Read The Headlines... There is good news there too!

Signs of Hope. Yes, if you look closely enough, right there in the headlines, there are glimpses of good news and maybe, just maybe, indications that a recovery is “around the corner”. It is pretty easy to get focused on all of the bad news but there is good news out there! You can see signs of hope and progress in the headlines. These indicators might not be “on top of the fold” but they are there, and they provide us with indications of our resilience and that things will get better. Here are a few recent examples worth noting.

California unsold home inventory down by half. This article sets forth the statistics showing that the housing market has improved in some regards. It was reported in the Sacramento Business Journal on February 26, 2009 that
· California had a 6.7-month supply of existing, single-family detached homes in January of 2009, less than half the 16.6-month supply it had in January of 2008 -- if homes were sold at the current rate -- according to a report released Thursday.
· The California Association of Realtors reported that the median number of days it took to sell a single-family home dropped to 49.9 days in January of 2009, compared with 70.8 days for the same period a year ago.
· Home sales increased 100.8 percent in January of 2009 in California compared with the same period a year ago, while the median price of an existing home fell 40.5 percent=
· Closed escrow sales of existing, single-family detached homes in California totaled 624,940 in January of 2009 at a seasonally adjusted annualized rate and statewide home resale activity increased 100.8 percent from the revised 311,160 sales pace recorded in January of 2008.

Sacramento is No. 21 in the U.S. in energy efficient buildings. We firmly believe that “you won’t change it if you don’t measure it and report it”. An important phenomenon to watch is that green buildings will reduce our carbon footprint while at the same time lowering expenses to tenants and raising returns for landlords. . It was reported in the Sacramento Business Journal on March 3, 2009 that
· According to the U.S. Environmental Protection Agency, Sacramento has the 21st-highest number of energy efficient buildings in the country with 45.
· Los Angeles has the most buildings with the EPA “Energy Star” rating, with 262, followed by San Francisco with 194 and Houston with 145. Those cities are followed by Washington, D.C., Dallas-Fort Worth, Chicago, Denver, Minneapolis-St. Paul, Atlanta and Seattle.
· “Energy Star buildings typically use 35 percent less energy and emit 35 percent less greenhouse gases than average buildings,” said EPA administrator Lisa Jackson, in a statement.

Community Banks Growing Amid Recession. Unfortunately we have been too focused on the “big banks”, and the creation of or the need for a “bad bank”. Here are excerpts from an article on the growth of regional and small community banks from the Sacramento Business Journal on March 10, 2009. The Independent Community Banker Association of America released a survey of their members.
· It shows that the majority of the banks have seen an increase in deposits as a result of getting new customers, while only 17 percent have seen customers draw down deposit accounts.
· “While the financial crisis has affected banks of all sizes and in all regions, community banks continue to lend and are typically faring much better than the larger banks because they didn’t participate in the high-risk activities that led to problems we are experiencing,” said Camden Fine, president of the ICBA. “This survey clearly shows that the vast majority of community banks are well-positioned to survive the economic downturn and, perhaps, even reclaim some of the customers from larger banks.”
· The survey found that 55 percent of banks increased deposits as a result of new customer acquisition.
· Community banks are getting new customers at a faster rate than in the past, the survey found, with 57 percent of respondents getting an increase in new retail customers during the second half of 2008, compared to the first half of the year. The survey found 47 percent of independent banks saw an increase in new business customers.
· And the survey found that community banks are making new loans, with 40 percent of respondents experiencing an increase in loan origination compared to the year earlier

California will get $51 Billion in stimulus funds. The Sacramento Business Journal of March 10th Reports “The Keynesian relief package will soon arrive and be put to use in the Golden State.”
· California and its residents will receive an estimated $50.7 billion from the American Recovery and Reinvestment Act signed by President Obama February 17th 2009, including $18 billion in federal dollars that can be used to offset General Fund expenses.
· Funding in the stimulus package is intended for various purposes.
· Funding designated for California in the stimulus package includes $11.2 billion additional funding for Medi-Cal, the state health care program for the poor. There is also about $5 billion in educational block grants.

Construction costs continue to drop. This is really good news for any investor or business person willing and able to pursue construction or development activities at the present time. The Sacramento Business Journal reported on March 10, 2009 that
· Commercial building construction costs decreased 5.77 percent in the first quarter, compared with the fourth quarter, according to Turner Construction.
· Construction costs have dropped 2.59 percent since first-quarter 2008, according to the index.
· “The cost of construction has come down as construction spending has decreased and competition in the industry has increased,” said representatives of Turner.
· However, construction activity in the education, health care and public sectors have continued to show strength.
· Investments are also up in "green" building across all segments. Green building projects could potentially benefit from the federal $787 billion stimulus package signed into law last month.
· The index is determined by several nationwide factors, including labor rates, productivity, material prices and the competitive condition of the marketplace.

Public transit use jumps 4 percent in 2008. This is good for the environment and good for the budget and shows signs that will sustain public transportation. This article was reported in the Sacramento Business Journal on March 10, 2009 that
· Although gas prices plummeted in the second half of the year, a report by the American Transportation Association shows that Americans took 10.7 billion trips on public transportation in 2008, a modern record.
· Those trips represented a 4 percent increase over the number of trips taken in 2007 on public transportation, while at the same time, vehicle miles traveled declined by 3.6 percent in 2008, according to the U.S. Department of Transportation.
· The ridership record continues a long-term trend of ridership growth. Public transportation use is up 38 percent since 1995, a figure that is almost triple the growth rate of the population -- 14 percent.

Keep your eyes open and notice the good with the bad. The business cycle is back and the best opportunities emerge from tough times. We believe that it is important to be realists and to not get paralyzed with fear. If you would like to discuss this blog post with us or if we can help you with a commercial or investment real estate transactions, please call or email us at Jim Gray (916) 617-4255 jgray@naibt.com or Nahz Anvary (916) 617-4257 nanvary@naibt.com. “Build on the power of our network” visit our website at http://www.naibtcommercial.com/

What A Difference A Year Makes

What a difference a year makes. Cautious optimism and value added opportunities have given way to despair, and the recession is growing deeper, unemployment is rising at over 600,000 newly unemployed each month nationally and the Sacramento region already has more than double digit unemployment. Most of those investors who acquired an investment property in 2007 and 2008 are shaking their heads and re-visiting their projections and their pro-formas and wondering where the tenants are and why rents are declining? Just reflect on the past year – the Dow Jones Industrial average has dropped more than 52% and economists report that households have lost approximately 10 trillion dollars. Consumer spending is falling, auto sales have nearly been halved, and Sacramento leads the nation in the number of auto dealerships that are closing.

The real estate cycle is back! And with a vengeance! This time the downturn is steeper than probably any other since our parent’s and grandparent’s great recession—albeit depression of 1929-1934. During this past year we have seen the decline and failure or nationalizing and forced merger of financial giants including Freddie, Fannie, AIG, Wachovia, Lehman Brothers, Countrywide, Merrill Lynch and etc. Wall Street has been battered and Main Street is bruised. Many need “first aid” but a growing number need hospice services.

A report in the March 9th edition of the Sacramento Business Journal has a headline that drives the point home clearly to us and to our industry; “Sacramento Commercial Real Estate Falls 88% in 4th Quarter”. A lack of financing alternatives and a weak economy led commercial real estate sales to plummet in the Sacramento region during the fourth quarter of 2008, most notably in the office building market, according to sales data from Loopnet and Real Capital Analytics.

The report shows a total of $275 million in office buildings with a price above $2.5 million were sold during the last three months of 2008. That’s down 88 percent from the same period in 2007, when $2.4 billion in property was sold. Sales of industrial buildings fell from $304 million to $127 million; retail building sales fell from $564 million to $223 million. Apartment building sales, however, increased from $580 million in the last quarter of 2007 to $594 million in the same period in 2008.

In the local banking environment, the Business Journal reported on March 6th that only four of eleven local banks had profitable earnings. Local banks endured a difficult fourth quarter as they pumped money into reserves, which reduced earnings and only one of Sacramento local banks had a fourth quarter that was stronger this year than last.

Some of the declines in earnings are attributable to outright losses, but by far most of the declines are from placing large sums of money into reserves to protect from possible loan losses. As the recession deepens the possibility of continuing and even larger losses are great and deepening according to most analysts and most local bankers.

These are truly tough times. There are great challenges and it will require “hunkering down” and recognizing that great opportunities will emerge –but probably not right away. Sacramento was one of the first regions to begin declining and sinking into the recession and hopefully, and likely, we will be one of the first to emerge from it! The future will be bright for those who work and invest smartly and truly bring value, good underwriting and recognize that the real estate cycle will rebound and turn upward. This time next year I am sure we will point out what a difference a year makes once again. If you would like to discuss this blog post with us or if we can help you with a commercial or investment real estate transactions, please call or email us at Jim Gray (916) 617-4255 jgray@naibt.com or Nahz Anvary (916) 617-4257 nanvary@naibt.com. “Build on the power of our network” visit our website at http://www.naibtcommercial.com/

Readying yourself in a Tenant's Market...Some Tips

2009 IS A “TENANT’S MARKET” CYCLE—SOME TIPS ON TAKING ADVANTAGE OF THE SITUATION.

The New Year is now upon us and 2009 is a year of “economic uncertainty”. Most analysts indicate that it is a “tenant’s market” and that there are opportunities for tenants to take advantage of the softening economy and achieve low occupancy costs for a number of years. What can you do to take advantage of the tenant’s market? Here are a few recommendations.

First, get some basic information in front of you—from your current lease and study current market conditions. Here is some advice on information that you will want to get organized so that you can determine the best strategy.

Get out a copy of your existing lease and create a brief abstract of it

When did the lease commence?
When does the firm term end?
What is your current base rental rate?
What other expenses do you have to pay as a tenant? (Taxes, insurance, utilities, common area maintenance, janitorial, repairs, other?)
Do you have options to extend?
If you can extend at what rates and terms? Are there notice requirements to extend?
What does your lease say about sub-leasing?
Do you have any expansion options?
Are there any early termination rights?
Is there a “hold-over provision” and if so at what holdover rate or percentage?


2. What would you estimate the current lease rate of your property to be? Is the landlord or their agent offering other spaces in your building or neighborhood? If so what are the asking rents? Are there any incentives being offered? (Free Rent, TI Allowance, Special Incentives?) Is your current lease rate above, equal to, or below market?

Are there any changes to the property that you need that would make you a more satisfied tenant? Do you want refurbishment to the space (Paint and carpet, enhanced signage, better security or lighting, expansion space, other matters)? Any changes in the floor plan?

After you have gathered this information it will become possible to begin to develop a strategy. One alternative might emerge to do a “blend and extend.” You might want to contact your landlord and inquire how will the economic terms change if you amend and extend your current lease? For instance if you currently have a remaining term of 18 months what would the landlord offer if you extended the term out for 4 or 5 years? The landlord might want the certainty and reduced risks of the longer term and in exchange give you some refurbishment or free rent or even reduce your current rental rate. Or maybe you can begin the process of looking at substitute spaces. We recommend that you start looking 9 to 18 months prior to the expiration of your lease. You might find a landlord that will provide you with incentives to relocate—including a
newly renovated space, an aggressive price, free rent, and sometimes even help with paying the costs of the lease that you are vacating if you move into the new space prior to the end of your current lease.

As mentioned above, we believe that it is currently a tenant’s market—but that is only true if you are able to either enter into a new lease or use market conditions and market information to your company’s economic advantage. If you would like help with reviewing or abstracting your current lease, estimating the market value of your current space, or developing a strategy to renew
or relocate we could bring friendly, knowledgeable, professional insights and service.
And if you are a landlord reading this—remember that 2009 is the time to get “defensive” and “aggressive”. Don’t let good tenants leave and use the same advice noted above to provide a high quality of service and other incentives to try to retain your tenants, the most valuable asset you have in this market.

If you would like to discuss this blog post with us or if we can help you with a commercial or investment real estate transactions, please call or email us at Jim Gray (916) 617-4255 jgray@naibt.com or Nahz Anvary (916) 617-4257 nanvary@naibt.com. “Build on the power of our network” visit our website at http://www.naibtcommercial.com/