purchase program. So, is it time to act? My answer is that it’s still too early.

For one thing, we need to be sure that the economy can maintain its momentum in the face of ongoing fiscal contraction. And it is also prudent to wait a bit and make sure that inflation doesn’t keep coming in below expectations, possibly signaling a more persistent decline in inflation.

My forecast assumes that federal fiscal retrenchment has largely temporary effects on economic growth and that inflation will resume its gradual rise toward 2%. Looking ahead, if this forecast holds true, then at some point it will be appropriate to scale back our purchase program and eventually end it.”

Here is a link to the Federal Reserve Release by Williams. http://www.frbsf.org/economic-research/publications/economic-letter/2013/july/economic-recovery-past-present-future/el2013-18.pdf

Some would say that the market has over reacted to Bernanke’s remarks.  Others would opine that rates were too low and had to rise.  But clearly the Fed has embraced a strategy to proactively share their view that they will keep up their efforts to keep rates down so long as the recovery is lagging and so long as unemployment is high.  

As I am wrapping up this Post I came across a chart of 10 year Treasury Bond Yields for the last 100 years.  My 30+ year career in real estate and Commercial Lending has led me to expect change and while rates have moved up 100+ basis points the chart reminded me that "this too will pass" and their will be many more opportunities to make good real estate investments.  Be Calm and Carry On!