E-Newsletter - May 31, 2013

Sacramento Association of REALTORS Commercial Banner
                                   May 31, 2013 

  

The two most powerful warriors are patience and time.
Leo Nikolaevich Tolstoy
Also In This Issue...
Regional Events
Legislation
Downtown Merchants Expect Arena Ripple Effects
Multi-Family Housing Market Picking Up
Positive Trends In CRE Market
Secondary Markets Win Multifamily Investors
Maybe The Worst Is Over?
Rising Online Sales Prompt Retail Shifts
Medical Office Boom Continues
Businesses Are Getting Used To Consistently Inconsistent Economy
Small Business Isn't Feeling Recovery
Consumer Confidence Soars
Public Project Construction Lagging
Downtown Retail Contest
Corporate Relocation Activity Picking Up
Will Building Boom End Party For Apartment Investors?
Industrial's Best Five-Year Return
CCIM Experts Lend Insight
Mexico's Real Estate Report

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COMMERCIAL REPORT FINDS CREDIT TO BE "UNNECESSARILY TIGHT

Things are looking up in the commercial real estate market, but financing remains a challenge for small businesses, according to the National Association of REALTORS®' quarterly commercial real estate forecast.


"The wheels appear to be greased for the big players, but not so much for small business," said Lawrence Yun, NAR's chief economist. "Despite the improvement for major commercial properties, 52% of REALTORS® report they had a commercial transaction fail in the past year due to a lack of financing. In addition, 42% of respondents said clients failed to complete a refinancing. Credit for small business remains unnecessarily tight."


The Commercial Real Estate 2013 Lending Survey, a companion report to the forecast, shows widely-varying access to lending capital depending on property size, with a significant disadvantage for buyers of smaller properties.


Commercial sales volume of major properties valued at $2.5 million and above increased 24% in 2012 to $294 billion. However, REALTORS® in the commercial sector reported that 85% of their clients' transactions are for purchases under $2 million-generally small businesses. These transactions are financed largely by private investors, along with local and regional banks, marking a bifurcation in capital availability based on property value, according to NAR.


Commercial members also reported that new and proposed legislative initiatives, as well as regulatory uncertainty for financial institutions, account for the lack of capital in commercial lending for smaller properties. (NAR)

CLOSER TO DROPPING DETAILED BIG-BOX STUDIES

by Ben van der Meer


Big-box grocery stores are closer to being easier to build in the city of Sacramento, after the planning commission approved last week, on an 11-1 vote, elimination of a 2005 ordinance requiring detailed studies for approval. The vote puts the issue before the Sacramento City Council's law and legislative committee next month, followed by the full council in July.


"It's definitely an immediate job creator," Joshua Wood, executve director of construction industry group Region Builders Inc., said, pointing out such stores, like Walmart Supercenters, attract other stores and generate thousands in sales tax dollars. City planners recommend removing the ordinance because it's out of alignment with an updated city planning and development code. (Sacramento Business Journal)  

REGIONAL EVENTS
Investment Forum

Tuesday, June 11 -- 7:30 a.m.

R.J. Grins at The Double Tree Hotel

E-mail  for additional information 

 

Sacramento Real Estate Exchange

 

Friday, June 21 -- 10:30 a.m. 

China Buffet in Citrus Heights 

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

  

CREW/BOMA June Program Featuring Rex Hime, President, CA Business Properties Association
Thursday, June 20 -- 11:30 AM - 1:00 PM
The Citizen Hotel

Information   

 

 

 

 

 

 

LEGISLATION  
How does this new law affect real estate professionals?
by William F. Becker Jr., CPA, and J. Bradley Campbell, CPA

The new 3.8% Medicare contribution tax on unearned income, effective for tax years beginning after Dec. 31, 2012, may directly affect many owner-operators and other real estate professionals.

Passed by Congress in 2010 as part of the Patient Protection and Affordable Care Act, the 3.8% Medicare contribution tax is imposed on the lesser of an individual's net investment income for the tax year or modified adjusted gross income in excess of $200,000 ($250,000 for married couples filing a joint return). If the Medicare surtax does apply, there is a particular impact on real estate investors and owners.

Net investment income includes net rental income unless it is derived in the ordinary course of a trade or business. Because some rental income is included in the definition of net investment income, it is important to understand the factors that may determine the imposition of the Medicare surtax. (CCIM) Full Story
  
DOWNTOWN MERCHANTS EXPECT ARENA RIPPLE EFFECTS WILL HELP THEM
by Mark Anderson and Kelly Johnson

Sacramento's sleepy downtown should get a much-needed jolt of energy from a new arena -- along with some new traffic headaches, say local business owners and residents.

"The arena will change the whole dynamics downtown," said Liz Tavernese, general manager of the 359-room Holiday Inn Capitol Plaza at 4th and K streets. She's been at the hotel for more than 20 years, and she can remember back when the west end of K Street Mall was flourishing. She anticipates a new hotel will be part of the arena development, and though that would mean competition, more importantly it would bring activity and people.

Restaurant owners near the arena also expect to see more business.

"The arena is great news. It is going to bring energy and nightlife downtown," said Neil Swinney, general manager of the steak house Morton's at 621 Capitol Mall -- a block from the arena site.
"Over the years, Sacramento has started and stopped having an active downtown and a busy nightlife. This will put us over the top," Swinney said.

Not only will the arena itself be a boon to the downtown, but businesses attracted by it also will energize the area, Swinney said. "The synergistic effects are going to be tremendous."  (Sacramento Business Journal) Dowtown Merchants
  
MULTIFAMILY HOUSING MARKET PICKING UP

Midtown Apts by Ben van der Meer


The market for multifamily housing is picking up, and Jim Drazenovich, senior investment adviser with Brittain Commercial in Sacramento, said it can be seen by the $2.8 million purchase of a Sacramento apartment complex last month by a Los Angeles-based investment group.


"There's a lot of interest, but there's not a lot of product," said Drazenovich, who said he's been doing apartment deals for 27 years. "A majority of sellers who need to cash out or want to cash out are waiting for the market to improve." Even then, or possibly as a result of tight supply, multifamily prices have gone up by 20% in the last year, he said.


Drazenovich, who handled the deal on behalf of the seller, a family trust, said it was on the market for about three weeks before he received five offers. "I'd say the activity was pretty strong," he said. (Sacramento Business Journal) Multifamily Market Picking Up

 

 

REALTORS® REPORT POSITIVE TRENDS IN COMMERCIAL MARKET WITH INCREASES IN INCOME, TRANSACTIONS

REALTORS® who practice commercial real estate have reported an increase in annual gross income for the third year in a row, signaling the market is on the road to recovery. According to the National Association of REALTORS® 2013 Commercial Member Profile, transactions and sales volume have also increased since last year.


The study shows median annual gross income for 2012 was $90,200, an increase from $86,000 in 2011 and is at its highest level since 2008. Brokers and appraisers reported the highest annual gross income while sales agents reported the lowest. The study's results represent REALTORS® who practice commercial real estate; these NAR members conduct all or part of their activity in commercial sales, leasing, brokerage and development for land, office and industrial space, multifamily and retail buildings, as well as property management.


"The commercial market is showing signs of improvement, which is reflected in the positive trends in income, transactions and sales volume reported by our REALTOR® commercial members," said NAR President Gary Thomas, broker-owner of Evergreen Realty in Villa Park, Calif. "This is a hopeful sign for the future. REALTORS® who practice commercial real estate build communities by facilitating investment and promoting the sale and lease of commercial space. There's no doubt that commercial market improvements will help spur economic recovery and growth for our nation."


Commercial members completed a median of eight transactions in 2012, up from last year. The median sales volume also increased from last year and was $2,507,700. Brokers typically had higher sales transaction volumes than agents. The median dollar value of sales transactions was $433,600 and the median square footage was 10,400. (NAR) Postive Trends 

 

SECONDARY MARKETS WIN MULTIFAMILY INVESTORS
by Bendix Anderson

Multifamily investors are finding lower prices and higher yields in secondary markets. "Markets that people gave up on are now markets that people are going back to," says Walter Page, director of research for Property and Portfolio Research, a division of the CoStar Group. "In most primary markets the average price per square feet is twice what it is secondary markets."

CoStar now expects to see the lowest average returns on real estate investments in prime markets like New York City and Washington, D.C. The highest average returns will come from investments in secondary markets, including the East Bay near San Francisco; Raleigh, N.C.; Portland, Ore. and Austin, Texas, says Page.

Before the crash, investors didn't get much of a boost to yield from buying properties in smaller markets. Cap rates for apartment properties in tertiary markets averaged about 7 percent in 2007, just a little higher than the average 6.5% cap rates in secondary markets and 6% cap rates in primary markets, according to John Sebree, vice president and national director of the national multi-housing group for Marcus & Millichap.

During the uncertain recovery, the cap rate gap between primary and secondary markets widened to 300 basis points as investors crowded into a few safe, core areas. Now more investors are venturing back into secondary markets. "Over the next couple of years that will compress," Sebree says. (NREIOnline) Multifamily Secondary Markets
  
MAYBE THE WORST IS OVER?

Worst 

RISING ONLINE SALES PROMPT RETAIL SHIFTS

Despite the 16.3% jump in online sales in 2012, development of brick-and-mortar retail rose approximately 9% year over year. However, there is a noticeable shift in the retail segments that have entered expansion mode, according to The E-Commerce Imperative, a new Cassidy Turley white paper.


The restaurant sector will account for 43% of planned retailer growth over the next 12 months, with approximately 15,439 new units scheduled to come on line in the next year. In the past, restaurants typically have been less than one-third of all planned growth, but "this dynamic has increasingly shifted in the face of e-commerce,"according to the white paper.


In addition, many retailers are embracing the concept of "omnichannel" retailing, shifting capital expenditure budgets away from new store development in favor of funding their e-commerce platforms. Read the white paper.


2013-14 Growing Retail Segments Projected:
Fitness, Health & Spa concepts; Drug stores; Thrift stores; Grocery stores; Fast food
2013-2014 Declining Retail Segments Projected:
Bookstores; Video stores; Do-it-yourself home stores; Mid-priced apparel; Mid-priced grocery

(Cassidy Turley) 

 

MEDICAL OFFICE BOOM CONTINUES

Medical office building (MOB) portfolio sales totaled more than $2 billion in 2012, and they're expected to match or exceed that level this year thanks to high demand and available capital, according to Jones Lang LaSalle.

 

Developers topped the list of sellers, with more than $3.8 billion in sales of MOB portfolios during the past six years. During the same period, public real estate investment trusts like Health Care REIT, Healthcare Trust of America, HCP, Healthcare Realty Turst, and Ventas emerged as the dominant buyers, accounting for almost 66% of all MOB portfolio acquisition volume.


"The zeal for medical office will continue unabated in the year ahead with seven portfolios comprised of six million square feet of property either closed, under contract, or in the market in just the first quarter of 2013," said Mindy Berman, managing director for Jones Lang LaSalle's Healthcare Capital Markets practice. "This gold mine in healthcare real estate keeps producing more material for the marketplace." (CCIM)
 

BUSINESSES ARE GETTING USED TO THE CONSISTENTLY INCONSISTENT ECONOMY
by Jeff Stibel

World economies are unstable, making it increasingly difficult to lead a business over the past few years. The uncertainty that business leaders face today is palpable. Some of the news is good, some is bad, but it is altogether uncertain and seemingly random. On one hand, there are wars, terror, market crashes, bailouts, budget crises, cliffs, and sequesters. Yet we also have higher corporate profits, positive consumer sentiment, and low interest rates. This is part of the reason that the stock market, which used to move a fraction of a percent each day, now shifts in record swings with increasing volume. Yet as the global recession continues into its fifth year, there are signs that businesses are adapting.

The brain doesn't like volatility, so it struggles to find a new "normal." Often, after years of abuse, victims no longer recognize that they are being abused. The brain normalizes the abuse. An extreme version of this is Stockholm syndrome, so named after a Swedish bank robbery in 1973, in which after only five days of being held hostage, the victims identified with and defended their captors. On a smaller scale, the brain treats any kind of volatility as stress. In fact, the brain is well-equipped to manage short-term stress: it releases adrenaline, raises the heart rate, and makes us more alert so we can handle whatever situation is causing the stress. Long term, however, the brain isn't made to cope with stress. Long term stress causes fatigue, irrational behavior, and myriad physical ailments. In order to keep the mind and body safe from these effects, the brain attempts to normalize any kind of long-term stress it encounters.

Volatility and stress are as bad for business as they are for the brain. Business owners often pull back when faced with challenges like political instability, market inconsistency, and fluctuating consumer confidence. That means that they simply avoid making important changes in hopes of receiving more consistent information down the road. Over time, however, businesses become accustomed to bad news and adjust: Stockholm Syndrome Incorporated.

Today, the environment in which businesses must operate has become consistently inconsistent and predictably unpredictable. (Harvard Business Review) Consistently Inconsistent Market

 

EXCLUSIVE CNN SURVEY: SMALL BUSINESS ISN'T FEELING RECOVERY
by Parija Kavilanz

Small business owners say they're not yet feeling the effects of an improving economy, and most aren't rushing to hire, or seeking funds to invest in their businesses.
 

In an exclusive CNNMoney survey about the state of small business today, more than a third of owners polled said the U.S. economy is in better shape than last year. But most say their own customers aren't spending freely, and only 40% are reporting stronger sales.

 
No wonder just 14% said they're adding more workers than last year, while two-thirds aren't hiring at all. "Business is too unstable," said one respondent. "I can't afford to hire anyone else at this point." Most (65.6%) aren't seeking additional financing either.

Entrepreneurs cite the economy (31%) and increasing costs of doing business (23%) as the issues weighing most heavily on their minds. Because of those two factors, "small companies have to take a greater hit to the wallet to compete with big businesses," wrote one respondent. "It's almost better to have a nine-to-five job than to be your own boss."


Others mentioned regulations (16%) as their biggest concern. Taxes were a popular write-in vote, although the survey didn't specifically list that option.

 

Health care is another issue that's top of mind for small firms. But the survey results showed that many business owners are still trying to understand what effect Obamacare will have on their companies. Only 10% of respondents said the health care law would help them, while 38% of respondents said it will hurt. The rest said it wouldn't affect them or didn't know what impact it will have.

 

Despite the challenges, 63% said they consider the United States to be the best place to open a small business. Many cheered the benefits of a free-market economy. Others said there are lots of resources here, making it relatively easy to launch a start-up. "There's not another country in the world where small business has the multitude of opportunities like the U.S.," said one owner. Another said: "This country was built for business." (CNN Money)  

CONSUMER CONFIDENCE SOARS TO HIGHEST LEVEL IN FIVE YEARS
Consumer confidence by Kent Hoover
  
Consumer confidence jumped by more than 7 points this month to 76.2, the highest level in more than five years for the Conference Board's monthly index.
  
"Consumers' assessment of current business and labor-market conditions was more positive, and they were considerably more upbeat about future economic and job prospects," said Lynn Franco, director of economic indicators at the Conference Board. "Back-to-back monthly gains suggest that consumer confidence is on the mend and may be regaining the traction it lost due to the fiscal cliff, payroll tax hike and sequester."
  
Despite this improvement, however, more consumers think business conditions are bad instead of good. Only 19.2%  think business conditions will improve over the next six months, up from 17.2 percent in April. And more than 12% expect the economy to get worse.
  
But consumers have a rosier outlook on the economy than do small businesses, at least based on the latest monthly survey by the National Federation of Independent Business. That survey also found that an increasing number of NFIB members expect the economy to improve in the coming months, but a majority still feel the economy is going to get worse, not better.
  
PUBLIC PROJECT CONSTRUCTION LAGGING ECONOMIC RECOVERY

by Ben van der Meer


Tom Holsman, CEO of Associated General Contractors of California, said he's guessing it'll be a couple years before public projects employ members of his organization in large numbers again.
Though construction for homes is picking up and many think a full-blown economic recovery is underway, Holsman said state and local governments, which felt the backlash from the economic downturn when tax revenues shrank, are still holding back.


"The bond money is running out, the state coffers are out," said Holsman, whose office is in West Sacramento. One estimate he's heard suggests man-hours in heavy civil engineering, the type of work that goes into building roads and other infrastructure, are down by as much as 12% from a year ago.


Still, there are other places contractors are finding work, he said. As homebuilders start laying out new neighborhoods, contractors will be with them to put in streets, sidewalks, sewers and streetlights, Holsman said.


Other contractors are moving straight into private jobs, and a trend to keep an eye on, Holsman said, are public-private partnerships where large companies are taking on projects themselves and working out the finances with a public entity over time. "We're going to see more of that because we don't have the money for all the needs right now," he said. (Sacramento Business Journal)

 

DOWNTOWN RETAIL CONTEST DRAWS 49 APPLICATIONS
by Kelly Johnson

Downtown Sacramento Foundation's inaugural retail business competition received 49 applications by last Friday's deadline.

Now the foundation, a sister organization of the Downtown Sacramento Partnership, will review the applications submitted by those entrepreneurs who have an idea for opening a retail storefront business in downtown. Those entries will be narrowed to 10 to 15 semi-finalists, Valerie Mamone-Werder, the Partnership's business recruitment manager, said in an email.

The big prize for which those applicants are vying has a value of about $135,000. The prize includes free rent for a downtown spot for up to a year, startup capital and business support services. The goal of the contest, named Calling All Dreamers, is to jump-start business development in the central city and support someone's next big idea for downtown.

Each of the entrepreneur semi-finalists also will get some guidance from veteran business people. Sacramento SCORE, the nonprofit that provides free business counseling and workshops, will provide each semi-finalist his or her own SCORE mentor who will assist in refining the business concept to make the proposal as strong as possible. (Sacramento Business Journal)
CORPORATE RELOCATION ACTIVITY PICKING UP AS BUSINESS CONFIDENCE RISES

As business confidence in the economic recovery deepens, corporate c-suites are at least thinking about when and where to expand their operations.


Although the evidence is largely anecdotal so far, commercial real estate brokers and corporate site selection consultants tell CoStar they've noticed a general increase in the number of corporate expansions and headquarters relocations after sitting on their hands through the recession and early recovery.


Prompted by a variety of motives ranging from cost-cutting consolidation stemming from mergers and acquisitions, to seeking big tax incentive packages from states and local government, to intense competitive in the recruitment of talented employees, companies seem more willing in recent months to consider expansion and relocation as an alternative, both within and outside their current real estate footprints. Cases in point include Hertz's planned relocation of its headquarters from New Jersey to Florida, MetLife's consolidation of facilities across the country into Charlotte and Raleigh-Durham, N.C.; and Google's purchase and relocation of Motorola Mobility from Libertyville, IL in suburban Chicago to the downtown Merchandise Mart.


Although corporate headquarters relocations remain a relatively small portion of total relocation and expansion activity, "because there is increased activity in all expansion/relocation projects throughout the U.S., there has been a slight increase in headquarters related activity," said Kathy Mussio, managing partner with Atlas Insight, LLC, who has focused on securing incentives and tax credits for development and expansion projects since the late 1990s. (CoStar) Relocation Activity

 

WILL BUILDING BOOM END THE PARTY FOR APARTMENT INVESTORS?

by Randly Drummer


Apartment developers and investors likely can look forward to enjoying another year or two of high occupancy and pricing power in a strengthening economy. But the music may stop by 2015 when the full brunt from the growing wave of new supply is expected to be felt across U.S. markets.


For now, the good times continue to roll. Multifamily pricing continued to post the strongest results of all product types during the first quarter, though there are signs of a deceleration in apartment fundamentals, mainly as a result of growing new supply, according to the latest CoStar Commercial Repeat Sale Indices (CCRSI).


The multifamily index gain of 0.8% in the first quarter was the best of the four major property types -- but a notable decline from its quarterly average of 3.2% over the last two years, according to the CCRSI.


The apartment sector's impressive performance has been driven in part by stronger fundamentals and in part by the free and easy activity of lenders, especially Fannie Mae and Freddie Mac lenders, the government-sponsored enterprises (GSEs) that have provided cheap debt for investors. 


Much of that readily available financing has been used to buy multifamily property. But increasingly developors have jumped at the opportunity to build, especially with the diminished demand for new office and retail space. (CoStar)  Will Building Boom End?

 

INDUSTRIAL DIGS UP BEST FIVE-YEAR RETURN

CMBSThe Pension Real Estate Association forecasters see the industrial sector providing five-year returns of 8.5% annually, the highest of all property sectors, according to its 1Q13 Consensus Forecast survey of the NCREIF Property Index. In addition, while multifamily returns are forecast to reach 9% this year, they decline going forward to provide a five-year average of 8.1% annually. Office and retail follow with five-year average returns of 8% and 7.9% respectively. PREA firms surveyed include 28 large investment and adviser commercial real estate companies.
 
"The growth trajectory should accelerate in 2014 with GDP growth ranging between 3 and 4%. Finally, after four years of sluggish growth, a very healthy U.S. economy is poised to emerge." - Kevin Thorpe, chief economist, Cassidy Turley. (CCIM)

 

CCIM EXPERTS LEND INSIGHT AT REALTORS® COMMERCIAL TRENDS FORUM
Two CCIM experts offered perspectives on the commercial real estate market's recovery during the REALTORS® Midyear Legislative Meetings & Trade Expo in Washington, D.C., May 16. Thepanelists who participated in the session expressed optimism and a favorable outlook for recovery, despite slow economic progress in the U.S.

The resurgence of capital flow is slowly spurring increased transactional activity across the country. "There's capital available out there," said panelist Daniel Sight, CCIM, vice president and broker for Reece Commercial. "My feeling is that credit has opened up, but it still helps to have a healthy down payment and good credit history."

Regional and local banks and credit unions continue to be key financing sources, but regulatory and legislative impacts of the Dodd-Frank Wall Street Reform and Consumer Protection Act are impacting the ability to finance deals in the U.S. real estate market, according to NAR reports.
Panelist Lawrence Yun, chief economist for the National Association of REALTORS®, said the U.S. is currently in a "unique" recovery phase. "Commercial real estate is dependent on the American economy and with an uneven recovery the market still has a way to go before a full recovery," Yun said. However, overall commercial real estate property sales volume is slowly rising with many markets seeing year-over-year gains.

In a live audience poll during the session, 58% of attendees said they believe commercial real estate will improve in 2014. Yun concurred noting that improved confidence among business owners could help to advance the economy's recovery. (CCIM) 
  
MEXICO REAL ESTATE REPORT

mexico A recent report on Mexico's real estate examines the commercial office, retail, industrial and construction sectors throughout the countrysince the election of business-friendly Enrique Peña Nieto.


According to the report, commercial rental growth in Mexico had been fairly stable, particularly in the office and industrial sub-sectors. Minimal growth in rents is expected over the course of 2013 amid a continued slowdown in the U.S. that has increased caution amongst international investors. Nevertheless, an overall positive view about the potential of the commercial real estate sector in Mexico is projected.


Mexico's construction industry continues to progress along a robust growth path and the outlook is the most stable in the Latin America region. The election of Enrique Peña Nieto spells good news for the construction sector growth, given NIeto's history as governor of the State of Mexico, where he presided over an ambitious infrastructure build-out and attracted private investors. Growth is anticipated to remain around 4-5%.


An increase in private sector involvement is expected and an invigorated National Infrastructure Plan (NIP) will bolster activity from 2013 onwards. Mexico is expected to continue to moderately outperform the region. However, structural inefficiencies -- especially those evident in the residential housing market -- will persist to curtail growth in the sector.


Manufacturing will likely continue acting as the main driver of growth over the coming decade. It is anticipated that Mexico will begin transitioning toward a more services-oriented economy, with stronger consumer activity boosting the country's economic outlook and retail segment.

(Small Business Newswire) 

 

  
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