August 2012 CCRSI

The CoStar Commercial Repeat Sale Indices (CCRSI) are based on 854 repeat sales in June 2012 and more than 100,000 repeat sales since 1996. The CCRSI offers the broadest measure of commercial real estate repeat sales activity.

Some highlights of the August 2012 report:

  • Only 18.6 percent of observed trades in June 2012 were distressed, – lower than the 28.8 percent average over the past three years.
  • The Multifamily Index advanced by a cumulative 24.3 percent through the first half of 2012, putting this sector closest to its peak level in 2007.
  • Pricing in the retail sector posted 3.7 percent average quarterly growth over the first six months of 2012. After bottoming in June 2011, the retail property sector has since advanced by 10.1 percent.
  • The Office Index for June 2012 reflected the economic uncertainty in the market, growing only 1.7 percent over year-ago levels.
  • The Industrial Index declined by 1.7 percent in the second quarter of 2012, reaching its lowest level since 2003.

Source: NASDAQ

Rio Towers

Bulgarian real estate developer MRP International is leading a consortium that plans to develop Rio Towers – six fifty-story waterfront office buildings in Rio’s central port district, according to The Wall Street Journal. The project will add 3.47 million square feet of office space to Rio’s downtown which currently has a vacancy rate of 1.6 percent. The final value of the towers can be as high as $2.5 billion.

The consortium, which also includes the Trump Organization, is expected to complete the project by the 2016 Olympic Games. Rio Towers is part of a larger initiative known as Porto Maravilha which is led by the Rio municipal government. The initiative’s aim is to revitalize the city’s port district.

Recovery in the CRE Market

The Wall Street Journal reports that a new survey expected to be released by KPMG LLP is expected to show a resurgence of caution by commercial real estate executives in regards to the recovery.

The survey shows that a majority of industry leaders don’t expect a full economic recovery until 2014, according to the report. The reasons cited include the European crisis, lukewarm job growth and rising operating costs. Forty-six percent of commercial real estate executives said their management teams will be working diligently to cut costs in the next two years.

The respondents’ view on employment was more positive: Fifty-eight percent expect to add jobs in 2013 – up from 53 percent in the previous survey. Thirty percent forecast that headcount levels will remain the same while 12 percent expect a decrease.

The survey was conducted in June and included about 80 senior commercial real estate executives.

Five Factors Driving the Industrial Sector Revival

1. Strong supply and demand characteristics:

  • National vacancy rate has declined by 90 basis points since Q1 2011 to 9.1 percent – a level last seen in 2009;
  • Eight consecutive quarters of positive net absorption;
  • Vacancy in the big box (>400,000sf) market at less than 3 percent in some major U.S. logistics markets;
  • Resurgence of speculative development in key hub markets.

2. Influx of foreign capital:

  • Industrial investment sales have increased from $10.9 billion in 2009 to $35.1 billion in 2011 and are expected to be $40-$45 billion in 2012.

3. Reevaluation of supply chain networks:

  • Growing labor costs in Asia increase the appeal of the U.S. labor market;
  • Volatile fuel costs make proximity more relevant;
  • Close proximity reduces freight costs and risks and improves speed-to-market and customer service.

4. Growth of e-commerce:

  • Traditional stores are increasingly giving way to online shopping, increasing the practicality of and demand for regional distribution centers.

5. U.S. connectivity and infrastructure:

  • U.S. has a world-class supply chain infrastructure, which attracts and retains manufacturers;
  • U.S. is near the Panama Canal;
  • Expansion/update of the Canal and the U.S. ports that will serve the larger ships will also encourage investment and growth in the industrial sector.

Source: Jones Lang LaSalle as reported in PR Newswire.

Investing in REITs

Since October 2011, the MSCI U.S. REIT index has gained 30 percent (excluding dividends) compared with a 22 percent gain for the Standard & Poor’s 500-stock index, according to The Wall Street Journal.

The article indicates that residential REITs may be overvalued despite strong fundamentals such as rising rents and low vacancy rates. AvalonBay Communities trades at a premium of 26 to its NAV and Equity Residential trades at a premium of 30 percent to its NAV.

Industrial REITs, on the other hand, are a good option because demand has increased and investors have yet to flock in that direction. His team recommends DCT Industrial Trust and Duke Realty trade at premiums of 8 percent and 4 percent respectively to their NAVs.

Top Cities for Foreign CRE Investment

London was the top city for overseas commercial real estate buyers in the second quarter of this year, according to Bloomberg. Foreign CRE investment rose 32 percent to $8.67 billion for April through June 2012. Paris came in second with $4.7 billion in foreign CRE investment – a 50 percent increase over the previous year. New York fell to third from first place a year ago. Foreign CRE investment dropped by 43 percent in the Big Apple to $4.34 billion.

Western Europe’s tallest building was inaugurated in London this month. Standing 1,016 feet tall, The Shard is one of five skyscraper projects that will add 3.8 million square feet of office space to Central London. Central London’s office vacancy rate fell from 5.8 percent to 5.4 percent through Q1 2012, according to the report.

Colliers International to Expand in NY Market

Joe Harbert, a high-profile executive from Cushman & Wakefield has joined Colliers International as president of the eastern region, according to The Wall Street Journal. Harbert’s plan is to recruit new brokers with the goal of doubling the firm’s revenue in the tri-state area to $125 million in three to five years.

Colliers currently has 237 employees in the tri-state area. They plan to invest about $20 million to expand in the region. Businesses in the Manhattan office market leased 7.4 million square feet in the second quarter and 7.9 million square feet in the year-earlier period, according to the report.

Tenant Improvements (TI)

  • The landlord or tenant should retain an architect to prepare a set of plans (known as CDs) describing the TI work. Both parties should approve it.
  • The work letter should be clear and comprehensive. It should specify who pays for the TIs and in what amounts and at what times. TI expenses should be itemized.
  • Two types of landlord TI concessions:
  1. Turnkey – The landlord agrees to pay all costs for the work stated on the CDs, irrespective of the amount. (This does not include changes in the work after the two sides have agreed on a plan).
  2. TI allowance – calculated as an amount per rentable square foot of the premises. The landlord pays the allowance and the tenant pays all costs above it.
  • If the tenant is doing the construction, it must:
  1. Send the CDs out for bids, select the contractor, obtain the permits and manage construction of the work;
  2. Provide payment and performance bonds to ensure that the work is completed in accordance with the approved CDs;
  3. Produce lien waivers from all contractors and suppliers as the work proceeds;
  4. Ensure that as-built drawings are prepared after completion.
  • The work letter should indicate what happens in the event delivery of the premises is delayed due to construction-related issues.

Source: Jeff Bennett – Tenants, Landlords Both Benefit by Planning Improvements

CMBS Delinquencies

Commercial mortgage-backed securities (CMBS) delinquencies rose to a record high of 10.16 percent in June after exceeding 10 percent for the first time in May, according to The Wall Street Journal. The increase is due in part to the maturation of many loans made during the real estate boom.

Debt specialists are still struggling with $76 billion of loans in or near default. However, the delinquency rate is expected to level off or decline as most five-year loans made in 2007 have already matured. CMBS provided more than $200 billion in financing for commercial property in 2007.