Appraisal Institute s 11 th Annual SCCAI Inland Empire Market Trends Seminar Focus: Industrial Market Overview West End

Transcription

1 Appraisal Institute s 11 th Annual SCCAI Inland Empire Market Trends Seminar Focus: Industrial Market Overview West End Presented By: Erik J. Hernandez Ontario, California June erik@lee-assoc.com

2 Lakers v Celtics, tonight 6pm on ABC

3 NO, SERIOUSLY, Lakers v Celtics, tonight 6pm on ABC

4 Recap of 2007/early 2008 Rental rates have flattened out in most size catergories. Lease rates under pressure in some areas of the market Landlords offering more aggressive deals to existing tenants to keep them in their buildings Leasing market steady in all size categories. Lease rates have moderated their upward momentum of the last two years. Landlords willing to offer greater incentive today to keep quality tenant in place rather than be faced with an empty building later this year.

5 Recap of 2007/early 2008 continued Small building for sale market shows some slowdown in VELOCITY, but PRICES are now FLAT in most areas on west end, DECLINING in East Valley Vacancy rates rising in ALL SIZE CATEGORIES However, RISING VACANCY / AVAILABILITY in buildings under 20,000 SF CAP Rates are creeping up, have remained stable in Class A Properties as a flight to quality has occurred over the last 6 to 12 months.

6 Recap of 2007/early 2008 continued 2 Continued limited availability of developable land in Rancho Cucamonga, Ontario, Chino, and Mira Loma Land prices have moderated, and are now falling in some areas. Sellers and Buyers are currently in disagreement over the value of land, possibly the widest range in the last 3-5 years. Dramatic change in new construction financing market. Higher LTV, mezzanine debt and much higher % interest rates. Hearing of some banks unwilling to extend construction loans when they come due.

7 Notable Transactions 901,662 SF Purchase in Mira Loma Closed December Bought by AMB EMPTY at $88.00 PSF 600,080 SF Purchase in Fontana at $84.16 PSF May ,000 SF Lease by Ryder in Ontario May year lease, $0.42 NNN starting lease rate 1,309,710 SF Lease to Hanes by Ridge Properties in Perris - 10 year lease, first 7 months free, then $0.34 NNN with bumps every 30 months

8 Notable Land Transactions 190 Acres in Fontana Purchased by Hillwood Former Young Homes Site Bulk residential land sale, to be rezoned to industrial use for large manufacturing/warehouse uses. 190 Acres in Rialto, Purchase By Oakmont Former El Rivino Golf Course Bulk residential land sale, to be rezoned to industrial use for large manufacturing/warehouse uses. Over 300 acres in large pending land deals have fallen out of escrow in the last since January 2008.

9 Greater Ontario Airport Region

10 Greater Ontario Airport Region As of April 2008 Flashback To April 2007

11 Slowdown In Velocity of Transactions April 2006 April 2007

12 Slowdown In Velocity of Transactions April 2007 April 2008 Where did the Under Construction Go?

13 Slowdown In Velocity of Transactions Typical Response To An Offer To Purchase At 10% Or More Less Than Asking Price (Buildings Under 20,000 SF) Umm thanks but no thanks. Call us back when your client gets real. We have 3 other offers to respond to. Countered at $0.50 off Asking Price PSF Countered At $1 to $2 off Asking Price Countered at $2 to $4 PSF off asking. Or, a lease w/option to purchase may be pursued, locking in today s asking price for up to 12 months. New Projects: 60% to 90% presold at completion. New Projects: 50% to 70% presold at completion. New Projects: 20% to 40% presold at completion. New Projects: 10% to 30% pre-sold at completion.

14 Slowdown In Velocity of Transactions Typical Response By A Seller To An Offer To Purchase At 10% Or More Less Than Asking Price (Buildings Under 20,000 SF) Umm thanks but no thanks. Call us back when your client gets real. We have 3 other offers to respond to. New Projects: 60% to 90% presold at completion. Countered at $0.50 off Asking Price PSF New Projects: 50% to 70% presold at completion. Countered At $1 to $2 off Asking Price New Projects: 20% to 40% presold at completion. Countered at $2 to $4 PSF off asking. Or, a lease w/option to purchase may be pursued, locking in today s asking price for up to 12 months. New Projects: 10% to 30% presold at completion. BROTHER CAN YOU SPARE AN OFFER? New Projects: Happy to have a presale, but few new projects today.

15 What A Difference A Few Years Makes Chino, CA Buildings In The 7,000 SF Size Range 2001: 6,800 SF $67.50 PSF 2002: 6,800 SF $75.00 PSF 2004: 6,900 SF $90.00 PSF 2005: 7,750 SF $ PSF 2006: 9,000 SF $ PSF 2007: 9,950 SF $ PSF 2008: 7,141 SF $ PSF Ontario, CA Buildings In The 30,000 SF Size Range 2002: 31,683 SF $59.50 PSF 2003: 30,433 SF $70.52 PSF 2004: 28,250 SF $74.68 PSF 2005: 32,322 SF $94.88 PSF 2006: 27,200 SF $ PSF 2007: 22,085 SF $ PSF 2008: 34,331 SF $ PSF

16 What Will Owner/User Buyers Really Pay? Assumptions: 10% Down, Fully Amortized Over 25 Years At a blended loan rate of 6.5% At a blended loan rate of 7.5% Lease Rate (NNN) Max Value PSF Debt Service At Par With NNN Lease Rate Max Value PSF Debt Service At 110% Of NNN Lease Rate $0.35 ($57.60) ($63.36) $0.40 ($65.82) ($72.41) $0.45 ($74.05) ($81.46) $0.50 ($82.28) ($90.51) $0.60 ($98.74) ($108.61) $0.75 ($123.42) ($135.76) $0.90 ($148.10) ($162.91) $1.50 ($246.84) ($271.52) Lease Rate (NNN) Max Value PSF Debt Service At Par With NNN Lease Rate Max Value PSF Debt Service At 110% Of NNN Lease Rate $0.35 ($52.62) ($57.89) $0.40 ($60.14) ($66.16) $0.45 ($67.66) ($74.43) $0.50 ($75.18) ($82.70) $0.60 ($90.21) ($99.23) $0.75 ($112.77) ($124.04) $0.90 ($135.32) ($148.85) $1.50 ($225.53) ($248.09) Max Value PSF assumes the present value of debt service over the assumed term, divided by the Loan-To-Value Factor. Owner/Users seem to be willing to debt service (per month) at least 110% of the rent they would have otherwise paid for a similar building. In Most Cased Significantly Higher.

17 Predictions For 2007 Lee & Associates Has Removed Its Guidance For 2007 and 2008 Due To Lack Of Visibility

18 Predictions For 2008 Lee & Associates Has Reinstated Guidance For Batten Down The Hatches Storm Clouds Are Here

19 Predictions For 2007 Rental rates should log additional gains of 5% to 10% in 2007 within most size categories, including buildings over 100,000 SF. Small building for sale market (under 20,000 SF) may see slow down Construction activity will be moderated in the western inland empire due primarily to the shrinking supply of available, developable industrial land. We all will be keeping an eye on impact in slow down of new construction of homes, and the impact on job creation in the Inland Empire (Cabinet makers, stone/marble tile companies, furniture companies, finance/real estate related groups)

20 Predictions For 2008 Rental rates will continue to flatten, as landlords provide additional incentives to entice tenants in WATCH OUT FOR SUBLEASE SPACE New construction for buildings under 100,000 SF comes to an almost grinding halt. Gap between Sellers and Buyers of land will close in the latter half of 2008 / early 2009 TRANSLATION: Falling land prices. Interest rates and lease rates are the two primary factors for the value of real estate today. With little to no upward momentum on lease rates, should long term interest rates rise dramatically, LOOK OUT BELOW.

21 Appraisal Institute s 11 th Annual SCCAI Inland Empire Market Trends Seminar Focus: Industrial Market Overview West End Presented By: Erik J. Hernandez Ontario, California June erik@lee-assoc.com