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Catch 22 -- Logical Paradox of this Recession and The Recovery

2010-06-20T21:46:00.001-07:00

An Economic Catch-22 —A Logical Paradox for Job Growth?

A recent report from the UCLA Anderson Forecast issued June 15th 2010, predicts that the California economy is expected to grow a bit slower than the nation's economy for 2010, and only slightly faster thereafter. This slow growth rate will result in only modest inroads into the state's high unemployment rate.

The report titled “A Homeless Recovery,” concludes that this time around, the economy can’t count on free-spending consumers to boost it along. The report cites today’s “frugal consumers” and describes “If the next year is going to bring exceptional growth, consumers will need to express their optimism in the way that really counts; buying homes and cars. And that is not going to happen if businesses continue to express their pessimism in the way that really counts by not hiring workers.”

In another element of the forecast, the economists predict the recovery will be “rocky” in the commercial real estate sector. “There is just too much debt that has to be worked through”.

The report cites an “Economic Catch-22.” (A Catch-22, coined by the author Joseph Heller in his novel of that same name is a logical paradox wherein a situation exists in which an individual needs something that can only be acquired by not being in that very situation; therefore, the acquisition of this thing becomes logically impossible.) The challenge is that significant reductions in the unemployment rate require real gross domestic product growth in the range of 5% to 6%, compared with normal GDP growth of 3%. As a consequence, consumers concerned about their employment status are reluctant to spend and businesses concerned about growth are reluctant to hire.
UCLA Anderson’s forecast for GDP growth this year is 3.4%, followed by 2.4% in 2011 and 2.8% in 2012, well below the 5% growth of previous recoveries and even a bit below the 3% long-term normal growth. In the California forecast they indicate that the state “will grow slower than the US and a slow recovery in jobs will leave unemployment at 12.1% for the year.” “The latter part of our forecast (through 2012) calls for health care, professional and business services, exports, construction and technology-related manufacturing sectors to generate a bit more robust growth in California.”

The Anderson report is another estimate of a “jobless recovery”. Their conclusion is that the state will grow more rapidly in the following two years but that job creation will not be fast enough to push the unemployment rate below double digits until 2012. “Unlike other deep recessions, the rapidity of the recovery, at least on the unemployment front, will be muted”…

To read more here is a link to additional coverage from UCLA Anderson:
http://newsroom.ucla.edu/portal/ucla/ucla-anderson-forecast-u-s-recovery-160346.aspx

Commercial and Investment Real Estate is both a global and local investment that is influenced by many factors including macro economic conditions. If we can assist you with commercial real estate in northern California please contact us at JimandNahz@ctbt.com or call us at (916) 375-1500

Western Real Estate Business Article on Sacramento Office Market

2010-06-19T09:00:00.000-07:00

This month, June 2010, the magazine Western Real Estate Business has a profile on the Sacramento Market. With our colleagues at Cassidy Turley we contributed to the commercial real estate market review. Here are our particular observations on the office market in Sacramento..

Office

The Sacramento Valley office vacancy rose to 16.3 percent in first quarter 2010, as total availability increased 300,000 square feet for a total of 13.9 million square feet. Sublease space remained constrained, representing less than 3 percent of the total availability. The overall average asking rate for office space slid another $0.03 per square foot quarter over quarter to $1.85 per square foot full service in first quarter 2010.

Gross absorption was a mediocre 1 million square feet in first quarter 2010, about 25 percent less than its quarterly average in the past year and 40 percent below since 2005. Large tenants remain very scarce in the market, with most of the activity being dominated by smaller tenants less than 10,000 square feet. Net absorption, the change in occupied space, was a negative 368,000 square feet in first quarter after having reported positive 117,800 and 213,000 square feet in fourth and third quarters of 2009, respectively. Notably, during the past year, net absorption (which excludes new vacant construction) has actually held stable with just negative 50,000 square feet. The heavy dose of new unoccupied construction has really been a primary cause for the large increase in vacancy and availability in the past year.

The larger leases in first quarter 2010 included California State Board of Equalization for 76,502 square feet in Sacramento; ITT Technical Institute for 27,020 square feet in Rancho Cordova; Principal Financial Group for 24,645 square feet in El Dorado Hills; and Brown & Caldwell for 22,126 square feet in Rancho Cordova. There were also a handful of notable sales, led by CSAC Excess Insurance Authority’s acquisition of a 48,591-square-foot building in Folsom.
Office construction continued to trickle at the start of 2010 as projects funded more than 1 to 2 yearsr ago are now finally being completed. One building was delivered in first quarter: the 141,210-square-foot Sutter Health Facility in east Sacramento. This pace is already drastically cooler than last year when 1.9 million square feet were delivered and caused a massive swelling to the area’s vacancy rate. The development pipeline, however, is quickly diminishing as developers wait on the sidelines until market conditions become favorable. This slowdown is a double-edge sword, as it will help alleviate rising vacancy, but it will also take away construction jobs, a historical key source of job growth for the market.

The climate continues to remain favorable for tenants as there are still a lot of rental rate discounts being offered, plus concessions such as free rent and higher tenant-improvement allowance dollars from landlords. Lease terms also remain shorter, with the typical leases ranging between 1 and 3 years. The office sector will continue to battle the effects of the economic recession. The services and tech sectors lost a reported 10,000 jobs, and the job outlook ahead remains pretty grim. The forecast is that there will continue to be growing vacancy, slightly lower rents and very little new construction. The bright spots in the local office market have been and will likely continue to be owner-user sales financed with SBA long-term, low-interest loans and growth in healthcare and education.

Notably, the heavy majority of the 10 largest office leases transacted in 2009 were from the state’s government. Government is at risk as revenues from property and sales taxes continue to shrink, as the deficits become increasingly structural. Employees are being furloughed. Services are being cut back, and capital expenditures are being frozen. A great deal of the federal stimulus funds found their way to state and local government last year, but who knows what the political future holds? What happens to state and local government will have profound impacts. There is reason to be more optimistic, but being able to avoid a “double dip” is not certain.

— Jim Gray is a partner and Nahz Anvary an associate in Cassidy Turley BT Commercial’s Sacramento office.

Here is a link to the entire article:

http://westernrebusiness.com/articles/JUN10/highlight1.html

Sacramento Market Conditions

2010-06-18T21:36:00.000-07:00

This month, June 2010, the magazine Western Real Estate Business has a profile on the Sacramento Market. With our colleagues at Cassidy Turley we contributed to the commercial real estate market review. Here are a few of our observations.

SACRAMENTO

Like most markets around the country, the Great Recession has severely impacted the overall state and morale of the Sacramento area in all facets and in some aspects even more so. Some of the effects have been dramatic job loss, wage losses, soft tenant demand, increased vacancy rates, plummeting rental rates, depressed housing values, rising residential and commercial foreclosures and tightened credit practices to a decline in consumer confidence and spending. Unemployment exceeded 13 percent in March 2010 from the mid-5 percent range pre-recession as a substantial number of jobs, more than 80,000 wage and salary jobs, have reportedly been lost in the area since mid-2007. Commercial real estate vacancies have climbed to new highs as rental rates have plummeted. It was reported in early 2010 that for every six businesses open, one was closed in greater Sacramento; this is a very staggering statistic.
New construction projects, namely office-oriented, that were funded a few years ago during the last market recovery were still being completed through 2009, which continued to add further strain to vacancy rates. Many retailers, from small shops to big box, have been forced to close their doors as a result of the difficult economic climate that has resulted in depressed consumer confidence and a drop in retail sales. Some large and small retail tenants have recently begun to emerge or re-emerge in the marketplace, but there still remains a lot of vacancy to fill.

Additionally, home prices have plummeted from their pre-recession levels, while foreclosures have climbed, with the latest figures showing more than 56,000 foreclosures since the start of 2007 in the Sacramento area. The city’s housing sector has been one of the most negatively impacted statewide although there are signs that it is beginning to right itself. In the commercial sector, a significant amount of foreclosures have been realized and a sizable number more are expected. In recent reports, the Sacramento metro area ranked No. 3 in the nation in terms of bankruptcy filings. However, the problems in the commercial sector are not anticipated to be as significant on the metro economy as the residential market.

— Ken Reiff is a managing partner with Cassidy Turley BT Commercial’s Sacramento office and Jim Gray is a leasing and sales specialist.

Here is a link to the entire article: http://westernrebusiness.com/articles/JUN10/highlight1.html

Steady and Stable... Don't chase quick hits...

2010-06-18T21:02:00.000-07:00

Unreasonable Expectations?

We received a phone call the other day that got us thinking. The call came in from a former client who was an acquisitions specialist for a developer. He no longer works for the company that he used to work for ---that developer is still trying to liquidate the surplus of units that they overbuilt in 2005-2009. This person is now working for a “value investor fund”. He called us to tell us about his new job and to solicit our help looking for real estate investments. He engaged us in conversation. He is looking for deals--- he is now what we call a “Scout”.

He outlined what his new company’s investment criteria. “We are ready to buy… We will buy Office, Medical Office, or Retail.” “We have a group of investors that are ready to fund.” “We have promised our investors a 20% return…”

Oh really? I reply… I then wonder; why are you wasting your time and ours? If you are looking for 20+% annual returns from commercial real estate you might as well be buying lottery tickets…

Here is why we believe that. Let’s look at a bit of math… Assume you have a million dollars to invest. If you are seeking a 20% compounded rate of return that means that a million dollars invested for five years with no cash flow for the first five years would have to be sold for and net $2.488 million dollars. So in five years the Asset has to appreciate nearly 2.5 times. But that doesn’t even consider the “value add expenses”. Say the subject property is 10,000 square feet. Assume you do cosmetic and tenant improvements that cost $30 per square foot and leasing commissions that cost $5 per square foot. Initial Investment plus improvements are now $1,350,000. To achieve a 20% return in 5 years, the property now has to be sold for $3.359 million.

To us it is difficult if not impossible to imagine a scenario in which a $1 million dollar property will become worth $3.359 million in five years. The income to justify a $3.359 million dollar sales price at a 9% cap rate 5 years from now would be more than $2.51 per square foot per month triple net.

To imagine a scenario like this occurring we’ll have to go through another cycle—money will freely flow, lending restrictions will ease, prices will increase, more money will come in, and things will get out of control again. It has happened before –and probably will happen again --but we doubt this is the likely scenario any time soon.

Scouts are likely to become frustrated and begin to question whether the chance for quick money and high double digit returns will be attainable at all this time. My gray hair and experience in the commercial real estate business leads me to believe it’s probably more reasonable to expect that a combination of extended consumer de-leveraging and ongoing economic funk will temper lending practices and hamstring demand for years to come. Financial reform will likely bring more restrictions on deal making too. The speculative bubble has burst and very few dollars are going to be made in “distressed real estate” in the short term.

We wish all investors happy hunting and there certainly may be one-off opportunities in the distressed market… We suspect that real estate investors will be better served to stop looking for the distressed quick trading hits. We’re just not going back to the “crazy good old days of 2005” anytime soon. At this point of the real estate cycle we believe that most investors should be focusing on building good core portfolios of well-leased income producing properties, grounded in good fundamentals. Investors should focus on achieving year-in, year out returns in the high single digits where annualized real estate returns historically perform. If values escalate again, these properties will almost certainly jump ahead of the curve so you’ll be in a great position to sell out. That’s why the top properties in the best markets make sense.

People can try to play the yo-yo game of finding rare jewels. But let’s face it--right now the economy and lenders just won’t cooperate. This time around we believe that conventional wisdom may take a lot longer to play out. Steady 8% returns not quick 20% returns is the more likely bet!

If we can be of service reviewing evaluating or finding commercial investment real estate or if you would like to continue the debate over which type of commercial real estate will achieve the best performance please call Jim Gray or Nahz Anvary (916) 375-1500 or at jim&nahz@ctbt.com.

Great Coach Great Teacher --Pyramid for Success

2010-06-05T09:06:00.000-07:00

Good bye and thank you Coach…

Arose today to hear that John Wooden one of the most revered people in basketball, coaching, and leadership died at the age of 99. Thank you for all that you have done and rest peacefully.

Wooden’s life and legacy has inspired millions. I have read his books and became familiar with his Pyramid of Success. I am a huge fan of basketball and a huge fan of his lessons on Leadership, on Preparation, and on Life.

If you need some inspiration or you want to know more about the philosophy and teachings of Coach Wooden here are two links you will enjoy. http://www.coachwooden.com/ and http://en.wikipedia.org/wiki/John_Wooden

Wooden is famous for a seven point creed. Given to him by his father and printed on a card and carried in his wallet:
1. Be true to yourself.
2. Make each day your masterpiece.
3. Help others.
4. Drink deeply from good books, especially the Bible.
5. Make friendship a fine art.
6. Build a shelter against a rainy day.
7. Pray for guidance and give thanks for your blessings every day.

And here is a reprint of his Pyramid of Success.

Impact of Distress on Class A Office Valuations

2010-06-03T15:39:00.000-07:00

We saw a question posted on a commercial real estate web site inquiring about pricing differences and impacts that Distressed Real Estate is having on valuing Class A Properties. Here is the exact question that was posted on Loopnet. "How are brokers valuing class A properties with so many distressed properties thrown into the mix?"

Here are our thoughts:

The performing "Class A Market" is different than and priced differently than the "Distressed Market".

Recommending a value or proposed sales price takes a disciplined approach, comparing market trends and market demand. Our job as investment brokers is to be able to thoroughly evaluate the property-- including recent comparable sales, an evaluation of income and expenses to determine net operating income, replacement cost, and competitive positioning within the market. In addition understanding the motivations of the Seller, macro conditions in the marketplace, and financing costs and availability, also need thorough consideration today.
In our opinion, there are two distinct and different markets today. Class A properties, those that are stabilized with good tenants and good income, are scarce and are trading at surprisingly low cap rates. Distressed properties -- with income that won't support the debt service, or properties that are unfinished, or poorly performing, in areas with little demand, are being sought by a different category of Buyer. (The property with a "story" that was built or bought at the top of the market.) Distressed vs. Class A Institutional are really different markets and should be and are priced differently.

Class A doesn't just mean "expensive finishes" it means strong demand. In the current market environment, the best income-producing properties—those distinguished by superior quality of construction and the right location are likely to hold their value, keep their tenants and appreciate sooner and more than others. Early in this recession, pricing correction affected all properties, including those with the strongest operating performance and, in the case of new developments, the potential for such performance. But now it is back to fundamental evaluation and underwriting. Location, rent roll analysis, expense benchmarking, strong management and the like makes a real difference.

The relative attractiveness of good buildings to tenants and investors should allow them to stay ahead of the rest even in the challenging years ahead; their values have hopefully bottomed out as the broader market continues to find the bottom. Anecdotal evidence suggests that cap rates on scarce Class A properties with real income and good lease terms are therefore much sought-after assets attracting multiple offers and those cap rates have already come down.

The current cap rate decline starts with that fact that there is more capital (debt and equity) in the market than there is product. That factor alone has pushed values up and cap rates down-- but only for strong assets. Distress Buyers and Distress Prices are different than most well performing Class A properties. Distressed deals get picked over and trade at dramatic discounts to replacement costs; if they trade at all. For many of these deals the owner has no equity and getting quality information and timely decision making is very problematic.

Institutional investors are seeking quality NOI. We are reading reports and hearing about deals in northern California where pricing with cap rates as low as 6+% based for good assets. But if it isn't class A -- and if the lease terms are short and there is any scent of distress or credit quality risk -- or if the likelihood of vacancy and rent-up risk is high --then the cap rate is more like 9% -- and or price per square foot-- well below replacement. That said, there is a great deal of anxiety out there as to how far cap rates have fallen and does it make a risk adjusted sense for them to stay low? The current imbalance of available high quality class A properties and the amount of capital seeking to invest in them has created what a number of analysts and market participants call a "scarcity premium." We believe that the distressed properties that are coming to market are those with little hope of value recovery for the foreseeable future (more than three years). These are two distinct markets -- priced differently for different categories of buyers.

If you have a question that is more specific to a particular property or market - or if we can help you assess the value of your asset -- Class A or Distressed -- or something in between, feel free to contact us. We promise you professional and friendly service. jgray@ctbt.com or nanvary@ctbt.com

Recent jobs report indicates that northern California losing jobs ...but rate of decline is slowing.

2010-05-31T18:22:00.000-07:00

A recent report by the Center for Strategic Economic Research dated May 2010 paints an accurate picture of the continuing job losses in the Sacramento, Bay Area, Solano, and Stockton Regions and contrasts those trends with those of California and the Nation. The report which is produced in conjunction with the Sacramento Area Commerce and Trade Organization and with California State University Sacramento demonstrates that these regions in northern California have continued to shed jobs, but that the rate of decline is slowing in a few areas.

The authors do a great job “slicing and dicing” the numbers. But it is not really a pretty picture!

In the last 12 months; April of 2009 to April 2010 there are 327,000 fewer jobs in California, 82,300 fewer in the SF Bay Area, 27,300 fewer jobs in Sacramento, 2,900 fewer in Stockton, and 3,700 in Solano. The job losses are in both the private sector and public sector.

The report highlights those areas of the economy that are actually adding jobs in each region. But the majority of sectors are still not adding jobs in any region. The report tries to have a positive light and repeatedly points out that the rate of job loss has slowed. The report states; “The mixed conditions in Sacramento’s largest sectors are slowing improvements in the overall economy as nearly all other sectors are better off than they were one year ago. The state and nation turned the corner about eight months ago and are posting much slower annual rates of loss.”

These job numbers are equal to employment numbers in 2001 and 2002. The demand for office and industrial space is likely to remain soft until job growth really picks up.

President Harry Truman said this about jobs and the recession. “It's a recession when your neighbor loses his job; it's a depression when you lose your own. ~Harry S. Truman

The report in its entirety is available at the following link: http://go.emaildir5.com/_p_ga4x2nw3hjfuzkwxrgfx6utsbafq2nwxrafubukxbjrubutsc8jw7ts5qmue3ggvvjulnndu6s_p_/trouble.htm

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

2009-03-12T15:05:00.000-07:00

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

2009-03-10T12:40:00.000-07:00

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

2009-01-27T17:50:00.000-08:00

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/

Watch out for a "hair-cut". Price reductions in the middle of a sale...

2008-10-25T16:55:00.000-07:00

Sellers…Ready for a haircut? The increasing phenomenon of “re-trading”

In an environment where investment property sales have plummeted in the Sacramento region approximately 75% or more over the past year, any Seller who has a property in escrow must be prepared for the growing phenomenon of “re-trading” a “hair-cut” or a “price reduction” that is taking place and is prevalent with almost every transaction these days.

The phenomenon of re-trading is also categorized as a “haircut”” or “price reduction.” It typically occurs when the property is in escrow, during some point of the Buyer’s due diligence process. Perhaps some sort of unanticipated or unexpected property defect is discovered whose repair/update requires significant additional dollars , or the amount and type of financing that the buyer expected to achieve is not possible or requires additional buyer equity. In this tightening credit market, these issues are no longer a remote possibility, but instead a daily market reality.

The end result is that the Buyer asks the Seller for a “price reduction”, after having spent a certain amount of time having the property tied up in escrow. No buyer or broker for that fact likes it, but in this market, it is more inevitable than ever. Our advice to most clients is “don’t take it personal” it doesn’t necessarily mean that the Buyer “isn’t ethical and dealing fairly” – most often it is a reflection of the tough times that we are in…

How does a Seller minimize the probability of a haircut when selling a property?

The more certainly a Seller can provide a Buyer up front in regards to the condition of the property, the better. Oftentimes, this may mean the Seller may pay for key inspections such as a roof inspection or a Phase 1 environmental report prior to bringing the property to market to understand the property condition and disclose any issues to Buyers up front before they have put the property in Escrow. It may mean some up front costs, but it goes a long way in defining the scope of any potential problems to potential Buyers prior to putting the property in escrow. Having accurate records regarding income and expenses, square footages, rent rolls and etc is also very essential.

Also, we as brokers know that counseling a Seller on choosing the correct buyer is really an art. Despite all of the Seller’s best efforts in doing so, there are occasions, now much more frequent, that require a buyer to say, “Oops, sorry, for XYZ reason, I can only pay this reduced amount.” As brokers, we counsel our seller clients to accept deals based on a combination of 3 primary factors. First, it is what PRICE the buyer is willing to pay. Second, it is the TERMS of the deal (how long the due diligence takes, any contingencies in place), and third, it is the Buyer’s ABILITY TO CLOSE. It is oftentimes not the Buyer who is willing to pay the highest price who will come through at the end of the day. Reputation on previous transactions is key variable.

Sellers have to understand that in a rapidly declining market, which seems in the short term to be getting worse, gone are the days where a Buyer who wants to change the terms of an agreed-to deal is substituted for another Buyer. Many negotiations are extending into and during the escrow period, with Sellers and their brokers working to keep the existing Buyer engaged and committed rather than disappearing. In this market, time or delays, kill all deals or certainly increase the probability of a haircut. Brokers and sellers as well as lenders, inspectors, attorneys and escrow agents have to work with a heightened sense of urgency. A prompt closing with a pre-qualified buyer and completed due diligence package on the property is the best defense to a “hair-cut”.

If you are ever faced with the issue of retrading as a Seller, take the time to think through all of your options and strategies. It is a normal reaction to become mad by the request to change the financial terms. But, sometimes, your best option is to continue to keep riding the horse you’ve chosen, taking a “little trim” if you are lucky, and helping the Buyer get over the finish line. Ultimately, this response may result in you achieving your objectives or the majority of your objectives of disposing of your asset more quickly rather than starting from scratch with someone new in a falling 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/

Sacramento Employment Continues to Deteriorate

2008-09-02T11:16:00.000-07:00

Sacramento Employment Numbers Show Further Deterioration—Sit tight, no recovery in sight
A recent report by Sacramento Regional Research Institute points out that there are 12,600 fewer jobs in the six county Sacramento Area at the end of July 2008 than there were a year earlier. This means that there are 1.3% fewer jobs than there were last year. Actually, the report indicates that we have lost 14,000 private sector jobs and actually added 1,400 public sector jobs. This is the slowest employment growth in almost two decades. The declines were steeper as a percentage in Sacramento than in the Bay Area or California as a whole.

The largest losses were in the following sectors: Construction (-6,100), Leisure and Hospitality (-3,000), Financial Activities (-2,800), Trade Transportation and Utilities (-2,700), Manufacturing (-2,100), Information (-400). Those sectors of the regional economy that added jobs included; Education and Health Services (+2,000), Government (+1,400), Professional and Business Services (+800), and Other Services (+300.)

Employment is a significant driver of commercial real estate. This underlying economic condition leads to reduced demand for office, warehouse, and retail spaces. In addition, these real job losses affect the overall economy, reduce earnings and spending, and contribute to a regional slowdown.

Things are pretty tough already in the regional economy but we are very concerned about the next stage of this slowdown. A recent Sacramento Bee article reports that the California legislature is still deadlocked on agreeing on a new budget—with a deficit of $16+ Billion dollars – it appears that the State is going to continue to reduce expenditures for the poor and needy-- and is likely to siphon off almost $3 billion dollars from County and City governments. That article of August 30, 2008 is entitled “It may all come down to a whole lot of borrowing – again” and you can find it at http://www.sacbee.com/111/story/1197429.html

Government employment at the state and local levels will have to slow or probably reverse. This will be felt in the California Capitol Region with greater impact than elsewhere in the State. What sector will step up and lead the recovery? A recovery will come…but when? Our guess is things will get worse before they get better.

Our advice for landlords of commercial real estate properties is that this is a time for making sure your current tenants are happy with the level of service and property management you are providing to them and to evaluate whether you can get an extension and renewal for your current tenants, and it is a time to get aggressive as it relates to “asking rents” and prices and concessions to attract new tenants.. We think being conservative and focusing on operating efficiencies and satisfied tenants is the thing to do now. It is time to sit tight and ride this through until the tide turns.

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/

Investment Sales Slow in USA and in Sacramento

2008-08-04T17:39:00.000-07:00

Investment sales slow dramatically…

My current line when people ask me “how is the commercial real estate business?” is “It’s fine but I get to sell properties 4 or 5 times before they actually close”. This is because buyers are pickier, sellers are confronted with a changing market and lenders are tougher when it comes to underwriting real estate loans. The indicators are clear and we feel it as active brokers in the business--Investment sales have slowed down considerably. The National Association of Realtors reports that “Investment in commercial real estate during the first 4 months of 2008 was $48.2 billion, down 69.5% from the $157.8 billion for the same period in 2007. More at http://www.realtor.org/press_room/news_releases/2008/commercial_index_contracts

And here in the Sacramento Region, the Sacramento Business Journal reported “Real Estate investment tumbles; sales happening, but at a slower pace.” The Business Journal reports that investment sales are off 2.1 billion or 58% drop for the past 12 months. More at http://sacramento.bizjournals.com/sacramento/stories/2008/08/04/story5.html

Clearly volume is down, but deals are still getting done. For the first 6 months of 2008 14 office investment properties have been sold and that contrasts to 56 transactions for the same period in 2007.

The slowdown is attributed to the overall decline in the economy, to a tighter credit market with stricter underwriting in which lenders are requiring higher down payments plus higher interest rates and personal guarantees from buyers. A number of lenders have left the market all together. Also a number of prospective buyers are waiting and assessing what is happening to operating expenses, rental rate growth/decline, and to potentially higher cap rates.

We agree that this market is slowing, but we believe it is not going to be like the savings and loan collapse of the late 80’s. There has not been that much over-building , and most properties are still generating positive income and cash flows for the current owners. Sure, there will be some investors who will get into trouble and will need to dispose of properties that were bought at the top—that haven’t hit their proformas and likely have short term debt or adjustable rate debt who will have a higher sense of urgency. Sellers who want or need to sell will need to be realistic about their price and their deals will attract buyers with more cash seeking higher yields – 7% to 8.5% cap rates on actual Net Operating Income – and underwriting and conditions of financing will make transactions harder to get funded and to actually close.

If you would like to discuss this blog post with us or if we can help you with a commercial or investment real estate transaction please call or email us at Jim Gray (916) 617-4255 jgray@naibt.com or Nahz Anvary (916) 617-4257 nanvary@naibt.com.

There are investments and there are sort of investments...

2008-07-25T14:26:00.000-07:00

Can you help me find an investment property? Digging into the details, asking questions and having a good chuckle …

Just the other day my colleague Nahz got an email from a prospect of ours who is looking for an “investment property”. We love those kinds of inquiries. This prospect is a sophisticated and smart individual who lives in our small college town of Davis, California. His profession is in the financial service area and he has a diversified portfolio and has acquired property through our brokerage firm before. We were pleased to have the opportunity to try to be of assistance and potentially make a commission.

So that lead Nahz and I to have a discussion, get busy scanning the market, making a few calls, getting the help from our research and marketing colleagues and having a few laughs about; “What is an investment property?” We are investment brokers and realize that when people seek an investment they are seeking a return on their capital. Also investors want to make sure that they get a return of their capital. We have been trained in calculating yield and returns and we know how to discuss cash flows and the reversion value or the future gain from a sale or disposition. We can build spreadsheets and do discounting and compounding and build 10 year projections to evaluate an investment with our clients. Our discussion turned quickly to what kind of investment. There are the four core investment property types; Retail, Industrial, Office, and Multi-family. Or would the client be interested in a non- core investment like ground lease, hospitality, special use, etc ?

Was this client looking for safe and secure income, institutional quality property and the resulting lower yield and higher price that goes with it? Was he interested in a value added deal? Do you think he wants a mom and pop kind of property with the management responsibility that goes with it? Single tenant or multi-tenant? How much leverage and how much cash? Was his investment being driven by tax shelter /tax deferral like a 1031 exchange requirement?
So we ran through our mental check lists and thought about all commercial properties that we knew were on the market, including our listings. Then we did a search of the commercial databases Loopnet, CoStar, the local MLS and we developed a list and a summary including a picture and a map of each property “listed as an investment property” in these databases.
Now here is where we think it gets funny. As we analyzed the 18 properties and summarized the data into categories we realized that- what is often listed as “an investment property” could in many instances be labeled and described as something quite different as well. In our letter of transmittal to our prospect we said.

Dear Client
Please find attached materials summarizing what is on the market. Two properties are commercial buildings with Net Operating Income. One is a multi-tenant office building at a 7.15% asking cap rate. One is a single tenant specialty/convenience store at a 5% asking cap rate. (Also that retail strip that we previously mentioned that had been on the market at a 6% cap, is not actually on the market anymore. “It has been removed from the market because of disputes amongst the partners and some tenant issues”… but if you want to make an offer we’d love to present it, their broker said.)
There are 3 Multi-family properties on the market, one is a four-plex at nearly $200,000 per door, another is a 13 unit apartment at about $135,000 per unit but no income or expense information is available and please don’t disturb the tenants. The third apartment complex is a nearly 40 year old 200 unit complex at $115,000 per door and a 5.5% cap rate.
Also there are 6 properties on the market – that are land deals—for development – in the People’s Republic of Davis. Those will give you an opportunity to spend money and a lot of time at hearings and meetings. There were two business properties seeking owner users. There were two Farm and Ranch Acreages. And finally there were two properties that we decided to label “Unique Davis Deals”. A campus like setting with living units, a school, an administrative office, a gym, a kitchen, and no income, and no asking price…make offer. And finally there is a remodeled 1917 bungalow with a conditional use permit for a wellness center that has a wheelchair ramp in a residential area but near the commercial center…
Please let us know if any of these are what you had in mind when you said you are looking for an investment property? Please call with questions or concerns.
Best Regards,
Jim and Nahz

Now don’t get us wrong every one of these properties has its positive attributes and we hope to be able to sell or lease each and every one of them and to serve the client in meeting their objective. However, I am not sure we would describe many of them as “investment properties”. In closing when describing considering and reviewing an “investment property” remember that there are some investments that have steady and predictable income and returns and there are other real estate opportunities that have attributes for use, development, and speculation. And every investment has potential for risk and rewards and occasionally a chance for some chuckles.

If you would like to discuss this Blog Post with us or if we can answer questions or try to help you search for an investment property or a good chuckle or if we can be of service please contact us. Jim Gray (916) 617-4255 jgray@naibt.com or Nahz Anvary (916) 617-4257 nanvary@naibt.com

California Green Building Code Enacted...!

2008-07-21T15:32:00.000-07:00

Attention developers!! Green—no longer just an ideal but now a reality. California Green Building Code enacted…

We like to think of ourselves as progressive, helping our clients better understand the ins and outs of what it takes to develop buildings for the upcoming century. It is clear that we need to get up to speed with the new building code for California. We will add that to our studies already underway for LEEDS AP. Thank goodness we are believers in lifelong learning.

This past Thursday, the California Building Standards Commission adopted the first statewide “green” building code in the nation, moving all of these “green talk” from just an ideal to a forthcoming reality. The code will be phased in between 2009 to 2011 and encompasses Commercial buildings, health care facilities, and homes. Some impacts include lowering water use, improving air quality, and increasing energy efficiency. Some advice to developers of commercial buildings and homes--use this as the impetus to get familiar with what it takes to re-conceptualize your plans and projects to incorporate these standard and other ideals rather than being forced to change by a new law.

For the reference, go to the California Department of Housing and Community Development’s press release at http://www.hcd.ca.gov/news/release/07182008PressRelease.pdf

Or to the Sac Bee article at http://www.sacbee.com/103/story/1091557.html

To learn more about green, to to the US Green building council web site at: http://www.usgbc.org/

Also view our previous blog article on intelligent buildings at: http://scorebrokers.blogspot.com/2008/06/intelligent-buildings-from-executives.html

If we can help you with strategies to help you prepare for this upcoming change in the building code and the related elements of vision, innovation, collaboration, sustainability, and consideration of utilizing technology and targeted marketing please give us a call. For questions about this post or to discuss please contact Jim Gray or Nahz Anvary at (916) 617-4255 or (916) 617-4257

Slowing Market... What we must do to work smarter for our clients

2008-07-08T04:54:00.000-07:00

So the market is slowing? What are we doing to work smarter on behalf of our clients? This is the crux of the soul searching that we commercial real estate brokers must be doing right now. Below are a few of the underlying questions that we must answer and which clients are already asking those of us who are listing agents for Landlords and Sellers. These are questions that must be asked and answered if you are going to provide good service in a soft market.

1. How do we review and present information to the Landlord or the Seller that communicates realistically what the market price or the market rent should be? Is it priced fairly and competitively?
2. What are we doing to feature the positive attributes of our client’s property? What differentiates the property and what is the value proposition for a future tenant?
3. What are we doing to maximize exposure?
4. How do we increase the number of prospects for a property?
5. How do we alert the other Brokers that this is a good deal and that we the owner and the listing broker are doing to be “broker and client friendly”?

I have been in this business nearly 30 years. Right now it is tough for sure and the market has changed dramatically, quickly and will probably get worse before it improves. But you don’t serve the client and help them achieve their goals by blaming the market and sticking to the techniques that worked when it was a “Seller or Landlord’s Market” and the average broker could get by as an “order taker”. It is time to work smarter and to make sure that properties show well and are priced at the market.

Here are a few steps to take so we as brokers work smarter on behalf of our clients.
1. Do a Broker’s Price Opinion. Base your analysis on recent sales or leases, including an analysis of incentives and concessions and how long a property was on the market. As importantly, list and describe competitive properties currently on the market. How many properties compete directly with the subject? What are they priced? What are the terms? Are there any incentives and concessions to the tenant or his broker? How much TI allowance was or will be provided?
2. Review the property in detail. What needs to happen for it to show well? Does it need to be cleaned up? Are there items of functional obsolescence? Will paint and carpet help? Do you need to order and evaluate 3rd party inspections for hazardous materials, termites, mold, Zoning, Code Violations, Conditions of Title and etc? Are there TIs that need to be planned and constructed? (Can you compare these matters with the other competitive offerings?) Prepare an estimate of the TI allowance and schedule to complete needed work if a tenant were found.
3. How descriptive and easily available is property information? Do property brochures and offerings have accurate financial expenses, floor plans, photos, aerials, maps and etc? How many web sites contain information about the property? Is the property advertised? Where does a prospect look to find information about the offering? Is information available in multiple media channels including the local newspaper, Craig’s List, Ecommerce sites such as LoopNet and Costar? Can someone Google their need –say 5,000 square foot office to lease in Sacramento-- and find your client’s building? Have you prepared a targeted marketing plan to address these matters and to “brainstorm and make a list to call” of who are the “low hanging fruit”, the likely prospects to reach out to?
4. Prospecting is about getting exposure to the kinds of business users and investors who would be most interested in the site. Are there alternative users—if it is a medical building with a vacancy have you also contacted labs, specialists, group practices, dentists, chiropractors, optometrists, and other allied health professionals? Have you reached out to the likely users and let them know that there is a good deal in the market? Can you provide free rent or moving expenses or lease buy-outs at existing properties to get a prospect interested?
5. Our business is not rocket science. If you can convince other brokers that the property offering is a good one and that they will be paid competitively and promptly if they bring a tenant or buyer to see the property you will get more showings and tours. What are you doing to communicate to the other Brokers that this is a good deal?

These are not guarantees in a slow market, but they will increase the likelihood of success. It is time to work smarter on behalf of our clients. There are no commissions to be made waiting for the phone to ring. Get busy, set realistic expectations with landlords and owners, price properties competitively, experiment with emerging media and marketing technologies, and learn to make good deals to attract buyers or tenants. Be nimble, be creative and work smarter.
If you would like to discuss this post or if you would like to discuss a Broker’s Price Opinion or a Targeted Marketing Plan , please call or email us Jim Gray at (916) 617-4255 jgray@naibt.com or Nahz Anvary at (916) 617-4257 nanvary@naibt.com

Lots of Options --Office Buildings For Sale Sacramento

2008-07-02T16:15:00.000-07:00

Office Buildings For Sale in the Sacramento Valley—What Does That Really Mean?
Sifting through Lots of Opportunites...

So you are looking for an office building to buy in the Sacramento area? Or you are thinking about investing in a commercial/office property in the Sacramento area? Well you have plenty to choose from – but you need to refine your search if you want to locate what you really want and you want it to meet your business and investment needs. Office properties are known as one of the four core product types of commercial real estate. Office properties vary greatly in their configuration, style, utility, and economic performance. The “office market” is comprised of many distinct property types. These include modern skyscrapers, medical office, office condos, classes A, B& C, single tenant and multi-tenant, offices for the owner user and offices that are well managed investment properties. There is institutional quality and there are mom and pop offices. Sometimes offices are mixed use with residential or with retail, and there are offices in warehouses and within flex buildings. There are various submarkets and plenty of features that differentiate. Being able to understand these variables and their unique attributes requires a professional focus and asking the right questions.

It is the first of the month and Commercial Brokerage Firms are sending out their “availability lists”. When this occurs, it means that the research staff and the administrative staff are working closely with the Brokers to make sure that an inventory of available property is updated and distributed. When this task is performed by the various offices it also means that the information to the commercial databases such as LoopNet or Costar are also updated. But consistent and uniform information it is not! We thought it would be interesting to review the office market and share some of the findings from our analysis of this imperfect market information.

Here is an effort to describe the current inventory of “office properties” that are “actively on the market”. There are 580 office properties currently offered for sale in the Sacramento Valley. They range in price from $135,000 to $26,500,000. Only 12.5% of the office properties have a quoted cap rate—the other 87.5% are being offered to owner users --or the investment attributes haven’t been provided for their office offering.

To help get our arms around the market we did a few searches in LoopNet to check in on market conditions. The searches included the counties of Sacramento, Placer, El Dorado, Yolo, and Solano. We then looked at the information in these offerings and have the following observations to share:

The first search was for “office properties” less than $1 million dollars. There are 209 separate properties on the market. They range from Victorian houses modified for commercial use to small office condo units. Only 11 of those properties reported a cap rate- ranging from 4% to 9.10%. 198 of the offerings are trying to attract the owner user. Sizes ranged from 384 to 9,600 square feet. Prices varied from $135,000 to $999,999 and from $104 all the way up to $962 per square foot.

The second search was amongst office properties from $1 million to $10,000,000. There are 355 office buildings on the market in that price range. In this category there are properties from $1 million to $9,815,000 on the market. Sizes in this price range from 2,435 to 59,616 square feet and prices per square foot range from $94 to $425 per square foot. Of these offerings, only 55 properties quote a cap rate –ranging from 4.12% to 9.08%. Three hundred of these offerings have no stated income and expenses and are not being offered as an investment.

The third search was for office properties being offered for sale at $10,000,000 or more. In this price category, there were 16 properties on the market. From $10,454,000 to $26,500,000 with more than half of these offerings being “un-priced” and only 6 of these have a quoted cap rate –from 6% to 7.6%. Sizes in these high price offerings range from 34,848 to 153,879 square feet.

There is a lot of inventory; more than 500 buildings being offered to users or being offered without stabilized income --but not a lot of office investment inventory on the market. However, it is worth noting that there are now more than 30 office buildings being offered for sale with cap rates higher than 7%.

If we can assist you with your search for an office for your business or an office as an investment please contact us to see if we can be of service and bring professionalism and value as you sift through and consider available options. If you have questions or comments about this post or if we can assist you with your commercial and investment real estate needs please call Jim Gray at (916) 617-4255 or Nahz Anvary at (916) 617-4257.

Bad Omens No Matter What You Call Them

2008-06-30T19:13:00.000-07:00

Closures, Lay-offs, Bankruptcies, Notices of Default… Bad Omens no matter what you call them

In the world of investment and office real estate there are many factors that influence the supply and demand for commercial space. A major factor that stimulates demand is job growth – we have never been quite sure what to politely call “job decline”. What to call it is not a new problem. Back in 1848, John Russell Bartlett, wrote a book titled the “Dictionary of Americanisms”. It is reported in Scott Sandage’s Book ; Born Losers A History of Failure in America; that Bartlett was great at listening for the slogans or slang that became those day’s expressions known as “the mouthful’s about failure”. Here are a few of them from 1848.
Busted, Flat broke, Dead Broke, Up a Tree, Hand to Mouth, Hard up, Hard Pushed, or Hard Run. And the results were often; Face the Music, Go through the Mill, Wind up, Wipe Out, Peter Out, Flunk Out, Flat Out, Fizzle Out…

In 2008 many of those expressions are still in use. Today a new group of more modern expressions – but with much the same meaning; Closures, Lay-offs, Bankruptcies and the like result in less demand for commercial real estate.

Here are a few headlines we want to bring to your attention from June 2008.

Sacramento’s Own ; McClatchy Newspaper Company, publisher of newspapers in Miami, Sacramento, Fort Worth, Kansas City, Charlotte and Raleigh, plans to reduce its workforce by about 10%. "The effects of the current national economic downturn -- particularly in real estate, auto and employment advertising -- make it essential that we move faster now to realign our workforce and make our operations more efficient," said McClatchy CEO Gary Pruitt. McClatchy is reducing workforce through both voluntary and involuntary separations, as well as managed attrition, involving about 1,400 full-time equivalent employees. http://www.costar.com/News/Article.aspx?id=E9FB572BF5C23C36D165C0E2216E2C7E#num2

DR Horton, Greater Sacramento's biggest homebuilder just two years ago, this week abruptly scaled back staffing in its Rancho Cordova office that serves as the Sacramento division headquarters. A three-person crew will run the office that once housed dozens of workers, according to several industry sources. http://sacramento.bizjournals.com/sacramento/stories/2008/05/19/story6.html?q=layoffs%20in%20Sacramento

UOP: State's in mild recession
Thursday, June 26, 2008 Story appeared in BUSINESS section, Page D1
California is in a mild recession and has been since the last few months of 2007, according to the latest report from the University of the Pacific.The UOP quarterly forecast, to be released today, is perhaps the boldest pronouncement by an economist to date that California's sluggish economy has crossed the line into recession.Jeff Michael, director of the university's Business Forecasting Center, said the recession figures to be fairly long-lived but not severe. http://www.sacbee.com/103/story/1040362.html

Sacramento Red Cross Cuts Over Half of Paid Staff
SACRAMENTO, CA - It's been four years since Courtney Miller began working for the Red Cross, and she still talks about it like it's the best thing that ever happened to her."I love giving back to the community," said Miller, "and this organization is just amazing. You really do learn life's lessons here at the Red Cross."If she wasn't so positive, it might be understandable. The same organization that she loves just handed her a pink slip."It's definitely not something that you plan for," said Miller.She is not alone. In her building, several workers were laid off in March."It wasn't enough," said Sacramento-Sierra Red Cross CEO Cindy Jackson of the job cuts. "Unfortunately, we also had to layoff some additional staff in May." Written for the web by Will Frampton, Reporter/Multimedia Journalist http://www.news10.net/tools/printfullstory.aspx?storyid=43788

Elk Grove Ford dealership shuts down
By Mark Glover and Darrell Smith - mglover@sacbee.com
Elk Grove Ford, arguably the automaker's anchor dealership south of Sacramento, closed down operations early Friday evening in the Elk Grove Auto Mall.In the surreal final hour before the 6 p.m. closing, customers were still trying to close deals on vehicles as sales staff patrolled the store boundaries, trying to keep the media out of the showroom."I'm looking at driving off the lot today," said DeLorean Dixon, an Elk Grove shipping and receiving manager who was shopping for a fuel-efficient Ford Focus. Exactly why Elk Grove Ford shut is unclear. Its owners, Sacramento-based Keil Enterprises, did not return calls seeking comment. http://www.sacbee.com/103/story/1046012.html

RV dealer to close; furniture chain files for bankruptcy
By Mark Glover - mglover@sacbee.com
Published 2:35 pm PDT Friday, June 27, 2008
Rough economic conditions have swamped two Northern California retail chains.
Dan Gamel, the 57-year-old, Fresno-based recreational vehicle dealer, said Friday he is selling off his $40 million RV inventory and plans to close all six of his California stores, including the Rocklin RV Center at 4429 Granite Drive.The other Gamel dealerships are in Salida, Anderson, Bakersfield and two in Fresno. The RV chain employs more than 200.
The RoomSource Furniture & Accessories, a six-store chain based in Sacramento, filed for Chapter 11 bankruptcy protection on Wednesday, according to records at U.S. Bankruptcy Court in Sacramento.The 11-year-old retailer operates a showroom at 1821 Exposition Blvd. and has a distribution center at 849 N. 10th St., in Sacramento. Other RoomSource outlets are in Rancho Cordova, Rocklin, Modesto and Stockton. http://www.sacbee.com/103/story/1045519.html

Sacramento area restaurants struggle as gas, food costs rise
By Jon Ortiz - jortiz@sacbee.com
Published 12:00 am PDT Friday, June 27, 2008Story appeared in BUSINESS section, Page D1
It would have been easier for Rick Zibull to take it if his restaurant was closing because the competition beat him.But Z's Wine Bar and Bistro in El Dorado Hills is shutting down Saturday night for reasons beyond its owner's control: Gas at $4.50 a gallon. Soaring food costs. And that rotten housing market.
"People having to make a choice: 'Do I spend a hundred bucks to put gas in my tank, or do I spend a hundred bucks on a night out?'" Zibull said. "You can guess which way that decision goes." Sacramento's eating and drinking establishments are entering a shake-out phase. Summer, already a traditionally slow season for restaurants, will severely test who can stand up to higher costs for everything from eggs to employees as sales wobble.The sluggish economy has already forced some out of business. http://www.sacbee.com/103/story/1043291.html

Sacramento Builder Owes $973 million
Sacramento Builder and Developer John Reynen Hopes Personal Sacrifice Spares Company
According the latest filings in the Chapter 11 bankruptcy reorganization case of Sacramento builder and developer John Reynen, co-owner of Reynen & Bardis Communities, Inc., owes $973 million in various personally guaranteed loans taken out during the housing boom, the Sacramento Business Journal reported recently . Reynen filed for Chapter 11 bankruptcy in April. It was a move intended to give Reynen & Bardis, which Reynen founded with Christo Bardis in 1969, its best chance for survival, company spokeswoman Michele McCormick told Builder. http://www.builderonline.com/business/sacramento-builder-owes-973-million.aspx

Housing bust takes toll on contractors, economy
Jun 2, 2008
LOS ANGELES — Robert Lindsey was not surprised by new data last week that showed new home sales in the United States have fallen more than 40 per cent from their peak almost three years ago. He can tell from his company's bank account."We're literally losing money every month," said Lindsey, general manager of Signature Drywall Inc., in Sacramento, which installs drywall in new homes and apartments in the Sacramento and San Francisco areas.In 2005, the firm raked in some US$30 million in sales. Last year, sales were less than half that, and this year Lindsey hopes he can make $8 million."It's kind of like bleeding to death," he said.http://canadianpress.google.com/article/ALeqM5idGvltUr8_3X3Pq5etGhTPPLEitQ

In a future posting we will do our best to find an equal – although we suspect it will be less- number of positive indicators on factors that are stimulating the regional economy and increasing the demand for commercial and investment real estate.

If you have questions about this Post of if you would like to discuss commercial and investment real estate services with you please call Jim Gray at (916) 617-4255 or Nahz Anvary at (916) 617-4257.

Tough or Bear Markets --Some Advice to Consider and Opportunites to Consider

2008-06-30T15:10:00.000-07:00

In tough or bear markets—important advice and opportunities to watch for.…

We are sales people and consider ourselves “honest brokers.” One of the challenges that we must confront is to coach and counsel parties to be realistic, and in tough time like these, that often means sharing bad news, and yet we still need to be positive and even optimistic. We don’t want our clients to say; “ Damn , here come Jim and Nahz with more bad news…” We enjoy our clients and we want to be welcomed by prospects and not be “shunned as downers or contributing to our depression”.

First, in this particular post we would like to do a little philosophizing and acknowledge up front that it is really tough in the commercial real estate industry right now. Conditions in northern California for many properties and for many sectors of the economy have taken a hit. Some people are taking real losses-- financially, in their relationships and even to their own sense of self worth.

Our goal is to share with clients and prospects market information as we gather, sift, compare, analyze, understand and hazard a guess and formulate a recommendation. Our goal is to appreciate the prospect’s or the client’s perspective and objectives – but sometimes the client’s goals and the market realities are not in sync. Unfortunately, there are properties that are worth less than someone paid for them, or leasing projections weren’t achieved and the cash flow and yield aren’t being obtained, or vacancy has risen and rents have actually declined, and increasingly operating expenses are rising faster than income. And unfortunately, businesses fail, tenants quit paying rent, and loans come due and can’t be refinanced at the old favorable rates and terms. It just isn’t fair --but sometimes you invest and you lose income and even occasionally equity or principal.

If you are well capitalized and a seasoned professional and the current underperforming asset isn’t going to increasingly deteriorate, the usual reaction is to “hold on – take it off the market”. You merely wait for the market to turn around and recover and don’t lose any sleep because it is merely a part of your diversified portfolio and you can subsidize the underperformance and it doesn’t adversely affect your life of lifestyle.

In this market we are seeing more and more people who are in denial and who aren’t fully equipped to hold on and to wait for the recovery…“But I can’t.!” “How will I tell my investors, my partners, my family my banker and etc ?” We have heard them all and we understand and it is tough and painful. We have sympathy and empathy and sometimes the best advice and the best help we can give is to present the facts and the strategies and help people get realistic, help them become decisive and cut their losses before their problems get worse with deteriorating relationships, bad credit, foreclosure and the like. If you get proactive and you get the problem behind you, manage your way through it the best you can, we have seen many people express relief and thanks. We share the advice and perspective that this too will pass. Hopefully there have been important and beneficial lessons learned, and with this behind you tomorrow will be a better day. With this behind you it won’t be dragging you down any further and that you can go on with other activities that bring you pleasure and make you money. You aren’t a failure. This investment might have been a lousy one. We firmly believe, from firsthand knowledge and experience, that we are all able to recover from the downturn or from an adversity or loss and if we learn from it and go on with optimism seeking opportunities that it will make us better and stronger. Life is about resilience and finding the silver lining and being able to make a new start a bit wiser.

Here are a few waves of opportunity in these tough seas and currents:

There are some opportunities that are emerging out there. Here are a few product types that are worth watching:

1. A number of small owner user office buildings and condominiums are available either from the developer, from a struggling company, or even from lenders as REO, that are beginning to be sold at below replacement costs. These properties often qualify for special SBA financing for business users with as little as 10% down. Make sure you do the math and the costs of ownership are equal to or less than you could rent a similar property for.

2. As a result of the number of housing foreclosures combined with high gas prices – it seems certain that apartment complexes and land for high density apartments in the urban centers and near transit will see considerable demand and likely increased rents and values. As fewer can own, due to the tightened lending standards, more must rent. This is likely to be a huge advantage for high density rental housing as we slowly de-suburbanize and re-urbanize in response to increasingly tight fuel supplies. Human habitation will gradually become more concentrated, benefiting purveyors of urban rentals.

3. We believe that intelligent buildings—LEEDs or Green Buildings —incorporating such features as security, technology, communication, and digital signage, will command above market rents as they develop a brand, and offer users better spaces with better services. In addition there will likely be incentives to do this and the investors long term operating expenses will likely be lower. Many of these opportunities just might be in acquisitions and renovations of existing buildings in core areas.

4. Cap rates are starting to rise and once sellers acknowledge that rates of return from net operating income are likely to be in the 7% to 8.5% range for good low or no leverage investments, more opportunities will be created for buyers.

If you would like to discuss this post or if we can be of assistance with a real estate service please feel free to call Nahz Anvary at (916) 617-4257 or Jim Gray at (916) 617-4255.

Sacramento Job Growth Turns Negative...Worst in 15 years

2008-06-24T11:11:00.000-07:00

Sacramento’s Negative Job Growth

According to the analytical employment work done by Sacramento Regional Research Institute, SRRI, for the first time in more than 15 years Sacramento’s job growth for a consecutive 12 month period has turned negative! See the steep decline in the green line below. That is the Sacramento Valley Line. Our region’s employment has declined more steeply than the Bay Area’s, more than the US Average, and worse than the California Average. There are 6,500 fewer jobs than there were 12 months ago.

This chart shows it in declining and vivid detail:

Six sectors in the Sacramento Region posted year-over-year losses resulting in a combined decline of 14,200 jobs. The Construction sector showed the largest decrease followed by Trade, Transportation, & Utilities (concentrated in the Retail Trade component).

Six Sectors showed positive job growth , they included; Government; Educational & Health Services; Professional & Business Services; and Other Services all added jobs between May 2007 and 2008, but only created a 7,700 job gain, which helped cushion, but did not completely make up for, the other relatively heavy losses.

These job losses are a clear indication of the economic woes and strain that are confronting the Capitol Region. We are all aware of the sharp declines in construction- primarily residential and new home construction- but financial services, manufacturing, utilities, and retail trade are additional sectors that are now shrinking. If you use a multiplier of 4 jobs per thousand square feet of office demand --- the 14,200 job decline in those six sectors means that more than 3,000,000 feet of office space that would have been the home for these workers now will be surplus and vacant. If you look at the offsets for those sectors that did add jobs this past year we still have a demand for nearly 1.5 million fewer feet than a year ago.

As they say in every economic cycle there are winners and losers. In the Sacramento region we now have 2 losers for every winner. Also it is worth noting that the largest growth has been in the government sector—we lost 3.1 private sector jobs for every government job that was added. Clearly, this situation is neither innovative nor sustainable. Also one must wonder as the reality of a $16+ Billion state budget deficit sets in will government employment continue to mitigate the private sector job losses. The other shoe may fall!

For a complete review of the report see; SRRI Economy Watch, EMPLOYMENT GROWTH IN THE SACRAMENTO REGION, THE BAY AREA, CALIFORNIA, AND THE UNITED STATES, June 2008.
If you have questions about this Post or if you would like to discuss a real estate question or need please contact Jim Gray or Nahz Anvary , of NAIBT Commercial Real Estate. We can be reached at (916) 375-1500.

To Sell or Not to Sell? Capital Gains Considerations is that the Question?

2008-06-19T12:56:00.000-07:00

To sell…. or not to sell? That is the question.

If you have been following the presidential race as closely as we have, one question may be at the forefront of your mind—to sell…or not to sell? Borrowing William Shakespeare’s famous line and applying it to the world of commercial and investment real estate has made us wonder about the role capital gains tax and the outcome of the upcoming election may play in our disposition decisions and what the best avenue may be to reinvest our proceeds from investment property sales.

The volume of 1031 tax-deferred exchanges has dropped dramatically, approximately 30-50% in the last year, especially in properties less than $5 million, according to Boulder Net Lease Funds. One explanation may be that investors who once never dreamed of paying Uncle Sam are now deciding to lock in their gains, as no one is really sure when capital gains rates may ever be this low.

Regardless of whoever takes the White House in November, it seems to be a matter of time until the very favorable capital gains tax rate of 15% is set to increase.

So…if you have been philosophizing about the big question “to sell…or not to sell” you may have just found your answer. Or at least you are asking the right question along with many other investors.

For more, read the article in the Wall Street Journal, June 18th, 2008, Your Tax Bill How McCain and Obama Differ; Capital Gains Rates are likely to Rise, No matter Who Wins.
http://online.wsj.com/article/SB121374794468982701.html

National Real Estate Investor, June 2008, Taking a Direct Hit.
http://nreionline.com/finance/investors/real_estate_taking_direct_hit_0601/index.html

If we can answer questions about this posting or help you with a real estate question or decision please feel free to call Jim Gray or Nahz Anvary at NAIBT Commercial Real Estate at (916) 617-4255 or (916) 617-4257.

A return to fundamentals in commercial loan availability and underwriting…

2008-06-18T10:01:00.000-07:00

This afternoon, I had lunch with John DiMichele, the CEO of Community Business Bank, a local bank less than 3 years old with nearly $150,000,000 in assets that focuses on relationships with small and medium sized businesses and non-profits in Sacramento, San Joaquin, Placer, Yolo, and Solano counties. John is a veteran of the banking industry and has more than 30 years in banking and has been the CEO at four financial institutions. (So here is the disclaimer, Jim Gray has been on the board of two different banks that John has led – but none the less John D. is a smart guy who we are proud to say is our friend and banker.)

Over lunch John said; “In my career I have never seen it change so quickly. There are still good customers out there and there are still plenty of good loans to be made—but we need to do a much better job of underwriting and we just have to say ‘no’ to some loans that we would have made just a few months ago. We don’t have to say we won’t make commercial loans or that we won’t make construction loans, but we do need to be more cautious and more thorough as we underwrite those loans. We must make sure that we underwrite not only the asset but also the cash flow and secondary sources of repayment.”

John is not alone in making these kinds of observations … Prudent lenders and the market place have tightened up their underwriting standards. Here are some ways that Commercial Real Estate Investors need to think about the implications of better underwriting. (And I do mean better.)

Six months ago you could get a commercial loan with a 75% to 85% Loan to Value Ratio- LTV. Now maximum LTV ratios are more like 65% to 70%. On a $5,000,000 acquisition 6 months ago you could have borrowed $4,250,000. Today you would be fortunate to borrow $3,250,000. In other words, you would need an additional million dollars in down payment for a total of $1,750,000.

The other underwriting ratio is the one that evaluates cash flow and it is known as Debt Coverage Ratio. DSCR . Six months ago you probably could have gotten a loan with a 1.10 or 1.15 DSCR. Now it is probably more like 1.25 to 1.30 DSCR.

The debt service coverage ratio is the ratio of net operating income to debt payments on a piece of investment real estate. It is a benchmark used in the measurement of an income-producing property's ability to produce enough revenue to cover its monthly mortgage payments. The higher this ratio is, the easier it is to borrow money for the property. In general, it is calculated by: DSCR = Net Operating Income / Total Debt Service

To determine the DSCR one needs to determine the Net Operating Income, NOI. In this $5,000,000 property example, let’s assume it was acquired at a 7% Cap rate, = $350,000 NOI. Then let’s assume that one could find a market interest rate of 7% and a 25 year amortization for the $3,250,000 loan balance, that would mean a monthly debt service of $22,837 or $274,045 per year. The DSCR is the annual Net Operating Income divided by the Debt Service which in this case is 1.28. In other words the cash flow after paying expenses and debt service is $75,955. The banker or the investor in the mortgage debt are now comfortable and feels that their risk of default is “covered”. The bank underwriter has returned to “tried and true” underwriting standards. And they have changed quickly.

Finally, let’s now look at the return that the buyer/ property investor receives in a $5 million dollar property with these more conservative underwriting standards. The Investor increases their down payment—investment -- to $1,750,000 and receives $75,955 in annual cash flow after paying expenses and servicing the mortgage debt, that equates to a 4.34% cash on cash return. In addition, after paying 12 monthly payments- interest and principal - there would be $48,069 in principal reduction which is 2.75% additional return on the initial investment.
In this new, more normal, lender /borrower relationship, the bank is “covered” and receives a 7% return on their mortgage debt and the buyer receives a cash flow of 4.34% and a total return including principal reduction of 7.1%.

Clearly what this means to a community banker is there remains a willingness to take a risk so long as it is coupled with a reasonable return for the risk and a requirement that the investor has a sound investment. How can one argue with these fundamentals? A borrower is going to have to have more cash, stronger collateral, and outstanding credit to achieve approval in this return to underwriting fundamentals.

The Denominator Effect

2008-06-15T07:20:00.000-07:00

The Denominator Effect…

No, it is not just a test of your recollection of long division, fractions, or high school algebra. The denominator effect is is a term that describes a phenomenon that is finding its way –unfortunately--into the commercial and investment real estate communities right now, and might lead to more pressure to sell and less capital to buy.

So here is how it works and what the implications are. An Institutional investor, pension plan, investment fund, or insurance company manages a portion of their risk by diversifying their portfolio. In broad terms they set guidelines for themselves on how much money to put into various asset classes and then they either quarterly or annually check their investment percentages against their guidelines. They do this not only amongst individual stocks, bonds and other individual assets but also amongst all asset classes. Commercial Real Estate and Commercial Mortgages are usually a small percentage of many investors’ portfolio diversification strategies. (5% to 15%)

As institutional investors have taken recent losses and declines in the Stock and Bond Markets, combined with the fact that much of their real estate investments had double digit growth over the past 5 years, some now find themselves “over-weighted” with commercial real estate. Now, many of them need to “rebalance” their portfolio by reducing their commitment to commercial real estate. Here is an example of how this works. Let’s say the investor has a $10,000,000 portfolio comprised of 60% stocks, 30% bonds, 10% Real Estate. Let’s say that the stocks perform like my IRA and lose 15% of their value in the last quarter. Let’s also say that long term interest rates rise by 1% or credit quality comes into question and you lose 10% of your bond’s value. (You have a good investment advisor and he didn’t let you buy any mortgage backed securities or auction rate notes so you have only lost 10%) The portfolio is now “marked to market” at a value of $8,800,000. The Plan should now allocate only $880,000 to real estate not $1,000,000. Funds available for real estate just went down by 12%. Investors either reduce their appetite for buying or they need to sell to reduce the size of their actual real estate holdings.

So what does this mean in the near term? First, several quarters of poor performance in the equities and, to a lesser extent, the bond market have had an impact on the denominator of plan assets and have increased the relative weighting of real estate. Secondly, strong performance over the past five +- years in the real estate sector has led to imbalances in sector weightings within the real estate portfolio. And thirdly, many experts have “expectations of moderating performance” including slower rent growth, potentially higher expenses, and likely rising cap rates and these factors are leading investors to reduce exposure to real estate as they consider new strategies in their real estate portfolios. It means less money for purchasing real estate and some pressure to sell commercial real estate so that funds can be reallocated.

This phenomenon is really happening and it is happening right here in northern California. Recently the City and County of San Francisco Employees’ Retirement System (SFER) reduced its target allocation to real estate by 73%, from $750 million to only $200 million in its next fiscal year beginning in July. Here is a link to that article from May 27, 2008. http://www.globest.com/news/1166_1166/sanfrancisco/171096-1.html

Keep your eye on the impact of this denominator effect and its implications for your particular portfolio or any purchase opportunities that may arise because of it.

If we can answer questions about this posting or help you with a real estate question or decision please feel free to call Jim Gray or Nahz Anvary at NAIBT Commercial Real Estate at (916) 617-4255 or (916) 617-4257.

Intelligent Buildings from the Executive's Point of View

2008-06-14T15:06:00.000-07:00

At the recent Realcomm Conference in San Diego there were a number of break-out sessions on the whole topic of "Intelligent Buildings". This is an important emerging trend that involves more than just energy management and enhanced security. This is conceptualizing , designing and then constructing buildings that incorporate technology and processes to enhance the work space.

Any discussion of this topic can move quickly to new and often expensive technologies but it also can focus on meeting the needs of tenants and users and creating better workspace -- which are healthier, safer, with enhanced communications, design, and other features. Resulting potentially in a strong branded building with real estate differentiation.

Here is a quick list of some of the areas getting discussed in this whole area of Intelligent Buildings.

Power

Communications

Computing

Security

Control

Digital Signage

Much More

It is really clear that to develop these Intelligent Buildings you have to work early on to bring a team together to create a "common vision". What do you want to accomplish? What should performance standards be? How much will it cost? How much will it save? Can we calculate a "pay back period"? What features should our building have? Also you should probably develop a checklist to talk about the perceived benefits of:

Special HVAC Systems, and their controls?

Security and Access control to the building and to parking?

Security Camera Systems? Swipe Cards or BioMetric Access.

Incorporating and Integrating Security System to Time Cards, to turning on or off lights, computers, and etc.

Digital Signage and Digital Media. inside, in lobby's in elevators and potentially on the external skin of the building?

What kind of Cabling for Computer and Communications?

Wireless and WIFI and Cellular Rebroadcast Enhancement?

Emergency Power?

Redundant Air?

Dry Fire Protection?

Racks and Cages for multiple tenants.

Integrating these items into a centralized(web based) control room.

We know , you think this all costs money, and it does... but you do this because it saves you money and creates enhanced net operating income and long term value. You do this because you can differentiate you product offering, and increase operating performance, save energy, provide better and fuller services to tenants and users, increase health and safety at the building, increase rents, and reduce costs. You do good and you do well as a result. These are the right things to do and they make financial sense.

The CEO of a building and the CEO of the tenant should focus on a few high level questions.

What is the value proposition to the tenant?

What is the value creation to the owner?

Branding and differentiation for owners and users?

As we listened to these presentations and participated in the full discussions of these matters it becomes apparent that these are the right things to do -- but in the real estate industry there is a lot more talk about it -- and planning for it -- than actual success stories. That is changing though.

One of the panels was; "Intelligent Buildings from a Real Estate Executives Point of View" ; and it included leaders within this industry , including Tom Shircliff of a firm known as Intelligent Buildings, as well as representatives of GE Asset Management, Tridel Corporation, and Colonial Properties Trust.

Tom LaDow, and executive with this REIT Colonial Properties described a mixed use project with a 170,000 square foot office building which they developed in the "progressive green capitol" of Birmingham Alabama. Here is a list of their amenities:

Attached to Mall anchored by Macy's, Belk & many others
Concierge Service
Covered Parking
Dual power feeds from two separate power substations
First LEED Gold certified multi-tenant building in Alabama
Highly efficient floor plates
Locker Rooms with Showers
Multiple On-Site Restaurants
On-Site Maintenance
Wireless capabilities

And here is a picture of this building that was finished in 2007. It is 100% occupied.

As Tom explained the development and the marketing process it made great sense. But the financial performance really caught our attention. The Building is 100% occupied, and was totally leased up within months of completion. They got a 36% rent premium to the market! Their rents are about $8 per foot higher than market. Their utility costs are 6% less than other buildings. The tenants loved a focus on the "21st Century" features and design. They are proud that they are occupants at such a high quality --environmentally responsible business location.

The other part of the story was how they marketed the property. They created a story and deliverables about the benefits of the building. ( WIFI, Enhanced Cell Phones, Safety and Security,a Webport for the Building and it's tenants, LCD Screens with Digital Signage, Data Recovery, Back-up power, Web based work order system for tenants, etc etc..) They made their presentation based upon benefits and attributes not just to the Real Estate and Facilities decision makers but they also targeted and pitched to the CFO and the Chief Information Officer(s). They shared information that resonated with the IT and financial folks as well. This is a real case example of it working.

I asked Tom, if they were thinking of selling the property and making a quick gain based upon the NOI. He said to me " Why no it is doing just great we are working on developing and building our next one."

Here is a link to Colonial Properties Birmingham Alabama property offering. http://colonialprop.com/property-info/?cid=1326

If we can help you with strategies about an Intelligent Building and the related elements of ; vision, innovation, collaboration, sustainability, and consideration of utilizing technology and targeted marketing please give us a call. For questions about this post or to discuss please contact Jim Gray or Nahz Anvary at (916) 617-4255 or (916) 617-4257

Realcomm --10th Annual Conference San Diego --Some Observations

2008-06-14T12:43:00.000-07:00

Realcomm is a name that everybody interested in the juncture between Technology and Real Estate needs to know. This week in San Diego, Nahz, Collette Kyro, and I --as well as Mark Bollozos and Jason Berry, colleagues from our Bay Area offices --attended the 10th Annual Realcomm Conference. The 5 of us were among a crowd of close to a thousand who attended.

It was our third consecutive Realcomm Conference and we want to congratulate Jim Young, the founder and CEO of Realcomm and his colleagues and sponsors for another great event. We left there full of ideas, stories to share, re-connection with old friends, and with the promise of new clients and services.

Sponsors this year included such firms as Cisco, Intuit,Yardi, Argus, REapplications, Johnson Controls, Panduit, Microsoft, Oracle, SAP, real foundations, Siemens, Tridium, just to name the first levels of sponsors. From the real estate industry side the conference was produced in partnership with AIA, the Appraisal Institute, BOMA, CCIM, SIOR, IREM and the like.

The theme for the conference this year was:

INvestigate-- discover new technology solutions that will benefit you, your company and your clients.

INititate-- get direction and insights from leaders in the fields or technology and real estate innovation.

INnovate -- stop thinking about it and take action-- go beyond the "status quo".

The first general assembly topic was a keynote address by 10 different presenters entitled " The Big Ideas" in which they shared ideas and concepts from around the globe that are leading to major changes in the way you design, build, lease, operate, manage, and transact space. The presenters were preceded by an old fashioned marching band who brought the audience to their feet and brought smiles to every one's face. The presenters drove home how global real estate and real estate capital is becoming, and reminded us that a number of innovations as well as busts( dotcom and subprime collapse) have emerged in the past decade. Google Earth, LoopNet, Intelligent Buildings, IP addressed controls to every light and switch, Web Based property Management Orders, tracking and controls, and the boom in smart buildings in Asia, the Middle East, as well as Europe and USA to a lesser extent.

Throughout the conference there was an active and packed Exhibit Hall, with a number of vendors offering their products and services, that enabled attendees to see first hand the next generation of offerings and to discuss the applicability to their particular project, business, or building.

There were four tracks that offered a number of break-out sessions, with industry leaders acting as round tables making presentations and answering questions. The four tracks included:

Align-- A focus on Business and Management

Automate-- Streamlining Business Processes

Connect --A forum and Presentations on Intelligent Buildings

Lights Out-- $mart Energy Makes Smart Cents

We took lots of notes, grabbed lots of hand-outs and business cards, and were amazed by the future is now -- time to change quickly in a pretty stodgy and lagging industry. The need for transformation is apparent and the value proposition is becoming clear.

We are going to be preparing some reports and follow-ups on behalf of some clients -- particularly in the areas of marketing and enhancing the value propositions in LEED's buildings and in the areas of adding value by acquiring and retrofitting Existing properties and making them best of class.

Here is a link to Realcomm... Subscribe to their free enewsletter. Get to know these folks and their offerings. http://www.realcomm.com/

If you have questions or comments about this post or if we can be of service to you please call us. Jim Gray or Nahz Anvary at (916) 617-4255 or (916) 617-4257