E-Newsletter - May 10, 2013

Sacramento Association of REALTORS Commercial Banner
                                   May 10, 2013 


It is amazing what can be accomplished when nobody cares about who gets the credit.
Robert Yates
In This Issue
RE Picking Up Speed On Parallel Tracks
Office Vacancies Drop Incrementally
Will Investors Play Ball?
Brokers Embrace New Technologies
Economy Grew at 2.5% In 1st Quarter
Eating Up Restaurant Deals
Two Top Issues Affecting CRE
E-Commerce Explosion
High Net-Worth Investors See Value in CRE
Crowdsourcing Comes to CRE
Why Seller Financing Is Alive
The "Retailization" of Healthcare
Office Demand Still Catching Up
Low Rates, Cheap Capital Raise Concerns
Moody's Warns Against Leverage
Thriving Economy Spurs CRE In Latin America


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News that the NBA's relocation committee had voted to reject the Sacramento Kings' move to Seattle got retail expert Garrick Brown enthusiastically talking about the commercial real estate impact.

If the Kings ultimately stay and a new arena is built downtown for the team, Brown, Research Director for Terranomics Retail Services and Cassidy Turley Northern California, said there will be a "flurry of retail and multifamily development downtown."

With the economy gradually recovering and cities needing help after redevelopment agencies were eliminated statewide, "the timing will be perfect for get some momentum going on here," Brown told the Business Journal.

Overnight, he said, downtown land prices will spike. High-end retailers that usually locate in regional malls and lifestyle centers will want a spot on K Street, he said.Around the arena there will be a shift from mom-and-pop stores and discounters to high-end retailers, Brown said. "This changes the game overnight," he said.

Sacramento lacks identity, and hasn't been able to brand itself, he said. So a new downtown arena and the development that will occur around the facility, Brown said, will give Sacramento an opportunity to build a brand. (Sacramento Business Journal)



Nearly one-third of commercial real estate professionals predict that the healthcare sector will provide the greatest investment opportunity this year, according to a DLA Piper State-of-the-Market report.

The sector's overall investment stability and stellar performance played a role in brightening investor sentiment. Meanwhile, the Affordable Care Act is also expected to drive demand for healthcare facilities.


The multifamily and industrial sectors took the number two and three spots respectively as prime investment opportunities. Of the nearly 200 commercial real estate execs who took part in the survey, 85% have a "bullish" outlook for 2013. 40% of those respondents attribute their confidence to healthy economic growth.


Of the 15% of respondents with a "bearish" 12-month outlook, nearly half cite constricted job growth as their primary reason for concern. (CCIM) Download the Survey

Investment Forum

Tuesday, May 14 -- 7:30 a.m.

R.J. Grins at The Double Tree Hotel

E-mail for additional information


ACRE May Luncheon

Tuesday, May 14 -- 11:30 a.m. - 1:00 p.m.

Double Tree Hotel Sacramento



NAIOP Hard-Hat Mixer

Wednesday, May 15 -- 5:00 - 7:30 p.m.

1501 16th Street, Sacramento

Additional Info


Sacramento Real Estate Exchange

Friday, May 17 -- 10:30 a.m.

China Buffet in Citrus Heights

Call Ben Couch at (916)989-4652 for additional information


Main St. and the Internet: Closing the Gap

The Senate is taking up legislation to even the tax-collection playing field between Internet retailers and bricks-and-mortar retailers. It's an important issue for commercial real estate professionals, because their clients face a disadvantage against out-of-state Internet retailers on tax collection.

It's not that no tax is due when something is purchased in a different state over the Internet. A tax is in fact due, but states have no way of systematically collecting it. And a Supreme Court case from 1992 prohibits them from requiring out-of-state retailers to collect the tax on their behalf.

As a result, it's largely been up to buyers to pay the tax, in the form of a "use tax," but they rarely do. Correcting this disparity is the rationale behind the Marketplace Fairness Act, S. 366, which the Senate is set to pass any day now. Lawmakers and analysts generally agree that the bill will in fact pass, and then it needs to be taken up in the House, where the outcome is less clear.

NAR supports the bill, mainly for two reasons. First, it will help the commercial real estate sector, which finds the playing field tilted against it as buyers go online to buy things from vendors in another state that, if bought in a store, would require them to pay state tax. Second, it's a good bill for states, because it will bring in tax revenue that's owed to them, helping those with a budget gap improve their bottom line. By some estimates, states are losing out on more than $20 billion a year.
Critics say the bill equates to a new tax, but in fact the tax is already in place. The bill is intended to make it practical and simple for states to collect what they're owed. (NAR)

Single Fam
Ben van der Meer

Three separate reports on different aspects of real estate showed parallel, if only tangentially related, tracks for residential construction and office and retail leasing.
Year-over-year, the Sacramento region saw a rise of more than 50% in new home permits in January and February, according to the North State Building Industry Association. Meanwhile, retail vacancy dropped to 11.1%, and office vacancy to 21.7% in the first quarter, according to CBRE.
Some of those numbers are related, and some aren't. CBRE's Rick Martinez said while retail often follows behind housing, the activity early this year -- almost all of it in Elk Grove -- is actually ahead of what's expected to be a busy home construction cycle over the next 18 months or so.
The boost in retail instead comes from a bit more confidence in the economy from both stores and commercial centers, leading the former to expand into new locations and the latter to firm up lease rates, Martinez said. (Sacramento Business Journal)  Real Estate Picks Up Speed

Ben van der Meer

A first-quarter 2013 report by Cassidy Turley on commercial real estate shows continued progress in office leases, but almost no movement for rates of vacant industrial space.

During the first three months of the year, office vacancy in the Sacramento region dropped from 16.3% to 16%, with health care companies comprising much of the new leasing. The report noted state and other public entities, which typically make up a third of the occupancy in the region, have been relatively inactive in recent years or even contracting. Total new leases for offices were 233,000 in the first quarter, the third straight quarter with moderate to strong growth.

Cassidy Turley's report stated in addition to ongoing activity from health care, insurance and telecommunications sectors, more interest from traditional real estate sectors such as mortgage brokers and real estate firms is expected in the second quarter.

Apart from a net gain of 22,000 available square feet during the first quarter, industrial land in the region saw no change in the region, which Cassidy Turley's report stated was in line with recent years. Local vacancy rates have hovered around 13% in recent years, according to the report, though deal activity was greater in the first quarter, 2.1 million square feet compared to 1.4 million square feet in the last quarter of 2012.

The report also noted the region lacks enough large distribution space for logistics and e-commerce firms currently expanding, in some cases to cities elsewhere in the Central Valley. (Sacramento Business Journal) 


by Malcolm Davies

Every real estate professional is well aware that commercial real estate is making a comeback. Even during the depth of the recession, the market of 2009 presented a great deal of opportunity for investors and lenders. Many of those who took advantage of the chance to buy properties at low prices are now cashing in on these investments.

But where can investors and lenders achieve that kind of success in today's market? While the caliber of reward achieved by investments in today's market may not be as large as it was in 2009, the opportunity for profit still exists. Lenders and investors are finding a whole new ball game in the secondary and tertiary markets, turning profits that often beat out their primary market comparables.


As primary and gateway markets have become saturated with competition, savvy investors are taking advantage of record low interest rates and are searching for new investment opportunities. Overall, deals are becoming much more common and profitable for investors and lenders alike. If these real estate players are willing to look outside the safe primary markets and take a bit of a risk, there is a very successful game in which to play. (CCIM) Will Investors Play Ball?



TechnologyBeth Mattson-Teig


Love it or hate it, these days technology can be a huge boon to busy commercial real estate brokers in creating efficiencies and delivering faster and better services to clients. Yet the challenge for both individual brokers and larger firms is sifting through the deluge of new tools without getting caught up in a race to have the shiniest new toys regardless of whether they help the brokers do a better job.

Commercial real estate professionals are gravitating to technologies that can assist with key functions such as file sharing, client relationship management, analysis and marketing. "What we hope to use technology for is that we can provide better services for our clients, not just for the purpose of deploying technology," says Mike Kamm, president of Cassidy Turley in San Francisco.

For example, Cassidy Turley is in the process of implementing a new customer relationship management (CRM) solution that it calls "eClient." The solution will allow brokers to track their individual client relationships and provide a broader look at who other brokers in the firm are working with. "That is going to be a major improvement in our productivity, and also allow us to provide better client services in a more coordinated fashion," says Kamm.

For small and mid-size firms, technology has the added perk of helping level the playing field when they compete head-to-head with larger brokerages. "Our view on technology is that it is only going to make us more efficient in the long run and we are trying to embrace it as best we can," says Scott Burns, president of Wilson Commercial Real Estate in Los Angeles. Wilson Commercial has 75 shopping centers in its portfolio. "We get calls all week long from people wanting to get in and tour the space," says Burns. Often, people want instant access to the properties. So Wilson Commercial has posted YouTube videos that provide virtual, 360 degree tours of its spaces. The firm still wants to bring prospective tenants to the physical space, but giving them a sneak peek eliminates some "tire kickers" that just want to check spaces out with no serious interest in signing a deal, adds Burns. (NREIOnline) Brokers Embrace New Technologies


by Ylan Q. Mui & Marjorie Censer

A steep slowdown in defense spending tied to the end of the wars in Iraq and Afghanistan is undercutting the country's economic recovery, according to new recently released government data.

The report showed gross domestic product grew at an annual rate of 2.5% during the first three months of the year -- significantly slower than most economists had expected. The culprit? A surprising 11.5% annualized drop-off in military spending.

The decline comes on the heels of an even bigger plunge in defense spending at the end of last year that brought economic growth to a standstill. Taken together, the two quarters represent the steepest declines in military outlays since the Korean War, according to JPMorgan Chase Economist Michael Feroli.

The GDP report amounts to a caution about the looming consequences of federal spending cuts known as the sequester. The cuts officially began in March but could take months -- or even years -- to fully digest. The Congressional Budget Office estimates that the sequester will shave nearly half a percentage point from economic growth this year, delaying projections for economic liftoff to 2014. (Washington Post) Stalled Recovery



by Mark Heschmeyer

Merger and acquisition acitivity in the U.S. restaurant industry is beginning to sizzle, according to the 23rd edition of the Chain Restaurant Industry Review, just released by GE Capital, Franchise Finance.

Activity increased to $3.9 billion from $3.7 billion, and the total volume of syndicated leveraged loans in the restaurant space increased almost 21% last year.

"In contrast to the slow but promising recovery in the global financial markets, the U.S. restaurant industry has been very focused on growing and expanding," said Agustin Carcoba, president and CEO of GEFF. "The activity has been driven by the improving economy, changing consumer habits and shifting U.S. demographics. People who are investing in the restaurant industry understand the importance of three factors -- operational performance, financial metrics and asset strategy -- and how they have changed through the latest cycle."

In a sign that the American consumer was feeling more confident about disposable income levels, nominal restaurant sales rose 4.2% to $425.6 billion in 2012. Sales are projected to increase 3.8% to $441.9 billion this year.

The Top 100 restaurant chains' system-wide sales were nearly $210 billion, representing more than half of all restaurant sales last year, and gaining 0.5% market share from 2011. (CoStar) Restaurant Deals


by David J. Lynn, Ph.D.

Each year, the Counselors of Real Estate produces its annual report on the Top 10 Issues Affecting Real Estate. I had a hand in researching and writing the Top 10 list this year. The full list will be released at the Counselors of Real Estate Conference in New York later this month. As a sneak preview, here are two of the top ten issues:

The Impact of Technology on Office Space
The development of increasingly sophisticated and innovative technologies coupled with growing acceptance of flexible, less conventional workspace models have greatly reduced the demand for physical office space in the traditional sense-a trend that is likely to continue.

The 21st century worker is electronically connected to the boss, one's co-workers, clients and prospects 24 hours a day, seven days a week with the ability to effectively participate in virtual meetings, from home, the local Starbucks, the airport or any location with a Wi-Fi connection.
Workers are more interested in collaborative space and the flexibility to move their computers to the areas that best support their work that day, then fixed offices or cubicles. Collaborative meeting spaces, not individual offices, have become more prevalent. All of these trends have led to dramatic reductions in dedicated space per office worker from about 225 sq. ft. in 2010 to 176 sq. ft. in 2012, according to CoreNet Global.

Another, perhaps more important trend is the change in the workforce. As a greater portion of the work force moves from salaried to independent contractor status, will the home office become the "new normal" as the corporate headquarters becomes a smaller, more streamlined version of its former self? Countering this trend are recent announcements by companies such as Yahoo that have changed policies to encourage people to work at the office, believing that face-to-face collaboration and relationships, are essential to firm productivity.

Echo Boomer Housing Demand
The largest generation of young people since the 1960s are called "echo boomers" because they are the genetic offspring and demographic echo of their parents, the baby boomers. Born between 1982 and 1995, there are nearly 80 million of them, and they are having a huge impact on entire segments of the economy.

Echo boomers are drawn to the urban lifestyle, unlike their parents and grandparents, who fled cities for the suburbs. Typically, echo boomers gravitate to the urban core with access to diverse activities, cultural amenities, restaurants and, perhaps most importantly, greater employment opportunities.
They are willing to trade size for location and are moving into smaller housing units proximate to employment and affordable mass transit options. In many locations (such as the San Francisco Bay Area), echo boomers continue to work in the suburbs, yet choose to commute from the city. This generation tends to be renters and is not necessarily seeking, or financially capable of buying a home. A highly mobile generation, they are not chained to their automobiles, as were their predecessor generations. Walking, bicycling and car sharing are in their DNA.

These and related Echo Boomer trends are exacerbating many of the current problems confronting suburban locations due to decreased housing and retail demand, transportation problems, a shrinking tax base, and a variety of related issues. Yet suburbs are not standing still, as they reinvest in parks, bike paths, and mass transit, and identify creative new uses for obsolete shopping malls and other antiquated symbols of a suburban lifestyle, which, for a younger, less possession driven generation, has lost its appeal and affordability. (NREIOnline)  Two Top Issues

E-commerce by Robert Carr

E-commerce has finally hit adulthood, if measured by the launch of Amazon.com in 1995, but like any graduating teenager, its future is anyone's guess-though most industrial experts predict there's nowhere to go but up with the nation's distribution markets.

What has been measured, and fully appreciated by owners, developers and brokers, is how e-commerce has affected the industrial market. Ordering goods online grew to a $225 billion industry in 2012, and not only has launched a number of dot.com firms which rely solely on distribution space for goods, many major firms now need space to handle dual supply chains for both brick and mortar and e-commerce.

San Francisco-based Prologis said in its recent "Shape of the U.S. Industrial Recovery" report that, thanks to both e-commerce and a much-slowed cycle, national industrial average rents are expected to rise 25% in the next four years. Of the buildings going up, more than one-third of the build-to-suit requirements are for handling e-commerce needs, according to the report.

However, though it's agreed e-commerce has a large hunger for industrial space, it's still not clear how everything will play out, says Chris Caton, vice president and head of Prologis Research. The reason for the uncertainty, he says, is a problem that's plagued technology since its inception-compatibility.

"You've got large companies like Walmart, Sears, Best Buy or even Victoria's Secret, and though they are all moving toward using e-commerce more, none of them have the same supply chain organization," Caton says. "There's just no common thread to how to tackle e-commerce, there's a lot of questions that can be answered in different ways: Do you want to be within a certain percentage of the population within one-day shipping time? Or find property that's cheap and has room for enough parking for the workforce you need? Should you build new or reuse? There are so many requirements that go into the e-commerce model." (NREIOnline) E-Commere Explosion



According to a recent survey of more than 500 high-net-worth investors, 80% of respondents believe commercial real estate will match or surpass equity markets in terms of performance during the next five years. The survey, which was conducted by the Investment Program Association, also found that 45% of respondents plan to make non-listed real estate investment trusts part of their future portfolio and 24% expect to invest in business development companies. This represents a 15 percentage-point and 11 percentage-point increase, respectively, based on self-reported holdings.

"After the significant downturn in the real estate market, investors are now saying that the market has turned a corner," said Kevin M. Hogan, president and chief executive officer of the Investment Program Association. "In today's low-interest-rate environment, these ownership levels can help provide investors in non-listed REITs and BDCs with significant current income potential over a multiyear investment horizon." (CCIM)    

by Christina Mlynski

After spending five years as a commercial real estate broker, Michael Mandel knew the industry was desperately missing a critical component --transparency.

That lack of transparency in the market led Mandel to create CompStak, which uses crowdsourcing to create a comprehensive database of commercial real estate and lease information, he told HousingWire. After gathering nearly 100% of all lease comps signed in Manhattan in the past year, CompStak recently launched a database for the San Francisco Bay Area. And the company isn't stopping its expansion there.

CompStak announced Wednesday that it plans to launch its database in Los Angeles on June 1 and Washington D.C. on July 1. "We're really excited to be growing so rapidly -- both geographically and in company headcount," Mandel, CEO of CompStak, explained. "Los Angeles and D.C. are natural next markets for us, with over three billion combined square feet of commercial inventory in these regions."

The company is providing data to some of the biggest names in commercial real estate, including Tishman Speyer, Malkin Properties and Beacon Capital. "CompStak is bringing a level of transparency to the market that will be welcomed by the entire real estate community," said Zachary Aarons of Millennium Partners, a CompStak investor. Using a crowdsourcing model, CompStak offers a free service to commercial real estate professionals. Candidates who want to access the database must put in a request on the company's website and then the submissions are reviewed to make sure each participant is valid. When brokers submit information about commercial real estate deals, they get credit, which can be used to access details of other transactions. (Housing Wire) Crowdsourcing Comes To CRE

 by Frank Rolfe


Prior to my first mobile home park, I had never heard of the concept of seller financing of real estate. I just assumed that all mobile home parks had to be purchased using regular old bank debt. So you can imagine my shock when the seller said "I want $400,000 with $10,000 down and I'll carry the balance.
Not only was he going to carry the paper, but the down amounted to only 2.5% rather than the 25% that I would have thought to be the norm. My next four parks all followed this example, with down-payments ranging from 0% to 20%. My peers in other commercial real estate niches are endlessly dumbfounded as to how mobile home park buyers can pull this off. The truth is that seller financing is a win/win for all parties, and a very common element to this unique niche. For example, we recently entered into an $8.9 million deal in which one of the requirements was that the seller got to carry the paper, rather than get paid in cash.

Why is seller carry so common? To engage in seller carry, the seller must own the property free and clear. The mobile home park industry is one of the few remaining real estate niches in which the original builders of the parks are still the owners. Most paid their mortgages off several decades ago, and are free to do what they want - including structuring financing in any manner they desire. (NuWire Investor) Mobile Home Park Financing


One of the clearest trends in the future delivery of healthcare -- and therefore in the utilization and requirements for healthcare properties -- is the drive toward outpatient care. Technological advances and ever-greater specialization in healthcare services means that patients will be spending more health care time in facilities geared toward outpatient services and less time in overnight-stay facilities.

The trend takes care from its traditional delivery center -- the hospital -- and distributes it to localities. Patient trips are shorter and integrated into other day jaunts, property signage opportunities are highly valued, and local traffic patterns speak volumes about the success or failure of the modern outpatient healthcare facility. If any of these factors and trends sound familiar, it's because they resemble the retail property value proposition.

At the Real Estate Journal Healthcare Real Estate conference in Chicago last month, the blue-ribbon panel discussing Strategies In Medical Office Space acknowledged the retailization of the medical care delivery model in a variety of ways. It was agreed that efficiency and competition -- as odd as it may be to hear about these time-honored determiners of commerce in the context of healthcare -- will shape the delivery of health services going forward. (CommercialSource)  Retailization of Healthcare

by Randyl Drummer

The slow but steady progress in the recovery of the U.S. economy continued to present somewhat of a conundrum for the U.S. office market in the first quarter. On the one hand, despite moving in fits and starts, the recovery has helped stablize the office market and support relatively high property valuations. On the other, the modest job growth seen to date has yet to translate into meaningful demand for office space, so office rents have remained at 'discount' levels.

While average office employment is growing at a rate of a little over 2%, demand for space is growing at just half that rate. That apparent disparity between office job growth and actual demand for office space was perhaps the most telling indicator of the office market's performance in the first quarter of this year, according to CoStar Group's First-Quarter 2013 Office Review and Outlook.

In a striking example, Dallas/Fort Worth, a major office market is increasing jobs at a rate of almost 4%, while use of space is growing by only 1.4%, noted Managing Director Hans Nordby, who presented CoStar's first-quarter analysis, along with director of office research Walter Page and manager of U.S. Market Research Aaron Jodka.

For the next five years, CoStar's PPR division forecasts a 30% discount across the country between office-using job growth and demand for space. "We need to eat up a lot of excess space from the last cycle," Nordby said.

At the same time Nordby noted, "We think the office vacancy recovery is less than halfway done. We have more upside in occupancy in the office sector than any other property type that we track." (CoStar) Office Demand Catching Up



by Randyl Drummer

Even as the economy appears to be gaining traction thanks to the flood of low-cost stimulus money that has flowed through U.S. capital markets, commercial real estate executives and economists vacillate between wonder and dread.

In DLA Piper's annual temperature-taking of the CRE industry, 85% of senior executives at commercial real estate firms surveyed reported having a bullish outlook for the year ahead, reversing a far more pessimistic view two years ago at the dawn of the economic recovery. Driving that optimism for 56% of the executives is a combination of current low interest rates and abundant debt and equity capital. At the same time, just 40% named the improving U.S. economy as a reason for their bullishness.

Analysts and executives throughout the industry, including economists at CoStar Group, have spent considerable time in recent weeks thinking about what will happen when the Federal Reserve finally eases back on quantitative easing and, as CoStar managing director Hans Nordby put it, "interest rates start to get normal again."

This week, the Federal Reserve reiterated its plans to keep short-term rates at record lows until the U.S. unemployment rate falls to 6.5%, and continue buying $85 billion a month in Treasurys and mortgage bonds to keep long-term loan rates down. At the current rate, the Fed doesn't foresee the jobless rate falling to 6.5% until at least the end of 2015. (CoStar) Low Rates Cheap Capital

by Bendix Anderson

Commercial properties are taking on larger and larger loans relative to their stabilized income-and that could mean trouble down the road, according to a review by Moody's Investors Service of commercial mortgage-backed securities issued in the first quarter.

"We are beginning to see some signs of credit slippage," says Tad Philipp, Moody's Director of Commercial Real Estate research. However, Moody's also found some good news in the short-term for these loans: Because of low interest rates and strengthening property fundamentals, they shouldn't have much trouble making their monthly mortgage payments.

Conduit loans are now getting dangerously large compared to the income from the properties, according to Moody's, which rated four of the nine CMBS issuances in the first quarter. The loans Moody's rated (excluding Freddie Mac) had an average Moody's loan-to-value (MLTV) ratio of 98%. "Conduit loan leverage is now poised to bounce back to just above 100% in the second quarter based on the 11 transactions in our pipeline," Philipp says.

Most lenders base the size of a commercial mortgage on property values-but those numbers are often distorted by the ups and downs of the real estate cycle. Moody's methodology assesses the value of each commercial property it considers based on the stabilized income from the property and the historic relationship of income to property prices. Moody's believes that defaults become more common for loans that pass its 100% threshold. "Borrower equity gets pretty thin at 100%," says Philipp. (NREIOnline) Moody Warns Against High Leverage


Latin AmericaEconomic growth, including expansion of office-using companies in Peru, Columbia, Brazil, Mexico, and Chile, is spurring commercial real estate investment and transaction activity, according to Jones Lang LaSalle's Latin America Prime Office Market Overview.

"Strengthening economies, in several cases reflecting government efforts to boost stability and economic activity, are fueling demand for prime office space in a number of Latin American markets," said Shannon Robertson, regional director for Jones Lang LaSalle Latin America. "As developers answer the call for additional space with new construction, a few markets, such as Mexico City have experienced a temporary softening, but most of the region's growth markets have soaked up the new supply and still hunger for more space."

Positive growth trends are visible throughout Latin America, particularly in countries such as Peru, where direct foreign investors are expected to infuse $6.5 billion into the market this year. In Columbia, demand is outpacing supply, driving vacancy into single digits and drawing increased investor attention. And, in Santiago, Chile, a record-high 800,000 square meters of office space will be added by year-end 2014. (CCIM) Read More
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