Happy Holidays

We wish you all a very Merry Christmas and a Happy and Prosperous New Year.  We are looking forward to a truly great 2013.  We believe the year will provide an opportunity for great business and personal growth for both us and all our business partners.

Interesting 2nd Half

This fall has proven to be very interesting so far.  At CCRB we are experience quite an uptick in activity, especially leasing.  Office, industrial and even retail has been more active than in the last several years, this despite the cry that "no one is doing anything until after the election".  Perhaps the big boys are waiting, but for our segment of the business, our clients can't wait, they need space now.  The expansion mode has cut across a number of industries, but more concentrated in the service area, from insurance companies, to ad agencies to the food service sector.  I attended a seminar given by CoStar that summarized office activity throughout the U.S.  They indicated that in general office activity is holding its own, growing steadily certainly by no means at a break neck speed but consistently.  Certain sub markets are growing faster than others, such as those associated with energy and technology.  It was interesting to note that New York, Manhattan is very healthy and yet across the river in New Jersey just the opposite is occurring.  Here in the Chicago area we are pretty much in the middle of the pack.  Next week I will be attending the seminar summarizing Q3 Industrial results.  Should be interesting.

May was a very hectic month for us at CCRB especially with the wedding of Jim Dunbar at the end of the month. There were lots of things happening and little time write about it or look for some interesting articles about commercial real estate.
Here we are in June and I found an article in Co-Star which bears out what we have been seeing in the market place over the past few months.  We have been working with a number of smaller businesses looking for properties and in the past these searches could last a long time since the market provided no sense of urgency, properties for sale or lease could remain on the market for months or longer.  Now, we are seeing changes, a number of the properties selected by our clients as worth pursuing are suddenly no longer available- under contract!  This is providing some urgency and even though we are tenant and buyer reps it helps us because it is one more factor that can help speed up the decision process. Here is the article:

Pace of Recovery Accelerates For Lower-End CRE Properties
Findings Point To Improving Market Conditions Across The Entire Commercial Property Market, Not Just Trophy Assets In Top Metros
By Randyl Drummer
June 13, 2012

CRE investors are stepping up their efforts to find value outside the best buildings in the top U.S. metros, casting their nets in a growing number of secondary markets and asset types as price growth slows for the highest-end properties, according to this month's CoStar Commercial Repeat Sale Indices (CCRSI) report.

For the past two years, pricing gains in the value-weighted composite index have been consistently stronger than its equal-weighted counterpart, suggesting that prices have recovered more rapidly among the larger and more expensive assets. Market fundamentals have also recovered more quickly at the top end of the market, where demand for Four-Star and Five-Star office buildings, luxury apartments, and modern big-box warehouses has outpaced the overall market.

However, the most recent data shows that the pricing momentum appears to be shifting from the larger, more-expensive buildings to the broader market, dominated by smaller, less-expensive properties.

The value-weighted composite index's 6.5% year-over-year gain in April slowed from its double-digit growth rate throughout 2011.

The April pricing data, based on 774 repeat sales during the month and more than 100,000 repeat sales since 1996, included the public release for the first time of analysis of CoStar's value-weighted U.S. Composite Index, which provides additional insight into CRE price movements, especially for larger institutional transactions.

The value-weighted composite index, along with the equal-weighted U.S. Composite Index -- the two broadest measures of aggregate CRE pricing within the CCRSI -- posted a decline of 2.2% and a 1% gain from the previous month, respectively, in April. Although the two indices reflected a mixed picture for prices in April, both improved from the same period a year ago.

CoStar has been tracking price changes on both an equal-weighted and a value-weighted basis since developing the CCRSI in 2010. While both indices include the same repeat sale transactions, the different weighting methods offer deeper insight by analyzing price movements in different ways.

The equal-weighted index weighs each repeat sale equally and is heavily influenced by the more numerous smaller deals. The value-weighted index weighs each sale by transaction size or value and is heavily influenced by larger transactions.

While an equal-weighted index is considered more relevant for measuring the performance of average commercial properties, a value-weighted index correlates better to marketplace capital flows necessary for larger transactions.

For the first time in the current recovery cycle, the equal-weighted index has accelerated its year-over-year growth over the past six months, showing that investors have begun to look beyond large, core properties to the lower end of the market.

As CRE prices rise, transaction volume and many other measures of liquidity are also improving. Over the past 12 months ended April 2012, sale-pair counts increased by 19% over the previous 12-month period ended in April 2011. The growth was slightly tilted toward the investment grade segment of the market, which posted a 25% increase in pair counts over that period.

In other CCRSI findings in April:

Transaction data shows that European investors have played a key role in improving liquidity. The share of commercial property purchases by European buyers in 2012 has more than tripled from 2011 levels, a signal that investors may be seeking safe havens in the midst of the Eurozone economic turmoil.

Commercial property sellers are finding a more accommodating market in 2012. Average time that properties are on the market prior to sale has decreased this year for the first time since the start of the Great Recession. Also, the gap between the initial asking price and final sales price narrowed over the first four months of 2012 at its fastest rate since 2006.

The level of distress property sales has been generally declining as a percentage of property sales volume over the past 12 months. Only 24.3% of observed trades in April 2012 were distressed, 12.2% lower than the peak level observed in March 2011.

In related news, the Federal Reserve announced that the June 7 release of the U.S. Flow of Funds (FOF) Z.1 Statistical Release, which measures aggregate assets and liabilities for the nation’s financial and non-financial sectors, now incorporates the CCRSI as a measure of value of the nation’s CRE and apartment buildings.

The Fed decided to drop the index from NCREIF (National Council of Real Estate Investment Fiduciaries) in favor of the CCRSI, saying in its release that the CoStar indexes "offer much broader coverage of these markets" than either the NREI (National Real Estate Investor) or the NCREIF indexes."

Small Businesses Driving the Office Leasing Market

While the perception is that office space leasing is dominated by the large 50,000 + square foot deals that make the news, the reality is that it is the small businesses leasing the 2000 square foot space and less that is driving this market. Those large deals that get all the splash represent less than 1% of the current market according to Co-Star.  Below are highlights from a recent article by Randy Drummer of Co-Star.

“The rebound in office-using jobs is spreading to smaller businesses, which dominated office leasing activity during the first quarter of 2012. The continued positive absorption, coupled with dwindling supply of available space, is setting the stage for resumed rent growth in U.S. markets over the next few years, CoStar Group reported this week in its First-Quarter 2012 Office Review & Outlook.

While overall job growth has been less than expected, the economy is converting the number of temporary jobs to permanent fulltime jobs at a faster clip and employees are working a greater number of hours on average, trends that bode well for office demand and rent growth over the next three years, the CoStar economists reported. If job forecasts hold up, the unemployment rate will fall to its long term of average of below 6% by 2015.

Leasing is now dominated by smaller tenants, with over 50% of transactions involving blocks of space measuring 2,000 square feet or less in 2011. At the same time, large tenants are very rare in the market, with transactions over 50,000 square feet representing less than 1% of total activity, according to new data generated by PPR and CoStar.

Tenants are also becoming more efficient in their real estate usage, with footprints on new leases down 6% over the last 10 years. While Class A tenants have seen a modest 3% increase in square footage, the amount of Class B space taken is down by 5% and Class C space down 13%.”

Commercial Real Estate on the Move

ULI: Consensus of Economists Sees Promising CRE Outlook Through 2014

CMBS, Investment Transaction Volume Likely To Jump Sharply As Economy Gains Steam

By Randyl Drummer

March 28, 2012

Even among the stream of positive real estate surveys and forecasts recently, the one issued this week by the Urban Land Institute (ULI) stands out. Expressing the consensus views of 38 leading real estate economists and analysts from across the U.S., ULI reported commercial real estate market conditions and the overall economy is expected to see broad improvement over at least the next two years as the recovery cycle kicks into overdrive and shifts into growth mode.

In other key highlights. the ULI forecast expects CRE transaction volume to increase by nearly 50% over the next three years, while issuance of commercial mortgage-backed securities (CMBS) is expected to more than double. Institutional real estate and real estate investment trusts (REITs) are expected to provide returns ranging from 8.5% to 11% annually through 2014.

Hans Nordby, managing director, and Shaw Lupton, senior real estate economist, for CoStar Group's forecasting and analytics company, Property and Portfolio Research (PPR), were among those consulted on the forecast, which generally dovetail with PPR's baseline forecast for the recovering market over the next three years.

The general theme during a ULI webinar presenting the findings on Wednesday was one of growing confidence that, as ULI Chief Executive Officer Patrick L. Phillips put it, "The U.S. real estate economy has weathered the brunt of the recent financial storm and is poised for significant improvement over the next three years. These results hold much promise for the real estate industry."

According to the consensus, vacancy rates are expected to drop in a range of between 1.2 and 3.7 percentage points for office, retail, and industrial properties and remain stable at low levels for apartments, with rising occupancy also expected for hotels. Rents are expected to increase across the board this year at rates ranging from 0.8% for retail up to 5% for apartments.

On the residential side, housing starts are projected to nearly double by 2014, and home prices will begin to rise in 2013, with prices increasing by 3.5% in 2014.

Although the findings came with a message of caution that geopolitical and global economic events could alter the forecasted growth trajectory, the strong projections are based on a promising outlook for the U.S. economy, with surveyed economists expecting real gross domestic product (GDP) to rise steadily from 2.5% this year to 3.2% in 2014, and unemployment falling to 6.9% by 2014. The heating economy will likely lead to higher inflation and interest rates, raising the cost of borrowing for consumers and investors, however.

ULI conducted the survey, a consensus view that reflects the median forecast for 26 economic indicators, in late February and early March. Comparisons are made on a year-over-year basis from 2009 during the recession through 2014.


U.S. Retail Sales Rose in Feb. by Most in 5 Mos.

By Shobhana Chandra - Mar 13, 2012 3:23 PM CT

Americans heartened by an improving labor market boosted spending at stores and malls by the most in five months, adding to signs that the world’s largest economy is gaining strength.

The 1.1 percent advance followed a 0.6 percent increase in January that was larger than previously estimated, according to Commerce Department data issued today in Washington. Sales rose in 11 of 13 categories, including auto dealers and clothing stores, showing gains in demand were broad based.

Stocks and bond yields rose as the report indicated that the best six-month streak of employment growth since 2006 is bolstering spending even as gasoline costs rise. Job gains have not been large enough to satisfy Federal Reserve officials, who today reaffirmed a commitment to keep interest rates low.

Consumers are “unfazed by higher gas prices,” said Jonathan Basile, an economist at Credit Suisse in New York, who correctly forecast the increase in spending. “This is a pleasant surprise on the overall picture for the economy. For the Fed, it’s steady as she goes. They will be encouraged, but there is still a long way to go.”

The Standard & Poor’s 500 Index (SXP) climbed 1.8 percent to 1,395.96 at the 4 p.m. close in New York. The yield on the 10- year Treasury note increased to 2.13 percent from 2.03 percent late yesterday.

The gain in sales last month matched the median forecast in a Bloomberg News survey of economists. Estimates ranged from gains of 0.5 percent to 2.1 percent. The Commerce Department revised the January increase from a previously reported 0.4 percent advance.

Gap, Target

Sales at chains like Gap Inc. (GPS) and Target Corp. (TGT) last month beat analysts’ estimates. Williams-Sonoma Inc., the biggest U.S. gourmet-cookware chain, said demand improved at the start of the year following the holiday shopping season.

“Post holiday, we saw a progressively stronger retail environment,” Laura Alber, chief executive officer of the San Francisco-based company, said on a March 8 conference call. The company reported record earnings for 2011.

Sales increased 1.6 percent at automobile dealers, reversing the prior month’s drop, today’s report showed. The results fell short of industry figures that showed an even bigger gain.

Cars last month sold at the fastest pace in four years, led by Chrysler Group LLC and a surprise gain from General Motors Co. (GM) Light-vehicle sales accelerated 6.4 percent from January to a 15 (SAARTOTL) million annual rate, the strongest since February 2008, according to Ward’s Automotive Group.

‘Pent-Up Demand’

“There are a number of factors that are helping release this pent-up demand,” Don Johnson, vice president of GM’s U.S. sales, said on a March 1 conference call with analysts. “They include stronger employment, good credit availability, and both of those are leading to improving consumer sentiment.”

Automobile stockpiles jumped by the most in more than a year in January, leading a 0.7 percent increase in business inventories, the Commerce Department said in a separate report today.

Retail sales excluding autos increased 0.9 percent in February, exceeding the median forecast of economists surveyed that called for a 0.7 percent gain.

The sales data, which aren’t adjusted for inflation, reflected a 3.3 percent jump in receipts at service stations, the biggest gain in almost a year, as gasoline costs climbed. Regular (3AGSREG) fuel in February averaged $3.56 a gallon, or 18 cents more than January, according to AAA, the nation’s biggest auto organization. It advanced further this month, reaching $3.81 on March 12, the highest since May.

Clothing Stores

Purchases at clothing stores rose 1.8 percent, the most since November 2010. Furniture and general merchandise stores were the only categories to show a decrease in demand.

Employment and income gains are giving consumers the confidence to spend more. The Bloomberg Consumer Comfort Index rose to an almost four-year high in the week ended March 4.

Employers boosted payrolls more than forecast in February. The 227,000 increase followed a revised 284,000 gain in January that was bigger than first estimated, the Labor Department reported on March 9. The jobless rate held at a three-year low of 8.3 percent.

Job openings were little changed in January, capping the best back-to-back months since mid 2008, a signal businesses remain confident about the economic expansion, other figures from the Labor Department showed today. The number of positions waiting to be filled totaled 3.46 million, down from a revised 3.54 million in December that was higher than previously estimated.

Pay Increases

Worker pay jumped in the last six months of 2011 by the most in almost five years, helping households squirrel away some extra cash. Americans saved 4.5 percent of their after-tax income in the fourth quarter, up from a prior estimate of 3.7 percent, according to Commerce Department data.

Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York and a former Fed researcher who specialized in consumer spending, projects Americans will boost purchases at a 3 percent annual rate in the second half of the year after a 2.5 percent gain in the first six months.

Investors have driven up retailers’ shares as the job market heals. The Standard & Poor’s Supercomposite Retailing Index, which includes Gap and Macy’s Inc., has climbed 15 percent this year through yesterday.

GDP Calculation

Excluding autos, gasoline and building materials, which are the figures used to calculate gross domestic product, retail sales rose 0.5 percent in February after a 1 percent increase in the previous month.

Fed policy makers reiterated a plan to keep interest rates low at least through late 2014 after meeting today. Chairman Ben S. Bernanke, in his semiannual monetary policy report to Congress, said maintaining monetary stimulus is warranted even with employment gains and a lower jobless rate.

While there are “some positive developments in the labor market,” Bernanke told lawmakers on March 1, “the pace of expansion has been uneven.” The rise in gasoline prices “is likely to push up inflation temporarily while reducing consumers’ purchasing power,” he said.

He who hesitates is lost

Landlords Poised to Regain Upper Hand In Recovering Office Market

2011 Sees Office Leasing, Sales and Pricing Improve Amid Growth In Office Jobs and Rising Tenant Demand. Outlook Has Landlords Preparing To Sing: "Our Day Will Come"

Office space absorption doubled during 2011 as the office-using job base expanded and vacancies declined across nearly two-thirds of U.S. submarkets, CoStar Group reported this week in its Year-End 2011 Office Review & Outlook. The report presented to CoStar clients found that positive momentum in office fundamentals and the continued absence of new construction is expected to result in higher rents for building owners over the next few years.

Office sales increased steadily through 2011 over the previous year as investors sought to get ahead of the curve, with investor interest spreading beyond the safer well-leased investment-grade buildings in top-tier markets and into smaller properties and second-tier markets such as Seattle, Atlanta and Northern New Jersey. Total fourth-quarter 2011 office sales are likely to match or exceed fourth-quarter 2010’s impressive $25 billion once all sales are tallied.

Total CRE sales, which evened out in 2011 across all property types, is estimated at nearly $300 billion, the highest since the peak of the real estate boom in 2007, and well above the historical average of around $220 billion since 2000.

Although office tenants continue to hold the cards in many markets CoStar reports the outlook appears to increasingly favor building owners in coming years as the cycle continues.

"To sum it up, for the office market, we’re just now getting started. Now is a good time to be an office investor," said Walter Page, director of research for Property and Portfolio Research (PPR), CoStar’s analytics and forecasting division. "We expect vacancy to continue to decline through 2015, and when you have declining vacancy rates, you can raise rents, returns are better, and for an investor, that’s good news."

Economy Shows Positive Signs For CRE

CoStar Group founder and CEO Andrew Florance noted that, although overall employment growth has been anemic, the U.S. posted a solid 1.7% gain in office-using jobs, led by technology and energy markets such as Seattle, Boston, San Francisco and Dallas.

Other positive signs abound, including a leveling off in the loss of manufacturing jobs and a bottoming of the housing market, which should be less of a drag on the economy going forward, and likely to be the source for new jobs as replacement demand for single-family and apartment housing fuels expected construction demand.

Meanwhile, corporate profits are off the charts, from $800 billion in 2000 to $2 trillion in 2011.

"Coupled with low interest rates, companies are in a position to invest aggressively in new facilities and equipment. From a CRE perspective, Corporate America is well positioned to invest in their businesses, plant facilities and equipment," Florance added.

Challenges remain, including relatively weak consumer confidence, continued high unemployment, a record federal budget deficit and economic upheaval in Europe. Occupancy recovery varies widely between metros, with "have" markets such as supply-constrained New York City showing 7.4% vacancy and housing bust "have-nots" like Phoenix lingering at a stubbornly high 20.7%.

However, CRE values have recovered to roughly 2000-year levels, and vacancies declined across the country last year. In a strong indicator of an impending office rebound, vacancy rates declined in 63% of the 2,400 office submarkets tracked by CoStar. That’s the strongest number since 2004-05, which roughly marked the beginning of the last CRE up cycle.

In the fourth quarter, CoStar recorded 18 million feet of net absorption, which drives occupancy rates and other leasing fundamentals, and a total of 49 million square feet for the year, doubling 2010’s absorption.

Despite rising concerns about the darkening economic picture that started last spring and continued through the year, absorption rose sharply in the second half of 2011, said Page, noting that companies are leasing space "and smaller tenants, the lifeblood of the office sector, are back."

Jay Spivey, CoStar senior director of research and analytics, said that the office recovery, while not feeling very strong so far for many landlords and investors, is actually much stronger than the recovery in the office market following the collapse of Internet companies and real estate downturn 10 years.

"We have seven quarters of positive growth, and at that same point 10 years ago, we were still seeing negative absorption," Spivey said.

Concessions Starting to Disappear

With improving occupancy and little new supply, concessions like free rent and tenant improvements are burning off in some markets and overall, the long downward slide in average office rents has likely bottomed.

CoStar sees significant upside in office rents, which are currently 11% below their long-term trend, Page said. With office construction at an all-time low, rents will rise and are expected to reach their long-term average between 2015 and 2017.

The analysts singled out "premier" suburban areas located near the urban core in markets such as Bethesda, MD, and West Los Angeles are seeing net absorption recover much more quickly on a rolling annual average compared with CBDs or outer suburban areas. Likewise, a survey of four- and five-star buildings in CoStar’s new Building Rating System, the equivalent of the top Class A properties, shows that the best buildings are absorbing most of the space. One- and two-star buildings, typically Class C, were hammered during the recession and are recovering more slowly.

While national vacancy and availability rates are both trending down, there are vast differences within metros and within the CBD and suburban properties in those markets. In Miami, for example, the CBD vacancy rate is about 22%, while suburban and premier suburban rates are lower. By contrast, Atlanta’s Buckhead premier office suburb, where much new construction came on line as the recession hit, has the highest vacancy at over 20%, more than 6 percentage point higher than the Atlanta CBD.

Investors Explore Secondary, Suburban Markets for Deals

The return of portfolio sales outside the largest markets in 2011 shows that investors, who largely retreated to the safety of well-leased properties in safe core markets like Washington and New York over the last couple of years, are ready to assume risk in certain transactions, with the help of a slowly returning flow of debt financing.

Distressed sales volume as a percentage of total office sale transactions fell during 2011. As distress has abated, prices have begun to rise over the last couple of quarters, spreading from investment-grade properties to smaller general commercial sales, according to the CoStar Commercial Repeat Sale Index (CCRSI).

Pricing has risen in most markets and is approaching replacement cost for some buildings, Spivey noted. Higher occupancy buildings are fetching a higher price premium currently than in 2007, possibly opening a window for investors on opportunities in select vacancy challenged properties.