Promus Commercial Real Estate News

December 2010

Commercial Real Estate Is Strong…Except When It Isn’t

In a market like we’re currently experiencing, things literally can change from one day to the next. So we won’t kid you – it’s not always pretty out there, but there IS reason for hope.

Let’s start with the bad news. Ken Simonson, Chief Economist of the Associated General Contractors of America reports office, industrial and retail rental markets nationwide remain weak, though there are some reports of slight increases in parts of the east and midwest. “Given lackluster demand for commercial space, nonresidential construction activity has been limited to mostly public projects.” Mr. Simonson says, adding “The commercial real estate and construction sectors will remain weak for some time, with commercial real estate lending remaining subdued and loan standards still tight.”

This sluggishness is supported by a report by CoStar Group. They show an historically high industrial vacancy rate in Q3 (10.5%), with countywide monthly asking rent during the quarter down 81 cents per square foot – 13% lower than a year ago. This helps explain why construction employment is off by 500. Still, we find a silver lining there since San Diego construction employment is only one percent lower than it was a year ago – a far cry better than in many other locations around the state.

As we learned all this we discovered the San Diego Business Journal is finding evidence of a gradual commercial property recovery, and the region is seeing a slow switch from negative to positive net absorption. “There’s a perception out there that we’ve reached the bottom of the market,” says James Duncan of Cushman & Wakefield.

As observed by the Journal, though, there’s a huge game of musical chairs being played by tenants moving around for the best deals. Landlords are vying for tenants with leasing price breaks, periods of free rent, improvement allowances, and other incentives.

And lest we forget, there’s way more real estate investment capital in the region than a year ago. Most of it is taking a long-term view, according to the National Association of Industrial and Office Properties. And while “There aren’t steals out there at 25 cents on the dollar,” according to Tim Hennessey of Real Estate Investors, some well-capitalized investors are finding selected bargains at good prices relative to replacement value.

The National Association of Real Estate Investment Trusts has also announced that equity REITs delivered a 19.1 percent return for the first nine months of 2010, compared with 3.89 percent for the Standard & Poor’s 500 stock index.

In terms of the larger real estate investment market, local experts continue to say it could be two or three years before investors are getting what have historically been considered normal returns on their investments. This makes sense when considering the Urban Land Institute study projecting the extend-and-pretend mindset will start to run its course in 2011, as recovering lenders take selected losses and post write-offs on lingering bad loans.

From what we see, this climate will favor cash-rich and well capitalized borrowers over those who are overleveraged. And look for big lenders to capture market share at the expense of small banks.

Bottom line – If you’ve kept your powder dry, you’ll have plenty of options. Expect your short-term returns to be moderate, but solid, long-term returns are definitely to be had in the marketplace.

Need some advice on what kinds of properties might make sense for investing in? Call us in for a free exploratory assessment.

Back to Top

Future Trends

A survey and study completed this past summer by SANDAG (the San Diego Association of Governments) has helped lay the groundwork for transportation throughout the region for the next 40 years. Examining issues like transit and freeway spending priorities, greenhouse gas levels, and incentives for using alternative transportation, this 57-page report is available at www.sandag.org, and a must-read for anyone trying to plan the future of their business.

The primary purpose of this report was to keep SANDAG aware of the issues that matter to people who live in the region. 1,200 people who live and vote in the region were randomly selected to provide their opinions about how transportation issues should be addressed in the county.

Upon completion, these were some of the conclusions arrived at:

• The overwhelming majority of San Diego residents rate the quality of life in San Diego as excellent or good. However, they believe the region’s transportation system can be improved. Only 42% rated the overall as good or excellent.
• The single highest priority for future investments and improvements is the public transit system.
• respondents assigned the highest priority to removing bottlenecks in freeways where lanes merge together and cause congestion
• Most San Diego residents feel at least somewhat informed about the relationship between greenhouse gases and climate change
• San Diego residents strongly favored projects that improve the efficiency of the existing transportation system or positively encourage individuals to reduce their use of a personal vehicle.
• Half of San Diego residents indicated that, realistically, they are willing to reduce the amount that they drive during the next six months through carpooling, taking transit, trip linking, riding a bicycle, and walking
• While unpopular, raising parking fees seems to hold serious potential for increasing the use of alternative modes of transportation among commuters who currently drive solo.

This information is currently being digested by SANDAG, the parking commission, and a variety of other governmental organizations, and is sure to have an impact on the way your tenants think in the future.
Because of this, we strongly recommend you also take the time to review the actual study and absorb all it has to say.

Back to Top

Women in Commercial Real Estate

The Commercial Real Estate Women Network (CREW) has released a study showing 7% more women in real estate than in 2005.

Long dominated by men, the industry is showing a greater number of women pursuing careers in commercial real estate. The study also revealed a number of other important findings, such as:

• An increasing number of women with five years or less of experience
• An increasing number of women with over 20 years of experience.
• A narrowing wage gap between men and women. 11% of women surveyed earn $250,000+/year, while 31% of men earn the same amount. These figures are 3% higher for women, and 3% lower for men, than in 2005.
• Men still earn more overall compensation from bonuses and stock options, but 9% of both men and women are likely to report a higher percentage of their total compensation is drawn from base salary than five years ago.

This study is the second in-depth review of gender in commercial real estate. The first such study was completed in 2005.

Commercial Real Estate: 2010 is a follow-up to the first ever in-depth look at the issue of men and women in commercial real estate, which was conducted by CREW Network in 2005.

“We are encouraged that more women are finding opportunity in commercial real estate,” said Kristin E. Blount, 2010 CREW Network President as the study was released. She added “Compensation and advancement issues remain, but these may be a reflection of differing long term goals with respect to men and women, as reflected by our questions on this topic. At the same time, it remains an issue that is important to understand fully and will be the subject of ongoing study.”

Community Recovery & Enhancement Act Dies

The Community Recovery & Enhancement Act of 2010 (H.R. 5943) – introduced this past July 29 by Democratic Rep. Shelley Berkley of Nevada – has died in the House Ways and Means Committee.

The legislation was developed to provide a market-based incentive for private business investments at a time when many commercial property owners and others are still recovering from the economic downturn and are in need of private capital.

“Communities across the nation have seen a downturn in commercial real estate as a result of the economic collapse,” said Berkley when the legislation was originally introduced as an incentive for private investment in commercial property to fund improvements and allow owners to pay down loans.

With many banks struggling with their commercial real estate loan portfolios, this bill was supposed to provide an incentive for investments in shopping centers, office buildings, malls and other commercial real estate.

Back to Top