Inaccurate CRE Appraisals

The New York Times cites a report by KC Conway of Colliers International showing that commercial real estate appraisals are consistently inaccurate.

Of the 2,076 properties studied, 64 percent were appraised above the sale price by a total of $1.4 billion and 35.5 percent were appraised below the sale price by a total of $661 million. In 121 cases, the appraised value was more than double the sale price, and in 132 cases, the appraisal was less than 70 percent of the sale price.

According to Trepp, LLC, which supplied the data for the study, $1.7 trillion in real estate debt will come due in the next four years, and banks own about $867.5 billion of that debt. Inaccurate appraisals may mean that the values of real estate loans held by banks are also imprecise.

Retail Sector Growth in Southern India

Hariharan Ganesan writes for the Jones Lang LaSalle Blog that continued development and improving transparency in the real estate markets of the southern Indian cities are propelling places such as Bangalore, Chennai and Hyderabad to a global status alongside Mumbai and Delhi.

The retail real estate stock in southern India grew from 1.6msf (million square feet) in 2003 to 13.2msf in the first quarter of 2012. Southern India’s share of India’s retail stock will rise to 36 percent by the end of 2016 from 20 percent in late 2011. The mall stock in the southern cities will pass the 40msf mark by late 2016 at which time the vacancy rate is projected to drop below the national average of 20.5 percent.

As India continues to develop, real estate investment is trickling down from the first tier cities to second tier cities. In the south, this means that Kochi, Coimbatore, Vishakhapatnam and Mysore will continue to develop as secondary hubs.

CRE Construction Spending in 2011

Construction spending in commercial real estate totaled $92.3 billion, increasing more than 12 percent from 2010, according to a NAIOP Research Foundation report authored by Stephen Fuller of George Mason University. The total economic impact of the development (pre-construction, construction and post-construction) added $261.6 billion to the GDP in 2011, compared to $231.7 billion in 2010. The increases in construction spending and activity led to 238.3 million square feet of new space – 2.5 percent more than in 2010. The new space has the capacity to house 610,000 jobs with an annual payroll of $26.8 billion.

Top Ten States in Spending for 2011 (2010 rank in parentheses):

  1. Texas (2)
  2. New York (1)
  3. West Virginia (48)
  4. California (3)
  5. Arizona (14)
  6. Utah (26)
  7. Florida (4)
  8. Illinois (10)
  9. (tie) Massachusetts (21)
  10. (tie) North Carolina (7)

Data is from the report for the highest amounts of direct spending in all three phases of development across all sectors of commercial real estate.

High Returns in Self Storage

Over the past decade, self storage companies provided the best risk-adjusted return among the 10 US real estate investment trust (REIT) indices, according to Bloomberg. Self storage had a risk-adjusted gain of 10.6 percent. Healthcare REITs provided a risk-adjusted return of 8.4 percent and regional mall REITs provided a risk-adjusted return of 7.5 percent in the 10 years through April. Warehouse REITs and hospitality REITs fared the worst with risk- adjusted returns of 0.8 percent.

The Bloomberg Riskless Return Ranking compares 10 of the 11 property index types within the Bloomberg REIT index (it excludes single-tenant REITs). Risk-adjusted return is not annualized and is calculated by dividing total return by volatility (or the degree of daily price variation) giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the possibility of unexpected losses.

Net operating income for storage facilities open for at least one year increased by an average 3 percent per year from 2001 to 2011, compared with 1.5 percent on average for other REITs. Median occupancy in self-storage rose to 81.1 percent in the first quarter from 80 percent a year earlier. The median asking rent for a non-climate controlled 10X10ft unit at ground level climbed to $90/month in the first quarter from $88 a year earlier, according to Cushman & Wakefield.

The U.S. had an estimated 50,048 self-storage facilities last year, up from 29,955 in 1999, according to the Self Storage Almanac.

CMBS Delinquency Rates

Trepp, LLC reports that the US CMBS (commercial mortgage-backed security) delinquency rate increased 12 basis points last month to 9.80 percent ($59.3 billion), according to MarketWatch. Newly delinquent loans ($3.8 billion in total) contributed about 64 basis points to the rate. All major property types improved in April except for the office sector, which experienced a delinquency rate increase of 82 basis points to reach a record 10.23 percent. The office sector also saw an increase in lending activity for April.

Special servicers improved the delinquency rate by about 24 basis points  with $1.4 billion in April loss resolutions. Retail delinquencies dropped by 26 basis points to 7.98 percent, further improving the overall delinquency rate. Retail loans remain the best performing of the major property sectors. Five-year loans originating in 2007 are a contributing factor in the overall rise in delinquency rates.

CoStar Leaseback

The Washington Business Journal recognized CoStar Group’s leaseback of its Washington headquarters building at 1331 L Street NW as the Best Real Estate Deal of 2011 in the Urban Office Sale category, according to MarketWatch. The 169,429sf Class A building sold for $101 million ($596.12/sf) on February 18, 2011 to Munich-based GLL Real Estate Partners GmbH with CoStar remaining as the tenant.

CoStar purchased the building in 2010 for $41 million ($243/sf). At the time, the market median for such a building was $518/sf. The 2010 purchase was also recognized as the Best Real Estate Deal in Urban Office Sale in that year by the Washington Business Journal.

Fairfield County Vacancy Rates

StratfordPatch cites a Cushman & Wakefield report indicating a rise in Fairfield County vacancy rates. The average vacancy rate for Class A office space increased from 20.4 percent in the last quarter of 2011 to 21 percent in the first quarter of 2012. At the same time, average rent rates in Fairfield County increased from $35.74/sf in the first quarter of 2011 to $36.57/sf in the first quarter of 2012.

The overall vacancy rate in the Stratford/Shelton submarket rose from 8.8 percent in the first quarter of 2011 to 13.6 percent in the first quarter of 2012. This increase is due in part to the 174,000sf left vacant when Pitney Bowes moved from Shelton to Danbury.

The Cushman report also notes that despite the rise in vacancy rates, the investment sales market continues to improve in this region.

Ares IPO

Ares Commercial Real Estate Corporation, a specialty finance company that invests in and manages middle-market commercial real estate loans has priced its initial public offering (IPO) of 7,700,000 shares of common stock at $18.50 per share, raising approximately $142.5 million in gross proceeds. The shares will trade on the New York Stock Exchange under the symbol “ACRE.” The IPO will close on May 1, according to Reuters.

Ares Commercial Real Estate intends to use the net proceeds of the IPO to repay debts, and to pay the shareholders of its Series A Convertible Preferred Stock who will redeeming their shares upon the completion of this IPO. The remainder of the proceeds will be used for general corporate purposes and to originate the company’s target investments.