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Five commercial real estate trends to watch in 2011

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1. Green is here to stay. Being able to advertise your office building is “green” is a major attraction to tenants now. Besides energy and water conservation, other mainstays of the green movement include buying local and in moderation. Waste is discouraged. Building components are preserved and recycled, rather than discarded. Buildings should be built with long lasting materials and those that require low maintenance. Energy conscious materials (such as recycled components) and those with low toxicity to the environment are chosen in the green building trend.

While these choices may be more expensive to incorporate into buildings, landlords are reaping the benefit over the longterm in cost savings and efficiencies in maintaining the property. Besides being politically correct, landlords who build or retrofit buildings that can market with the label are attractive for multiple reasons. Buildings carrying the green label are often easier to rent to tenants, as workers log in less sick days and fewer complaints of “toxic building syndrome” that lead to asthma and sickness. Tenants are drawn to green buildings for energy and water conservation, cost savings, and the “because it just feels good to do the right thing” benefit.

2. Temporary tenants take hold. Short term lease storefronts and “pop up” retail operations are not a new idea. Frequently malls would use the concept to fill vacant holes in their properties when a tenant vacated. Seasonal stores have always been around, especially in the last few months leading up to Christmas. But in the past year we’ve seen more “pop up” stores prospering from high vacancy rates and lower rents. Some are testing new retail concepts, while others are simply taking advantage of the cheaper prices.

Whatever the rationale, landlords win in that they get to fill vacant storefronts and collect rents, even if it’s at a reduced rate. They’re hoping the new tenants do well enough to convert to longer term leases and higher rents eventually. But until we get through this economic downturn, it’s better to have some cash flow than zero, and better to make your property look like it’s bustling than a filled with a bunch of vacant spaces.

3. An upswing in the market. Many analysts think we have hit the bottom of the commercial market and that we have better days ahead. The incredibly low interest rates and moderate growth last year seem to have spurred investor confidence at the end of 2010. Many areas of the country saw an uptick in commercial deals closing in the last quarter of 2010. Perhaps this aggressiveness at the end of the year was due to analysts predicting we have bottomed out and are headed into a recovery, kind of a chicken-and-egg phenomenon. Did the positive market reports create the uptick or did the uptick drive the market reports?

Whatever the root cause several sectors seem be leading the charge: hotels and apartments. It is no coincidence that both are driven by short term data. Both hotel stays and vacancy reports and apartment numbers turn around quickly, as opposed to retail and office leasing, which takes more time to reflect changes in the market. Positive news in the sector reflects quicker in hotels and apartments than the rest of the commercial sector.

4. Banks still uptight and anxious. Despite the much publicized QE1 and QE2, quantitive “easing” is not “easing” the commercial lending department. Underwriters are still uptight and difficult to deal with, especially if you’re a small business. While we have record low interest rates, only the very best seem to be able to score a decent loan. The irony is that those who need money the most desperately are probably not the ones who will be able to get it right now. But if you are a business with solid cash flow and stellar credit, now is the time to lock in extremely favorable financing rates and terms. All indications are that underwriters won’t be loosening their standards any time soon, so we might as well learn to deal with this “new reality” of lending.

5. Smaller deals pay the bills. Probably the biggest trend we saw in 2009 and 2010 in my commercial deals is that the big ones are great to close — but even fewer and farther between. The bulk of my deals, the bread and butter of my commercial practice, is the “small stuff.” I am listing and leasing more and more properties than three years ago. The deals are smaller in transaction dollar but more numerous. I close more $1000/month rentals than half a million dollar sales. I am handling more property management functions for out of area landlords and less big time scores. In summary,

I’m doing a lot more work for less money, but that’s what is paying the bills. And we all have to either adapt to the new reality, or choose another career path. Commercial real estate is more difficult than ever. Let’s hope that we truly have hit bottom and that 2011 brings continued low interest rates, a loosing up of credit, and increased consumer confidence.

Erica Ramus is the Broker/Owner of Ramus Realty Group in Pottsville, PA. She also teaches real estate licensing courses at Penn State Schuylkill and is extremely active in her community, especially the Rotary Club of Pottsville and the Schuylkill Chamber of Commerce. Her background is writing, marketing and publishing, and she is the founder of Schuylkill Living Magazine, the area's regional publication. She lives near Pottsville with her husband and two teenage sons, and an occasional exchange student passing thru who needs a place to stay.

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41 Comments

41 Comments

  1. MH for Movoto

    February 7, 2011 at 2:17 pm

    Great post – and I definitely agree with all your points. As the economy as a whole recovers, some new business ideas that have been hibernating through the worst of the recession will start growing and looking for office space, but they’ll be cautious and they’ll be looking for those “small deals”.

  2. Rocky Mackintosh

    February 7, 2011 at 6:17 pm

    Erica — very good summary of the current situation … here in Frederick, Maryland, I can say that things are about the same. Landlords who have fairly new and still vacant office space are becoming very aggressive by offering full service leases at under $20/SF and abating the first year altogether!

  3. KCinvestmentproperty

    February 7, 2011 at 7:04 pm

    “I’m doing a lot more work for less money, but that’s what is paying the bills…”

    No kidding! But I still get frustrated when I do all the work and it doesn’t close at the last minute. 🙁

    But hey, I’m surviving. Great post, by the way.

  4. Ryan Martin

    February 10, 2011 at 7:03 pm

    Erica,

    We are seeing a lot of the same trends in our market.

    The “Green” movement has not entire resonated with local developers based on being cost prohibitive, but I can see it on the horizon. I actually find it interesting that a “progressive” city such as Bellingham, WA loves to fantasize about being green, but most businesses wouldn’t pay more for it.

    Definitely doing a lot of small retail and industrial leases in the $1,000 – $1,500/mo. range. Most of these have been one to two year terms with 3 year extensions. There are big deals out there too, but definitely fewer and further between.

    Best of luck to you in 2011

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Commercial Real Estate

Pace of commercial real estate improvement is slowing

(Commercial Real Estate) The commercial real estate sector has improved substantially since the economy crashed, but is now showing signs of slowing, but data does not indicate lost ground.

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commercial real estate

Commercial real estate outlook is positive

According to the National Association of Realtors’ (NAR) quarterly forecast, commercial real estate is continuing to improve, but the pace is slowing.

Dr. Lawrence Yun, NAR chief economist, said that fundamentals are still on an uptrend. “Growth in commercial real estate sectors continues at a moderate pace from a very slow pace of absorption, despite job additions to the economy. Companies appear hesitant to add new space,” he said.

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“Office demand is expected to see only slow and gradual improvement,” Dr. Yun added. “Demand for retail space is benefiting from improved household wealth, while industrial real estate is stable with increasing international trade, which requires warehouse space. Of course, the apartment market fundamentals are the strongest, as nearly all of the new household formation in the past 10 years has come from renters, and not homeowners.”

Forecasting the future

Overall, national vacancy rates in the coming year are forecast to drop 0.2 percentage point in the office sector (the sector with the worst vacancy rates) to 15.6 percent in the first quarter of 2015.

Vacancy rates are projected to fall 0.1 point in industrial to 8.9 percent, and 0.3 point for retail real estate to 9.9 percent.

With rising apartment construction, the average multifamily vacancy rate will edge up 0.1 percent to 4.1 percent, but this sector continues to experience the tightest availability and strongest rent growth of all the commercial sectors.

Rental rates for various sectors

Office rents are projected to increase 2.3 percent in 2014 and 3.2 percent next year. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, is likely to total 44.6 million square feet this year and 50.0 million in 2015.

Annual industrial rents should rise 2.4 percent this year and 2.6 percent in 2015. Net absorption of industrial space nationally is seen at 106.1 million square feet in 2014 and 110.6 million next year.

Average retail rents are forecast to rise 2.0 percent in 2014 and 2.3 percent next year. Net absorption of retail space is likely to total 14.6 million square feet this year and 20.9 million in 2015.

Average apartment rents are projected to rise 4.3 percent this year and 3.5 percent in 2015. Multifamily net absorption is expected to total 204,900 units in 2014 and 112,500 next year.

Regional performance varies

The markets with the lowest office vacancy rates in the first quarter are New York City, with a vacancy rate of 9.5 percent; Washington, D.C., at 10.2 percent; Little Rock, Ark., 11.6 percent; Birmingham, Ala., 12.7 percent; and San Francisco and Nashville, Tenn., at 12.8 percent each.

The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 3.7 percent; Los Angeles, 3.8 percent; Miami, 5.8 percent; Seattle at 5.9 percent; and San Riverside/Bernardino, Calif., at 6.1 percent.

Markets with the lowest retail vacancy rates include San Francisco, at 3.1 percent; Fairfield County, Conn., 3.8 percent; Long Island, N.Y., 4.8 percent; San Jose, Calif., 5.2 percent; and Northern New Jersey and Orange County, Calif., at 5.3 percent each.

Areas with the lowest multifamily vacancy rates currently are New Haven, Conn., at 2.1 percent; Minneapolis and New York City, 2.3 percent; and Oakland-East Bay, Calif., and San Diego, at 2.5 percent each.

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Commercial Real Estate

Should you buy or lease office space? 5 questions to consider

When considering whether you should lease your office space or buy, an industry expert outlines the questions you should ask yourself.

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office leadership

Should you buy or lease an office space?

Many people set up shop and lease office space, assuming this is their best, and often only option, but there are some instances where buying office space is a better option. Many blindly make this decision based on a gut feeling, and we’re not saying that is a bad thing, we’re saying that in addition to that instinct, these five questions should be asked when considering whether you should lease or buy an office space.

Stan Snipes, senior advisor, Sperry Van Ness Investec Realty of Nashville notes that the two options depend on several variables, as he outlines below:

1. Is your business well-established?

If your business is still in the startup phase, I rarely recommend buying. During the next 5 to 10 years you’ll experience employee count fluctuations, client and customer oscillations and even business direction and strategy adjustments. That is, you’ll need to be flexible, not tied to a certain space. Additionally, any leftover capital should most likely be recycled back into your budding startup. You don’t want to stretch yourself too thin.

The only exception that applies some of the time — not every time — is if your startup is in the technology space. Oftentimes tech employees can work remotely, or the technology is automated and won’t require more employees in the future. Additionally, clients of many tech startups can successfully access the company’s offering without visiting a physical office space.

2. Will you endanger your business with a property purchase?

Yes, buying can be a great investment and add a source of revenue, but even well-established business owners need to think about the stress that buying a property can put on their bottom line. Oftentimes your time and money is best spent on what you do best, running your enterprise. If buying means you won’t be able to focus essential resources to your first priority, your business, then you might want to hold off on buying.

Further, because commercial real estate can be a great investment, business owners are sometimes so eager to get in the game that they sell off portions of their business to finance the purchase. This is a bad idea. You should not let real estate decisions determine how you run your business. You’ve worked long and hard to build a successful company — don’t give it away. Another deal with always come along.

3. Do you have heavy, difficult-to-move equipment?

If you have machinery or specialized equipment that make it difficult for you to move, buying may be a great option for you. Two primary reasons: 1.) Lugging dense equipment from leased space to leased space is annoying, cumbersome and costly.

Plus, you increase the chances of damaging it every time you move. 2.) When a landlord knows it’s difficult for you to relocate, he or she is holding the cards when it’s time to renew your lease. If your lease doesn’t have a stipulation to remediate this, leasing office space will cost you more money than it should. More often than not, buying a custom space for your specialized equipment is the way to go.

4. Does your location affect employees or clients?

If attracting and maintaining top-notch employees means securing office space in your city’s prime business district, finding the perfect space to buy may be difficult. Why? Prime business districts usually have lower vacancy rates, which typically means higher prices plus fewer properties to choose from. Anytime you’re limited to a narrow location, you risk not landing the best deal. This doesn’t mean don’t buy, just understand what you’re up against from the onset.

The other issue you may face in buying location-specific space is when your customers or clients depend on your position for convenience. This is a challenge when and if your city’s submarkets are in transition. The trendy spot of the last five years, may not be in vogue five years from now. A lease allows flexibility to move where your customer and clients need you to be.

5. Are you prepared to be a landlord?

There’s a lot of maintenance that goes along with owning a building. Will you have the ability to hire a maintenance crew or will you tend the bathrooms, burnt out light bulbs and overflowing trash bins yourself?

Furthermore, many landlords have easy access to financing that could benefit you in the form of a tenant improvement package. Even though you may have capital to buy your building, can you afford to build it out the way you want to? The cost of ownership is sometimes underestimated. Make sure you’ve considered all of the possible expenses that go along with buying your office space.

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Commercial Real Estate

Commercial real estate improving modestly, little change to come

As commercial real estate improves across all sectors, the gains have been modest and NAR predicts they will continue to inch forward.

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Commercial real estate sector is improving

According to the National Association of Realtors’ (NAR) quarterly commercial real estate forecast, commercial real estate is improving modestly, with little change seen for the near future. Dr. Lawrence Yun, NAR’s Chief Economist said in a statement, “Jobs are the key driver for commercial real estate, and the accumulation of 7 million net new jobs from the low point a few years ago is steadily showing up as demand for leasing and purchases of properties,” he said. “But the difficulty of accessing loans remains a hindrance to a faster recovery.”

NAR reports that leasing activity rose 2.0 percent in the third quarter compared to the second, and sales levels are higher than a year ago.

Yun said there have been some shifts in commercial purchases. “Investors have been looking for better yields, and have found good potential in smaller commercial properties, notably in secondary and tertiary markets. Sales of commercial properties costing less than $2.5 million in the third quarter were 11 percent above a year ago, while prices for smaller properties were 4 percent above the third quarter of 2012.”

Commercial investment in properties costing more than $2.5 million rose 26 percent from a year ago, while prices for large properties were 9 percent above the third quarter of 2012.

National vacancy rates over the coming year are forecast to decline 0.2 percentage point in the office market, 0.6 point in industrial, and 0.5 point for retail real estate. The average multifamily vacancy rate will edge up 0.1 percent, but that sector continues to see the tightest availability and biggest rent increases.

Retail vacancy rates should be going down

Retail vacancy rates are forecast to decline from 10.4 percent in the fourth quarter of this year to 9.9 percent in the fourth quarter of 2014. Average retail rents should increase 1.4 percent in 2013 and 2.2 percent next year. Net absorption of retail space is projected at 11.0 million square feet in 2013 and 18.1 million next year.

Multifamily construction will meet demand

Multifamily Markets
The apartment rental market – multifamily housing – is likely to see vacancy rates edge up 0.1 percentage point from 3.9 percent in the fourth quarter to 4.0 percent in the fourth quarter of 2014, with new construction helping to meet higher demand. Average apartment rents are forecast to rise 4.0 percent this year and 4.3 percent in 2014. Multifamily net absorption is projected to total 239,400 units in 2013 and 211,300 next year.

Office rents should be going up

Vacancy rates in the office sector are expected to decline from a projected 15.6 percent in the fourth quarter to 15.4 percent in the fourth quarter of 2014. Office rents should increase 2.4 percent this year and 2.5 percent in 2014. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, is seen at 32.2 million square feet this year and 46.1 million in 2014.

Industrial vacancies on the decline

Industrial vacancy rates are likely to fall from 9.2 percent in the fourth quarter of this year to 8.6 percent in the fourth quarter of 2014. Annual industrial rents are expected to rise 2.3 percent this year and 2.5 percent in 2014. Net absorption of industrial space nationally is anticipated at 97.0 million square feet in 2013 and 104.9 million next year.

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