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Institutional Prices on the Rise

Transaction prices of commercial properties sold by large institutional investors rose by 4.4 percent in 3Q09, according to the MIT Transaction-Based Index, bringing them to 36.5 percent below their mid-2007 peak, according to the National Association of Real Estate Investment Trusts. Given that and a narrowing of the gap between buyer and seller asking prices, REITs soon may start dipping into their amassed capital to purchase distressed assets. By the end of August 2009, REITs had raised an aggregate $24.2 billion in new capital, 34 percent more than raised in all of 2008, according to Jones Lang LaSalle.
Briefly Noted

Hospitality — “If you’re reading about it, it’s already too late,” says HotelNewsNow.com. Although lenders have been slow to take troubled properties to market, the time is now to buy distressed lodging assets as the sector’s recovery may come as soon as this summer. There are 1,248 hotels in distress and values are down 42 percent from the 2007 peak.

Industrial — The Detroit, Houston, and Atlanta industrial markets all saw more than 1 percent increase in availability in 3Q09, while the national rate increased to 12.9 percent from 12.4 percent, according to CB Richard Ellis. Austin, Texas, and Columbus, Ohio, posted the largest decreases in availability at -0.9 percent.

Office — Office-using sectors have lost 2.3 million jobs since 1Q08, according to Jones Lang LaSalle. Austin, Texas, is the only metro area of 35 MSAs tracked without job losses on a year-over-year basis.

Multifamily — This sector could be 2010’s big winner as 70 percent of commercial real estate investors chose multifamily to outperform the other property sectors by as much as 30 percent this year according to the Jones Lang LaSalle Fall 2009 Cross-Sector Survey. That’s a vast difference from a year earlier when two-thirds of respondents predicted a decrease in multifamily activity.

Retail — Big-box retail leasing was up for 3Q09, at least for shopping center real estate investment trusts. Of Kimco Realty Trust’s 3Q09 leasing deals, 66 percent were for big-box locations, according to the REIT. Kimco also saw increased retail leasing in Florida and California, two states hardest hit by the housing crisis.
Looking Ahead

“Markets like Detroit, Phoenix, Atlanta, Cleveland, and Sacramento, Calif., could be shedding the largest amount of office space in several quarters based on most recent recorded office employment losses.”
— Jones Lang LaSalle,
North America Office Report 3Q09
Advice for the New Year
Sector     Action     Comments
Multifamily     Buy or hold     "Possible shortage of apartments by 2012; buy busted class A condos and class B infill."
Hotels     Buy     "Higher-end business hotels in major markets have most potential to recover sooner."
Distressed condos     Buy     "Beachfront condos in South Florida always bounce back."
Land     Buy     "Buy infill sites in top markets; be prepared to hold five to 10 years."
Industrial     Buy or hold     "Warehouses can recover quickly."
Office     Hold     "Prime properties in 24-hour cities will attract B and C tenants."
Retail     Triage     "Infill grocery-anchored centers and fortress regional malls will survive."
Source: Emerging Trends 2010
Dining Details

Restaurant patrons are much more satisfied — and spend more per minute — when their tables are separated by at least 36 inches from those of other diners, according to a Cornell University Center for Hospitality Research study. Cutting that space in half significantly reduced satisfaction and spending levels researchers found. And apparently removing any reference to money also makes diners happy. In another study, researchers offered diners the same menu with one exception: The prices were formatted differently — $20, twenty dollars, or 20. Of the three formats, restaurant patrons spent considerably more when given the numeral-only menu. Three restaurant professionals, including the head of food and beverage for the Hilton Hotels, concurred with the study, saying that a move to the European style of price formatting increased spending in their restaurants.
Smarter Reading

"In the depths of a major crisis — much like the one we’re in now — is where a principled approach to leadership and decision-making is most needed. … Only by practicing a clear set of principles can we ensure that the recovery is long-lasting and that future business is sustainable." — William W. George, author of 7 Lessons for Leading in Crisis

"The templates and wizards of the past probably took most of us … down a road to ‘really bad PowerPoint.’ … But today … we can make effective presentations with even older versions of PowerPoint — often by ignoring most of the features." — Garr Reynolds, author of Presentation Zen: Simple Ideas on Presentation Design and Delivery
Top 5 Niche Investment Properties

   1. Medical office
   2. Seniors housing
   3. Student housing
   4. Infrastructure
   5. Urban mixed-use

Source: Emerging Trends 2010


Tighten Your Belts

Benefits are on the chopping block for real estate professionals according to a Grant Thornton survey. Real estate executives said they were cutting back on the following perks:

    * 63% chopping bonuses
    * 58% slicing raises
    * 50% reducing stock options
    * 42% shredding healthcare benefits
    * 32% freezing 401(k) matches

Historic Value Declines

The value of preserving a building’s historic façade has declined, according to an Appraisal Journal article. A study in Savannah, Ga., showed that historic façade easements decreased the sales prices of condominium row houses by 2.85 percent a year, or 57 percent over 20 years. When issued, the easements were valued between 5 percent and 15 percent, in keeping with the Internal Revenue Service guidelines on valuation at the time. However the inability to change protected façades and the increased expense of maintaining them have eaten away at the value, the study suggests. However, property owners still receive tax deductions for initially granting easements.
Worth Quoting

"While the U.S. and European economies represent approximately 50 percent of world gross domestic product, they are not the engines of the recovery. …Based on growth rates, it will be Asia and Latin America that will lead the world recovery."
— CB Richard Ellis Global MarketView, 3Q09
Vacancy Rates: Historical Perspective
     
Office
   
Industrial
   
Multifamily
   
Retail
3Q09
   
16.1%
   
13.5%
   
7.4%
   
12.2%
Historic high
   
19.1
(2Q91)
   
11.8%
(1Q04)
   
6.8%
(4Q03)
   
11.3%
(1Q92)
Source: CB Richard Ellis-Econometric Advisors
Top 5 Office "Holds"

Percentage of "hold" recommendations for office properties in top metros from 900 survey respondents:

    * Chicago - 63.4
    * Atlanta - 63.2
    * Denver - 61.4
    * San Diego - 61.1
    * Philadelphia - 57.4

Source: Emerging Trends 2010

By Jeffrey A. Usow, JD, and Jade Earl Newburn, JD

Given the current credit-market constraints, seller financing may be a way to bridge the financing gap facing buyers and sellers in today’s commercial real estate market. Seller financing is a transaction in which the seller makes a secured loan to the buyer to finance a portion of a property’s purchase price. The two most common forms are traditional mortgage loans, which are secured by a lien on the underlying real estate asset, and mezzanine loans, which are secured by a pledge of the borrowing entity’s ownership interests.

Property owners should carefully examine their ability and preparedness to be lenders, their economic motivations for selling particular assets, and the potential seller-financing capital structures.
Lender Requirements

Sellers must satisfy a number of threshold requirements before becoming lenders. They first must review their organizational documents; joint venture, fund, and upper-tier debt agreements; and statutory and regulatory obligations. If they find they are not authorized to make loans, sellers must amend or modify organizational documents or meet any applicable statutory or regulatory obligations.

In addition, sellers must consider if they have the underwriting and monitoring capabilities necessary to effectively service individual loans or a lending portfolio. If not, they must either build internal systems or outsource to appropriate loan servicing agents. In the context of such activities, sellers also must know the laws, regulations, and other legal restrictions that apply to lenders. These include lender licensing requirements and potential lender liability that may arise from real estate loan originations or servicing.
Seller Motivations

Sellers authorized and otherwise prepared to be lenders also should consider their motivations for entering into seller-financing transactions. The key economic questions in any seller-financing transaction are how much cash the seller needs to receive at closing either to pay off existing property-level debt or generate liquidity, how much cash the buyer can pay at the closing, and the assets that the seller may choose to sell.

Assets that are encumbered by little if any property debt have the greatest potential to be sold in seller-financing transactions. However, seller financing is likely to be more challenging if the existing property-level debt is a significant percentage of the property’s current value. In theory, the seller could sell a portion of the seller-financed loan at closing or convince the senior lender to accept partial lien payment, allowing the buyer to assume the remaining debt and junior liens to attach at closing. However, these solutions will be challenging to implement in practice. Fortunately, the choice of capital structure may solve these problems.
Capital Structures

The difference between the amount of closing cash that the seller needs to receive and the buyer is able to pay forms the basis for two primary capital structures in seller-financing transactions. Sellers may be able to serve as either senior lenders or junior lenders to facilitate such transactions.

Accordingly, in one possible capital structure, the buyer pays a portion of the purchase price — for example 40 percent — with its own equity, and the seller lends the remaining 60 percent of the purchase price to the buyer as the first priority lender. This structure works best when the existing property-level debt is relatively small in comparison to the asset’s sale price. The seller has greater flexibility in determining the amount of cash it is willing to accept at the closing; however, the usefulness of this structure is dependent upon the extent to which a buyer is able and willing to contribute cash at the closing.

Alternatively, suppose a buyer can only contribute 20 percent of the purchase in cash and the seller needs more cash at closing. Then the buyer may be able to borrow a portion of the purchase price from a first position third-party lender and borrow another portion of the purchase price from the seller. The seller becomes a junior lender, either through a second priority lien on the underlying asset or by a pledge of the ownership interests in the title-holding entity in a mezzanine loan. In such a transaction, the third-party senior lender might loan 50 percent of the purchase price in first position, the seller might loan 30 percent of the purchase price as a junior lender, and the buyer might pay equity at closing of 20 percent. Accordingly, the seller would receive 70 percent of the purchase price at closing and the buyer would obtain an aggregate loan-to-value ratio of 80 percent.

With the cumulative leverage of both a senior loan and a junior loan, potential buyers also may be able to maintain a relatively high debt-to-equity ratio and have the potential to earn greater yields on their equity investment. Thus, they may be more likely to enter into commercial real estate transactions in the near term. Also, sellers may be able to charge higher interest rates than the senior lenders but would be in a first loss position relative to the senior lender.

Sellers looking to sell multiple assets should consider setting up a program with other lenders that are willing to lend in first position in relation to the seller’s junior loan. By doing so, sellers may be able to pre-negotiate the intercreditor agreement and subordination agreement and present prospective buyers with complete financing solutions during the purchase agreement negotiations.

By Jennifer Norbut

After many successful years negotiating leases from the landlord’s side of the table as a regional executive for national and international commercial real estate organizations, Debra Stracke Anderson, CCIM, SIOR, saw a niche opportunity hidden among the corporate giants’ shadows. In 2000, she launched Sloan Street Advisors and continues to serve as president and chief executive officer of the Washington, D.C.-based corporate real estate services firm. In 2003, Sloan Street was selected as the D.C. regional affiliate for the International Tenant Representative Alliance (www.itraglobal.com), an organization devoted exclusively to tenant/buyer representation in more than 70 global markets. Anderson is the 2010 chairman of the ITRA board of directors.

Commercial Investment Real Estate asked Anderson to talk about the role corporate real estate consultants play in this climate and the value her CCIM education brings to the table.

CIRE: Based on your recent experiences, what’s the most important aspect of leasing in today’s market conditions?

Anderson: One of the most crucial issues today is flexibility. Our requests for proposals always have been detailed in terms of renewal options, expansion and contraction rights, sublease and assignment rights, and termination options. But corporate clients appreciate our tenacity in this regard today more than ever before because the future is unknown: Will they experience growth, downsizing, consolidation, or even bankruptcy? How long will the current economic conditions last and who will remain standing when the dust settles? Overall, flexibility in future leases will be key as the workplace evolves.

CIRE: What’s the biggest stumbling block for corporate clients?

Anderson: Many companies are teetering on the edge financially and lending remains largely nonexistent. Further, some firms are limited to short-term leases because of concerns about the future, which unfortunately prevents them from benefiting fully from today’s market conditions. For those that are well funded, this is the ideal time to sign long-term leases and lock in today’s rates and concession packages.

CIRE: Does the CCIM designation give you an edge with corporate clients?

Anderson: Corporations today are focused on operating their core businesses successfully. With the downsizing of in-house corporate real estate departments, they need on-the-ground experience and creative strategies from seasoned service providers, particularly those who have worked through multiple economic cycles. They choose providers who have the best education, senior-level expertise, and the most sophisticated tools. Seeing the CCIM designation on a business card assures them that the service provider meets these criteria and much more.

CIRE: Tell us about a time you used CCIM tools, networking, or both to really wow a client.

Anderson: A prospective multiregional client told me that a much larger competitor could offer sophisticated mapping and related reports for a site-selection search. Using CCIM’s STDBonline mapping and financial analysis tools, I provided a complete, detailed report to the potential client in less than four hours. I was awarded the account on the spot.

In another example, one of our valued national clients had a challenging office space requirement in a distant market. I used the CCIM member network to identify local prospective partners to complete the transaction. After researching a specific designee’s credentials and references, I referred my client to the local CCIM. The designee proceeded to hit the ball completely out of the park and made a hero out of me.

CIRE: How can earning the designation help industry pros who want to break into the corporate sector?

Anderson: There is no better educational track available than CCIM’s and thus the designation is highly respected among the corporate real estate executive community. In addition to encouraging seasoned service providers to pursue the designation, I always advise young professionals just entering the field to complete the CCIM education. The designation provides credibility with potential clients and greatly assists in serving them well after they become clients. Corporations have many service providers from which to choose — having the designation gives CCIMs a powerful edge.