Twitter
LinkedIn
YouTube
FacebookSanta Maria Commercial Real Estate
On August 29, 2013, in Economist Commentaries, by George Ratiu, Research Economist
As the traditional summer vacation season wrapped up, it became easier to focus on the economic performance over the first half of the year. However, the task became an exercise in reading fortune cookies given the many changes in the economy, the markets, and the legislative environment.
The main measure of economic activity—gross domestic product—has been redefined and revised by the Bureau of Economic Analysis during the second quarter. It has been redefined to include business investments in intellectual property, such as research & development, software, and entertainment and original artistic work. GDP has also been revised, as it normally is at regular intervals.
The results point to an economy that nominally is much stronger than it was a quarter ago, by almost $2.0 trillion. At the same time, the revised annual rate of growth for first quarter GDP dropped from 2.7 to 1.2 percent. However, the estimate for the second quarter growth rate is 1.7 percent, indicating an accelerating economy. Of course, given the pace of acceleration, we should not expect any whiplash, as there is no hurry in the macro advance.
Sales of major properties (over $2M) advanced 24 percent on a yearly basis during the first half of this year, totaling $145.3 billion, based on Real Capital Analytics (RCA) data. Most property types registered double-digit growth rates, signaling strong investor interest in commercial assets. Based on National Association of REALTORS® data, sales of properties at the lower end of the price range (mostly below $2 million) increased 12 percent on a yearly basis.
Portfolio sales made up a significant part of transactions in the first half of the year, with Archstone’s sale of apartment properties accounting for over $14 billion of the total. Hotels were another major component of the top portfolio transactions. On the individual property side, the General Motors building in New York ranked at the top, selling for $1.3 billion, at $1,766 per square foot. Office properties made up the top three, with Sony Plaza and 425 Lexington Avenue, both in New York, coming in second and third place.
In line with growing demand for properties, prices rose 8 percent on a yearly basis, according to RCA’s Commercial Property Price Index. Prices rose the most for apartments (15%) and retail buildings (13%). The average apartment unit price reached $108.347. Retail spaces commanded $166 per square foot. Office buildings traded for an average of $212 per square foot, up 7 percent year-over-year. Industrial properties posted average prices of $63 per square foot, a 5 percent decline from a year ago. Cap rates inched up 17 basis points, to an average 7 percent nationally across all property types. For lower priced properties (below $2M), prices increased 2 percent year-over-year, based on survey data from the National Association of REALTORS®.
Investor interest in secondary and tertiary markets continued in the first half of the year. Markets like Jacksonville, Long Island, Philadelphia, Las Vegas posted triple-digit growth rates in sales volume. By the year’s midpoint, 31 markets exceeded the $1 billion mark. In terms of dollar volume, Manhattan, Los Angeles and DC’s Northern Virginia suburbs rank at the top of the list. However, Dallas and Houston move in the top five, surpassing Atlanta, Chicago and Boston.
Distressed properties accounted for $118 billion across all property types, with office making up $36.5 billion of the total. The workout rates have been steadily climbing, reaching 66 percent in the first half of the year. Apartments and hotels recorded the highest workout rates, at 68 percent and 67percent, respectively.
New commercial distress is on a downward trend, as asset values continue to rise. CMBS continues to hold the largest proportion of outstanding distress—45 percent. U.S. banks are the second largest holder of distressed properties, accounting for 25 percent.
Several markets stand out for their rates of distress workouts. Las Vegas retains the top spot in terms of total current outstanding distress—$11.4 billion. Its workout rate is 43 percent, a fairly low figure. Manhattan posted the second highest current outstanding distress volume, totaling $8.4 billion. However, its workout rate reached 77 percent in the first half of the year. Other markets with high distress workout rates were DC (82), San Francisco (87%), Pittsburgh (79%) and San Jose (76%).
Overall improvement in the private-sector job market and the tenuous single-family housing market will continue to prop up the southern California apartment sector through the year. Increased hiring in the professional and business services sect
or has supported stronger household formation growth. Gen Y will begin to move out of the nest as they become comfortable with the economic environment and feel secure with their job. This will contribute to household formation especially in the professional areas of Orange County, San Diego and Los Angeles. In Los Angeles, the number of households expanded 1.3 percent this last year, marking one of the highest rates since the late nineties. With single-family home prices on a steady decline since the fourth quarter of 2010, most of the new households will reside in multifamily properties. The growing trend to watch are the Baby Boomers beginning to shift toward retirement living from single family homes. This may bode well for some multi-family properties, but the majority of the growth will come in the senior living sector.
Low interest rates and strong buyer interest will motivate apartment owners to list assets in 2012, especially those who missed the strong run-up during the 2003-2007 period. This trend has already taken hold and there is a surge of 1031 exchange transactions occurring. Beach communities, as well as prime neighborhoods along the 405 and 5 corridors can offer investors returns anywhere in the high-4 to low-5
percent range. Value-add plays in more tertiary markets of the Inland Empire, north Orange County, portions of Los Angeles, and along the inland 78 corridor of San Diego and East County yield in the high-6 to low-7 percent area, depending on deferred maintenance. The hardest hit areas of the Inland Empire still maintain yields in the mid 7 to 9 percent range, due to the lingering unemployment rate and the single family housing inventory.
Operators will still find it difficult in some of the tertiary markets to fill units and raise rents above the rents of repositioned homes and the shadow inventory that still exists especially in portions of Inland Empire, Los Angeles county and north Orange County. Meanwhile, individuals who work in Los Angeles or Orange County are flocking to areas such as Corona, Ontario, Fontana, Chino and Corona in order to cut commutes but maintain affordable rents. The Riverside-San Bernardino market will continue to see increased activity as value-add investors and prudent buyers continue to snap up REO and distressed properties.
In San Diego the apartment market’s supply and demand ratio is leaning heavily toward the demand side of the equation, which is allowing owners to reduce concessions and raise rents. Effective rents will reach an all-time high in 2012 and the vacancy rate is still compressing toward 4-5% for well positioned properties in attractive markets and higher cap rates in the mid 6 to mid 7 percent range in East County and inland. These areas will attract new construction, so the risk is offset by higher yields. All in all, the investor pool exceeds the supply of for-sale properties, creating a competitive buying environment. More properties may come to market as investors see this as a good time to attract high prices for their properties.
Brian Jacks, our Vice President and Regional Director at East West Commercial Real Estate, was recently featured in the 
Sacramento Business Journal on Friday, June 15th 2012, where he comments on the multi family real estate industry. Mr. Jacks further explains how apartment complexes are drawing investors from the stock market and other real estate sectors. Click Here for complete article.