What A Difference A Year Makes

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

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

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

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

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

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

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

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

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.

The Denominator Effect

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

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.

1. Power



2. Communications



3. Computing



4. Security



5. Control



6. Digital Signage



7. 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.

1. What is the value proposition to the tenant?



2. What is the value creation to the owner?



3. 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

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:

1. Align-- A focus on Business and Management


2. Automate-- Streamlining Business Processes


3. Connect --A forum and Presentations on Intelligent Buildings


4. 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