Tag: Commerical Real Estate Outlook

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What Do Market Corrections and Marathons Have in Common?

Two weeks ago I finished my first marathon and learned that a combination of two strategies works best for surviving long runs and market corrections--you must first save by creating efficiency of movement and conserving energy.  Next you must grow through the pain and lead your way to success in preparation for future recovery and expansion. Read more

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What Happens to Market Demand When Life Catches Up?

Jack liked to smoke.  Often.  He'd hang out smoking just at the entrance to the office and would greet me with a casual smile and the seasoned look of a battle hardened real estate broker.  On normal days, I'd stop, stay hello and then go to my desk.

After the World Trade Center attack in 2001, the world seemed to come to a stop.  Everyone stopped and waited to see what was going to happen to the market and overall economy, and seemed equally unwilling to take any risks and get back making money work.  People were just proving that the market responds worse to uncertainty that it does bad news. On a fall day in October, 2001, I pulled into the parking lot and saw Jack smoking on his stoop.  I said hello, stopped, and asked what he thought of everything going on and whether the market would pick back up.  He paused, smirked, and exhaled answering, "Of course.  That's what I love about real estate.  Someone's always getting married, divorced, having a baby, getting hired, laid off, or just ready to retire." Basically, the world may stop, but time and life don't.  Eventually they catch up and give people a  kick in the butt to keep moving. In the  Greater Boston and New England market, the first 6 months felt a lot like the month or two after 9/11.  We're now beginning to see the early stages of activity, which feel a lot like pent up demand to us.  Tenant requirements have been flooding in with immediate occupancy requirements; investors coming back to the market looking to generate higher returns than their ING accounts will pay; and sellers going out of business needing to sell fast and hoping to walk with some cash. What are you seeing?  Anything shaking loose? Get free weekly email updates of this blog. About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com.

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What Does Pele Know About Commercial Real Estate?

Fans used to ask Pele, the great Brazilian soccer player, how he achieved such mastery of soccer.  He used to answer,"Everything is practice." Pele understood that the path to greatness wasn’t spending hours perfecting the most complicated plays of the game, rather endlessly trying to master the fundamentals.  Mastery of the fundamentals, his most difficult endeavor, catapulted him to soccer stardom. Pele teaches us that when we’re looking for increasingly complex solutions in a market of disarray, through mastery of investment analysis fundamentals, we gain the ability to see through the chaos to what really matters: understanding risk, return, and making well-informed, profitable investment decisions. Learn about applying the discount cash flow model to price commercial real estate investments, which allows us to value deals with multiple variables in a clear, coherent, and informed manner.    Once you master its application, you’ll find yourself taking stock of tenant risk, interruptions in cash flows through these uncertain times, pinpointing exit assumptions, and making adjustments today to create investments that meet your acquisition criteria. I learned my basics through the CCIM Institute. If you're interested in taking a CCIM course, email me Jeremy@Mansardcre.com and tell me your name, the course you'd like to take, when, and list the questions you have about what to expect.  I'll respond to your email within 24 hours of reading it with insights into the CCIM designation and what to expect when you enroll in your next session. About the Author :Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com .

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How to Think Like Smart Money

We live in a time of turbulence.  We hold on as old systems are tested and pushed to the hilt.  Look at how government spending supports and maintains these systems for as long as possible before allowing them to break -- case in point, GM’s bankruptcy. But what happens when these systems shatter?  We pick up the pieces and rearrange them to create new modes of operating amidst a new landscape.  We develop a new equilibrium, don’t we?

Here are a few applications I’ve seen recently:

• Combine a demolition crew with a functionally obsolete 
 warehouse building to bulldoze portions of the building to create 2 -3 functional industrial properties.

• Make tenants your lenders.  Ask them to finance your 
 development and also be the anchor.

• Unpack the words “Toxic” and “Asset”.  They’re really just liabilities.  Turn 
 trash into cash by repackaging, repricing, uncovering underlying value, and 
generating return on investment by aligning the new asset with market 
demand.

Ask yourself, if it’s true that, according to he philosopher Heraclitus, “A wonderful harmony is created when we join together the seemingly unconnected,” then what pieces could you assemble to create new opportunities that will make you money and provide value to your community? About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com. Sign up for free CREFrontline updates, if you haven’t already. It's free and has absolutely no obligations.

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When New England Based Investors See the Bottom

When the market changes, not everyone agrees with what's happening.  If change is inevitable and everybody resists it,  how do we know when the market will bottom?  In the last post, you read about what 1,157 New England based commercial real estate owners and investors thought of the market. Today, you'll read about where they think it's going. If values are tied to income, what's happening with your tenants? Owners and investors have a keen eye on the tenant market. They use it as a gauge to predict where the market may be headed, relying on a tenant's strength to weather changes in their business and to consistently pay their rent. When surveyed, most investors and owners felt that tenants were becoming riskier and that tenant expectations of them were changing. 78% of those polled said that tenant defaults are increasing and 75% agreed that tenants expect landlords to modify leases upon request.  While 41% of those investors and owners somewhat agreed that tenants expect lease modifications, they clearly feel that tenant expectations are changing and they're aware that modification requests may still be looming. Only 9% of investors and owners said they disagreed that tenants expected more landlord concessions, but 31% disagreed that tenants expected rents to decrease. Tenants have been telling us that they expect rents to decrease, but most have been signing renewals, so these new leases they're renewing may be meeting some resistance as investors and owners try to hold out for as much as possible while still being open to deteriorating lease fundamentals in the competitive market. When do you think lease rates will bottom? Several investors and owners answered "who knows?", which was quite surprising.  Most agreed that rates would not bottom this year, rather in 2010 and 2011.  There seemed, however, to be a narrow divide between whether rates would bottom in 2010 or 2011. 2011 took the prize for the bottom of the lease rate market. When do you think values will bottom?

Definitely, 2011.  2011 was the resounding year that investors and owners alike predict a bottom in values in the commercial real estate market.  If incomes are so closely tied to values, then it makes sense that 2010 and 2011 would represent the bottom of the lease rate market and that affected values would result in 2011.

Ultimately, we see the emergence a new market where the necessity vs choice sellers compete. Investors will begin to see the distinctions between these opportunities.  They'll react accordingly, looking first for those who have to sell (necessity) and often times ending up buying from those who (choice) want to sell--these deals are often stabilized, less risky, are well located, and are superior in construction. We also expect investors to price the projected dregs of 2010 and 2011 into their proformas and begin to aggressively pursue deals as cash dwindles, vacancies increase, rents decline, and debt matures.  If you're a seller thinking about holding out for more, be ready to hang on for a while. It's going to be an interesting ride. About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com. Sign up for free CREFrontline updates, if you haven’t already. It's free and has absolutely no obligations.

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How New England Based Investors See the Market

Change is inevitable and everybody resists it.  But what happens when the market changes and not everyone agrees with what's happening?  We wanted to find out.  So we ran a survey of over 1,157 New England based commercial real estate owners and investors to collect their thoughts on the commercial real estate market. Do you really think anyone selling today is distressed? Well, not exactly.  On our end of the business, we're hearing that there aren't enough opportunities in the market and that sellers are afraid to transact, creating the impression that those selling today must be distressed. Our survey indicates otherwise.  The results were almost equally divided.   Almost half disagreed.  Only 9% said they definitely agreed that anyone selling today is a distressed seller. What's going on with cap rates? Will they stay the same or increase?

We've seen an uptick in cap rates.   What do you think?  75% said  they believed that cap rates would change.  Yet a full 25% maintained that cap rates would stay the same.  So if rates are changing and most agree, are they going up or down?

According to our investors and owners, 84% thought they would go up, but they were mixed on how strongly they felt about it.  28% somewhat agreed that cap rates would increase, 44% agreed they would increase, and only 13% said that cap rates would definitely increase. When the market's in flux, people tend to withdraw and then slowly return as they reassess the situation. These opinions may reflect the beginning of a detente in expectations between buyers and sellers.  There's not doubt that cap rates are increasing and it seems to be gaining general acceptance in the market among owners and investors alike, which signifies the early steps in agreeing on the market's direction (the amount of the cap rate increase is to be determined by how much they buy and sell for over the coming months.) If you were to have asked these questions 3 months ago, the outcomes may have differed.  More people would have likely answered that anyone selling was truly distressed, which, according to this survey, seems to have moderated. Two types of sellers--necessity vs choice sellers--will emerge and investors will begin to see the distinctions between these opportunities.  They'll react accordingly, looking first for those who have to sell (necessity) and often times ending up buying from those who (choice) want to sell--these deals are often stabilized, less risky, are well located, and are superior in construction. We believe that this easing of expectations in the market will lead to increases in transaction volume. More properties will sell, but for less. In the next post, learn about what these investors and owners think of the tenant market and when they expect to see the bottom. About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com. Sign up for free CREFrontline updates, if you haven’t already. It's free and has absolutely no obligations.

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Office Vacancy in 128 North to Increase

Vacancy rates for office space in 128 north are increasing.  According to CoStar research, vacancy rates dipped in 2006-2007 into the 13% range.  They're now forecasting vacancy rates up to 16% as more space comes on the market with pending job layoffs.  The vacancy rate has not increased more drastically because tenants have not started giving up space to their landlords as they hold out to see when the recession will end and to see whether they'll need space to rehire staff. Watch for office lease rates to decline as we approach the second half of this year and enter 2010.  We anticipate lease rates to decline as vacancy rates increase as the market searches for equilibrium amidst a new landscape of supply and demand. About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com. Sign up for free CREFrontline updates, if you haven’t already. It's free and has absolutely no obligations.

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Capitulation in Boston Commercial Real Estate?

"You've finally capitulated, haven't you?" joked my business partner. He and I laugh at the fact that he's a bear and I'm a bull. It works for us. And when either of us become too negative or positive on the market, we weigh the pros and cons. "Yep." I said. "Despite the fact that you know that I'm a bull and that I've been writing and advising of this correction for some time now, I really feel that I've experienced the shift today. There's no going back now."A lot of equity's going to be lost. I had been on the phone earlier that day with a broker that exclusively represents Bank of America. Many considered BOA to be one of the most desirable and credit worthy tenants. He and I were chatting about the market and how we were seeing retailers looking for rent concessions up to 20% from landlords. He told me, "We're closing several locations where owners aren't working with us and we're also liquidating 173 units this year." I had heard and seen of many retailers renegotiating deals, but not Bank of America. Imagine the impact. No one is safe from the loss of equity we're going to experience. It's going to be expensive. Next up will be the office market. It took the retailers about 18 months to get here. Watch for office tenants to begin similar talks from October, 2009 to December, 2010. About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com. Sign up for free CREFrontline updates, if you haven’t already. It's free and has absolutely no obligations.

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Why Being Pound Wise and Not Penny Foolish May Pay Off

Property owners, here's your good news, the stalemate is ending.  You have just summitted a mountain of transactions and have been sliding down the other side,  as represented in CoStar's chart showing national sales volumes for office properties. You're wondering, what's selling? And for how much?

The appraisers are wondering, too. "There just aren't any comps out there," as stated by 3 appraisers that have called our office in the past 3 weeks.  "We're calling around trying to value a subject property and are having a tough time finding lease and sale comparables to determine market value." Typically, the national office market measures approximately $2 to $3 billion in sales, which from 2004-2007 looked like an aberration when it reached a high totaling $18 billion. And in less than 2 quarters, we've quickly ridden down the other side and are looking for the bottom.  No wonder there aren't any comps. To those looking for comparables, the comparables are coming.  The market will be repriced and you'll have transactions to study.  The next question will be: what will those deals be worth? Our crystal ball says: watch for the second two quarters of 2009 to show more market activity than the previous two.   Speculators exit the market and investors reactivate.  Sellers, Buyers, and their Lenders battle over what market values really are, and by the end of the year, expect to see that chart beginning to point toward the mean. During the second half of the year, buyers creep into the market, testing the bottom to see which sellers are the first to accept that the game has changed. These sellers are labeled "distressed."    Some are.  Many aren't.  These pound wise sellers see that their properties are worth more now, leaving the impending battle over new values for the penny foolish sellers who enter the market needing to sell in 2010 (see more on this topic here), when we have more auctions, actual distressed sellers, and more supply that's competing for the same buyers. 2011 looks cloudy right now. There's talk of some employment growth, which helps to absorb excess space created by this year's job losses, but we believe this "return to the mean" may take some time to process.  If you're holding property  with an anticipated exit in the next 24-36 months, you may be pound wise to enter the market today instead of holding out for penny foolishness tomorrow. About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com. Sign up for free CREFrontline updates, if you haven’t already. It's free and has absolutely no obligations.

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Greater Boston Office Buildings Provide Suburb Appeal

Budget relief can come in many forms, and smart companies are taking a close look at the details to save on spending. Technology companies in Boston are no exception. There’s not much they can do about insurance costs, real estate taxes, and payroll, so what gives? Perhaps savings can be found in the monthly cost of rent. The prestige of a Boston or Cambridge address loses some appeal when the rents creep up to $80 or $90 per square foot. Landlords may be willing to discount the price during a renewal, but the question is how much and is it enough? The tenant can compare that pricing to what is directly available in nearby suburbs, typically at $10 per square foot less than downtown rates, and the price becomes be too good to ignore. In a February 20th, 2009 article posted by Inside Real Estate on high-tech firms in the Boston area, Bridget Botelho writes “…Tenants are approaching leasing decisions with extreme caution and renewals have become increasingly popular. Many of the companies that are in leases they signed four or five years ago expect to get their leases renewed at lower prices, or they can find less expensive space once their lease is up…” In some cases, these firms cannot justify the expense on rent when viable alternatives are less than 10 miles away. At the least, a responsible tenant will conduct an analysis of rental expense and consider all alternative options before signing a new lease. The author of the article goes on to say “Landlords are likely to continue losing tenants throughout 2009 due to company downsizing and bankruptcies, and feel pressure to lower prices to attract new tenants…” Technology companies in Boston have the option to renegotiate in place, and may have success based on a landlord’s fear of an empty building. Armed with strong data, a successful technology firm has a strong leg to stand on in this type of negotiation. The worst the landlord can say is NO, and the tenant knows that there are alternatives available just around the corner. Landlords in the b must prepare for this opportunity and appropriately market vacancy to firms who may be in the process of making a decision. A message to the suburban landlord with large vacancy – do not lament the situation! Find a way to be one of the top alternatives on the list for a nearby high tech firm and chances are the deal will be too good to pass up. Sign up for free CREFrontline updates, if you haven’t already. It's free and has absolutely no obligations.