Commercial Real Estate QUARTERLY MARKET SURVEY

Transcription

1 NATIONAL ASSOCIATION OF REALTORS ECONOMIC RESEARCH Commercial Real Estate March 2010

2 The REALTORS Commercial Real Estate Market Survey measures quarterly activity in the commercial real estate markets. The survey collects data from commercial Realtors. The survey is designed to provide member Realtors with an overview of their markets performance, sales and rental transactions, along with current economic challenges and future expectations. The questions are designed to capture the effects of the existing economic conditions on the commercial real estate business. Each quarter, participants respond to questions regarding the current demand for commercial properties, price, cap rates, rental concessions and other economic factors. Download this report from: Copyright Reproduction, reprinting or retransmission in any form is prohibited without written permission. For questions regarding this matter please THE, The Voice for Real Estate, is America s largest trade association, representing 1.2 million members involved in all aspects of the residential and commercial real estate industries.. Although the information presented in this survey has been obtained from reliable sources, NAR does not guarantee its accuracy, and such information may be incomplete. This report is for information purposes only. 2

3 2009.Q Survey Highlights Sales volume declined 15 percent in the fourth quarter compared with a year ago. Sales prices declined 17 percent in the fourth quarter on a year-over-year basis. Cap rates rose on average 32 basis points from the same period a year ago. Average vacancy rates increased 6 percent from the third quarter of the year. Rental rates were down 9 percent compared with the previous quarter. Concession levels moved up 9 percent on a quarterly basis. Financing continues to top the list of most pressing current challenges. Dollar amount of last transaction Under $500K Between $500K and $1 M 2% Between $1 M and $2 M 1 $2 M and $5 M Between $5 M and $10 M Over $10 M 2% Average Rental Space Demanded During Last Transaction 2009.Q Q > 100,000 sq ft 50,000 to 99,999 sq ft 10,000 to 9,999 sq ft < 10,000 sq ft

4 REALTORS Commercial Activity 2009.Q Sales Volume Compared with Previous Quarter Down 8% Sales Volume Compared with Previous Year Down 15% Sales Prices Compared with Previous Quarter Down Sales Prices Compared with Previous Year Down 1 Cap Rates Compared with Previous Year Up 32 bps Expected Availability for the Next 12 Months Up 1 Expected Cap Rate Movement for the Next 12 Months Up 15 bps Rental Volume Compared with Previous Quarter Down 2% Rental Rates Compared with Previous Quarter Down Rental Vacancy Rate Compared with Previous Quarter Up 6% Level of Rent Concessions Compared with Previous Quarter Up Direction of Business Opportunities Compared with Previous Quarter Down 1% Volume of New Construction Compared with Previous Quarter Down 1%

5 REALTORS Most Pressing Challenges 2009.Q 2009.Q3 Other National Economy Local Economy Inventory Financing Banks are not lending!!! Working with lender owned properties. Lenders are very difficult, impractical, and irrational. We purchase distressed buildings and notes. Lenders are not selling their REO properties. Tenants and Buyers still waiting for a bottom and afraid to commit. Owners are anxious to sell and lease, and prospective tenants and buyers are not moving as quickly as owners would like (but probably as quickly as the current market will allow). Indecision of buyers and sellers due to concerns of future economic conditions as well as government intrusion into private business matters. Uncertainty about future income tax policy and other expenses that Washington may create with energy and health care. Pensive clients who are very uncertain, afraid of new federal government tax hikes, massive spending, and various policies that are hostile to business and capitalism. Investors are sitting on the side and waiting till the Gov deals with the insolvent banks and the CRE in loans and renewals that might go bust. Economy. We are rolling along the bottom. Businesses large and small are still closing their doors. The biggest concern for apartment owners is job growth to create rental demand. Occupancies and rents appear to have stabilized at lower levels but improvement won't come until there is job growth. Some significant number of buyers are still feeling for the bottom, and lending conditions continue to be difficult for prospective buyers. Getting financing for the deals. My last 5 deals have been for "all" cash. Financing of commercial products. Increasing rental space without comparable increase in prospective tenants. Rates and Cap Rates appear to be heading up - lending isn't opening up - banks are not dealing with issues, this market could be lousy for 2 or 3 years. The disconnect between sellers and buyers as it relates to price or perceived value. Owners coming to terms with actual pricing. Disconnect between buyers and sellers. Sellers are only selling if they have to. 5

6 Commercial Real Estate Sales Volume Compared with Previous Quarter -1 8% % 2% 2% -2 NA -1 25% -21% 2% 1-35% 32% % 25% 2% % 5% -6% -18% -35% - -25% - -1% % % - 25% -1% % -% -1 6

7 -26% -26% -26% Commercial Real Estate Sales Volume Compared with Previous Year -26% -25% % NA -2 11% 11% -35% -31% -1-38% -1% -18% -31% -2-6% 8% -21% -6% % -22% -1-1% % - 11% ,000-26% -% % -1-32% 7

8 Commercial Real Estate Sales Prices Compared with Previous Quarter NA -6% -% - -1% -1-21% -25% - -1% % - 1% - 2% % - -25% -1 -% 2% -6% -12% % % 8

9 Commercial Real Estate Sales Prices Compared with Previous Year % NA -1% % % % % % % % - -21% % -1% -1-16% -18% -1-22% 9

10 Commercial Real Estate Cap Rates Compared with Previous Year (in basis points) NA

11 8% 8% 8% 8% Commercial Real Estate - Expected Availability for the Next 12 Months 8% 11% 11% 18% 5% 16% NA 11% 1% 6% 6% 22% 5% 15% % % 1 5% 12% 1% 5% 25% 12% 1 1 1% - 1% - 5% 6% % - 15% 16% % - 5% 11% % 11% 5% 12% 1 11% 11

12 Commercial Real Estate - Expected Cap Rate Movement for the Next 12 Months (in basis points) N/A

13 Commercial Real Estate Rental Volume Compared with Previous Quarter -6% 2% 12% -% 2% N/A 1% 6% 6% -25% -25% -25% % - 1% % % - 25% 15% -22% 1% -1 1% 12% -%

14 Commercial Real Estate Rental Rates Compared with Previous Quarter -1-16% N/A % % % % % % % % 1

15 Commercial Real Estate Rental Vacancy Rate Compared with Previous Quarter -1 15% % 1 N/A 1% 12% 1 1 2% 1 11% -12% - -% - 1% - 5% 6% % % 1 % 5% 12% 8% % 8% -1 -% 1% 2% 25% 8% 15

16 Commercial Real Estate Level of Rent Concessions Compared with Previous Quarter 1% 2% 12% 15% 11% N/A 1 % 6% 6% 1% 1 12% 1% 2 2 1% 15% 11% % 1 6% 2% 15% % 1 1 % - 5% 6% % - 15% 16% % % % 15% 12% 12% 15% 2% 11% 5%

17 Direction of Business Opportunities in Commercial Real Estate Markets Compared with Previous Quarter -6% -6% % 22% N/A 5% -5 8% -1-6% % 2 26% 6% 8% 1 5% -6% -% 5% 5% 1 1% % - -1% - -% - 5% 6% - 16% 1-26% % -% -% 17

18 Direction of New Construction in Commercial Real Estate Markets Compared with Previous Quarter -% -1% 1% -2 N/A % -25% -38% 8% -1-12% -1-26% 1% -2-16% -16% % % - 1% - 8% -18% % -2 5% -25% -16% -18% -2-1% -1 18

19 The REALTORS Commercial Real Estate Quarterly Market Survey asks participants to comment on current challenges and difficulties in their markets. Below are a few of the comments about the TH quarter environment and members most pressing concerns. Business Opportunity sales are near-dead. Commercial building buyers are waiting for prices to fall further waiting for more foreclosures. Getting enough cash in the door to keep the doors open. Between the decline in business, slow pay and no pay on deals completed, life's difficult. Maintaining my existing client base and developing new business in other fields of real estate. The next few years will be difficult for everyone in the real estate business and you will need to be innovative to keep competitive Commercial Listings looking for 20 buyers per month over the past 8 months commercial listings looking for 60 tenants over the past 8 months. Price reduction is not increasing sales volume. It is just driving commercial RE in to the toilet. Lack of demand due to market conditions. We are marketing more than ever, but limited number of prospects/clients active in the market and they are seeking concessions/discounts. Landlords are having to realize that rental rates are down 25%-3 pretty much across the market in industrial. This is due to the exorbitant amount of space available. I think businesses are terrified of what is going on in Washington, D.C. and in the states and in this environment are reluctant to do much of anything other than tread water and see what happens. There are quite a few buyers and speculators ready to buy properties but cannot obtain loans. Banks are asking for 35% down and additional funds on deposit making the total cash tied to the project closer to 6 in many cases. Market conditions are dramatically improved from the same period one year ago... when things were very scary. Current market volume and values represent a "new norm" which is very similar to conditions that existed during the period. As jobs growth comes into a more focus and consumer confidence in the economy grows so will the over-all economy grow. Our Southwestern PA market never experienced great appreciation, and consequently did not have the drop other parts of the country experienced. While our market is still strong, conditions around us continue to influence our market. Investor confidence is at an all-time low. I believe that the capital markets will improve this year, but the question remains as to when the players in the market will regain confidence; which, in turn, will allow transactions to occur. The feeling locally is that the Federal Govt.'s threat of increased taxation and additional bureaucratic overhead will slow our already delicate recovery. Take a long view look at the market...not only are we unsure where we are headed...but we cannot estimate the "velocity" at which things are going. Many business owners are just hanging on hoping they can weather the storm. Most investors and business owners I deal with are very concerned about the future of not only our economy but our nation. The national debt, the dilution of the dollar, expanding government, the potential for nationalized health care is of great concern to business owners and property owners alike. In Charlotte, NC in the retail sector, we have appeared to near the bottom. The next challenge is getting prospective tenants to understand that there aren't many "great" deals to be had in this sector, and therefore bidding closer to the ask price, which correlates with debt service. The activity seems to be picking up in our area the phone calls are more frequent than in a good while. This is a very bad market for landlords. There is a glut of inventory in ALL sectors. Every sector is hurting. Vacancies are at an all time high. Business is at an all time low. The mood is gloomy here in Vegas and we have good reason for it. It will take 5+ years to absorb the inventory and that's without adding more to the pile. 19

20 The REALTORS Commercial Real Estate Quarterly Market Survey Comments continued. This is regarding my submarket, the Inland Empire: It is no secret that 2009 was a dismal year for commercial real estate with California losing more than a half million jobs and unemployment approaching 1. The Inland Empire was hit even harder with unemployment reaching 1.6 in October of Commercial real estate, especially the office sector was decimated, partially due job losses but also due to a rapid over building during the last four years. The good news is that the halted construction starts has helped to slow the rising vacancy rates and tenants are seeing the most attractive lease rates in years. Further positive news is seen in the positive net absorption experienced in the th quarter of 2009 that caused vacancy rates to drop for the first time since 2005! Although it is brief improvement, it is improvement none the less. I believe things are starting to stabilize in Colorado but I think there may be one more downturn before we really find a strong market again. It could be a couple of more years. Landlord concessions to tenants are definitely helping my personal market. Our market is down and I expect to see a further downturn until sometime in Lots of listings with no buyers. It reminds me of the 1980's. I just hope this recession does not last as long as the one we survived back then. Government should create "Green Opportunity Zones" and help small businesses meet the horrendous soft costs in applying before local planning boards. My market is exploding with growth and my ONLY obstacle is lender attitude. When they do approve a loan it is at 5 of collateral value and anything else they can lien on. Polk County Florida is an extremely well positioned market, with a bullet train, Merlin Entertainment, CSX Distribution Center and University of South Fl Polytechnic all breaking ground soon. We have a difficult time getting lenders to understand they must put money into office buildings to pay the TI and lease commissions plus offer concessions in a down trending market(the office market continues to trend down). They seem to think the market will drastically improve within the next 6 months. Omaha's market has not experienced the deep recession that many other markets have. We hope that that will provide a basis for a speedier recovery. We have some of the local governments are looking for ways to raise revenue and they are starting to assess sign permit fees for simple step-in real estate signs. This is a huge problem for us, especially if it catches on around the country. Until banks start foreclosing on properties and resetting the basis for the next investor, we are going to be stalled. I met with a lender today that is going to start the foreclosure process sooner on troubled properties because the time to try and modify vs the time to foreclose is such a huge disparity. This particular lender will end up being money ahead by foreclosing on the troubled assets. Recent analysis in this area suggest we have not yet reached the bottom in the Commercial market. Slowest comeback will be hotels/motels and condos. Initial comeback is probably 1-2 years away and will be fueled when the residential market turns around and creates opportunities for Commercial Retail, followed by Industrial. Medical has the most opportunity at this point. Buyers need assurances of economic stability. They must know the status of capital gains, healthcare legislation, environmental legislation and possible governmental control of traditionally private sector businesses. I have 0 years experience as an active broker. And I have done more than OK thru all the recessions since What we are going thru today is far, far different and I fear it will get much worse before it's over. Frankly, I am ready to hang up my license and retire. YOU ASKED FOR A COMMENT, SO NOW YOU HAVE MINE. I truly hope I am wrong but I fear for the youth of America and for all who are raising a family. Survival of the fittest. Rural America is not where you want to work. I've been in the business for 30 years. This is the worst I have ever seen. For the first time in two years we are beginning to have calls on warehousing! That seems to be a good sign. 20

21 The REALTORS Commercial Real Estate Quarterly Market Survey Comments continued. We don't believe that the commercial real estate market here has bottomed out. We are witnessing increased pressure on landlords to lower rents and/or provide greater tenant concessions. This will eventually create cash flow issues, which will in turn cause greater anxiety in the commercial lending market. We are witnessing no absorption of vacant office spaces-- merely lateral movement. Unless the commercial industry as a whole gets help in revamping loans and in receiving new loans on potential buys the next 18 months are going to continue to be tough for all of us. We are not seeing any encouraging signs that financiers are prepared to take any risk and they appear to be trying to force down the value of commercial RE by "forcing" appraisers to mandatorily discount the values. There is no sign that they have learnt anything from the residential foreclosure and funding policies. If we see this repeated in the commercial sector over the next two years (with the attempts to renew LOC and short term notes) the flow on effect will be extremely challenging. People's perception of the national economy is probably one of the biggest hurdles to current investment, expansion and purchases of a permanent location in our town. We seeing a slight uptick in activity. Overall deals are being made - bought are far more complex weighing in all the variables to produce a deal that makes sense on all sides. We are a university market which offers it's own challenges. However, I believe it has faired better in these times than other markets in the collar counties of Chicago. Unless the investors gain some confidence they is no sense of urgency to buy. I have seen half price deals laughed at by the seller only to be taken 6-12 month later. Buyer know this and just leave the offer open. Buyers and sellers are trying to go around real estate people because they think they can make a better deal. Loyalty is a thing of the past. There is a feeling that the winter of will be the bottom of the market. The climb out from the bottom will be long and slow, however most people don't think it will go lower from here. Financing is available with sufficient down payment (25-). Financing options are increasing. Financial institutions avoiding commercial loans almost entirely which severely retards any small to medium size business growth. The lack of federal focus upon jobs creation, plus policies that are overall hostile to business expansion have caused widespread fear and uncertainty among most of my clients. Basically, there is very little market to speak of. The deals are small lease deals. Sales hardly exist; business leaders are not willing to make a decision at this point in the economy. The banks are also terrible to deal with. This market is at risk to further damage because of inane moves by the federal government; coupled with ignorance and apathy by the very ones being harmed. It appears that we may have reached the end of the decline. Sales and rents appear to have stabilized. May be another 9 to 12 months before we see an upswing in the market. We have a great market and appears to be steadily improving - timing of lease payments are very slow and affects our operations. Consumer confidence is down and lending has all but ceased. Liquidity to the market would allow for business owners to take risks and expand, thus creating further consumer confidence and spending. Rentals slowed greatly after 9/15/09. We had light activity for the winter months. I am hopeful the rental market will be slightly better this year and more so for Things have to improve. I don't see any help from the state or national government. I don't think the politicians have any idea how to help nor do I think they care. I am fed up with them and will not give another penny to RPAC until I see some change in their attitudes. We are seeing good signs from Buyers that want to get back into the market or expand portfolio's and some family trusts are now liquidating some holdings. Memphis area has not fallen as much as some areas which had seen the bigger growth. Our market grows slowly and falls slowly. We are positive and could do better with financing. 21

22 RESEARCH DIVISION The Research Division of the NATIONAL ASSOCIATION of REALTORS produces the Commercial Real Estate Outlook, a quarterly report forecasting commercial market fundamentals. Additionally, NAR Research examines how changes in the economy affect the commercial real estate business, and evaluates regulatory and legislative policy proposals for their impact on REALTORS, their clients and America s property owners. If you have questions or comments regarding this report or any other commercial real estate research, please contact George Ratiu, NAR Economist, at gratiu@realtors.org. To find out about other products from NAR s Research Division, visit Research Division 500 New Jersey Avenue, NW Washington, DC