Cap Rates - Trending Downwards

Here is a quick look at the trends on apartment, office and retail.

Investors have been paying premium prices for trophy properties in gateway cities, and this accounts for much of the downward trend reflected through the current pe

riod. The last six quarters, though representing a bit of an upswing relative to the lows of 2009, are certainly still subject to selection bias since transaction volumes are still less than 30 percent of 2007 highs.

The real question is whether the current economic sentiment will lead investors to shy away from commercial real estate properties, or whether it will benefit trophy properties even more as they – much like gold or the Swiss franc – are perceived to carry even greater safety amidst turbulent times.

For more information, go to ReisReports website.

GSA's Reform on Office Leasing

For those who are familiar with the U.S. General Services Administration (GSA) leasing process, you will find GSA is making considerable changes to make it easier on all parties involved.  Please read on...

Looking to bring its leasing procedures more in line with market conditions and correct inconsistencies with market practices, the U.S. General Services Administration just released its final Lease Reform Implementation Report.

According the GSA, the process of offering to lease space to the federal government differs so much from the process in the private commercial real estate sector that it discourages many building owners or developers from offering space in their buildings to the government. In particular, the GSA report identified such problems as:

• The length of time it requires to conclude a lease from end to end;
  
• The high cost to offerors to compete for GSA leases;
  
• Delays and inconsistencies in the requirements development process; and
  
• The detrimental effects that holdovers and extensions have on lessors' abilities to refinance or sell their GSA-occupied buildings.

The report links these issues with a lack of response from the open market, and limited offerings translate into higher rates, the GSA has said.

The reforms are important to the market given the amount of space the GSA leases across the country. At the end of FY 2010, the GSA lease inventory rose to 191.4 million rentable square feet consisting of 9,285 leases in 8,094 buildings.

The largest share of the inventory by lease count - 82% - is vested in smaller leases, up to $500,000 net annual rent (total rent less operating expense rent). These leases account for only 30.2% of total square footage and 24.4% of rent.

Conversely, leases in excess of $1 million net annual rent represent 9% of the lease count but 56% of the square footage and 61% of total annual rent.

GSA's reinvention seeks to "streamline, standardize, and simplify" the process for both large and small leases, and thus the results could signal major beneficial changes for all concerned.

"The final report and the associated Leasing Desk Guide provide the details on the much-anticipated GSA leasing process overhaul that has been underway for the past 18 months or so," said Darian A. LeBlanc, senior managing director, Government Services Group of Cassidy Turley in Washington, DC. "My initial impressions are that the changes are more than superficial and provide some much-needed streamlining to the federal leasing process. The modified process and lease forms will be comfortable and 'user friendly' to those familiar with past GSA practices.

GSA will gradually pilot their new process to the real estate industry over the coming months to identify possible improvements and troubleshoot potential problems.

"The older process will still be used, in parallel, for most lease procurements during this period. Eventually the new process will become the standard," LeBlanc added. "There will be a learning curve, but otherwise I don't see many negatives to the new process. It certainly can't be any worse than the current process."

The GSA hopes to have some of the changes in effect soon. Others, such as those requiring statutory changes, will take longer.

GSA's includes many aspects that are GSA-internal, such as establishing teams and sub-teams for different aspects of review and follow-up, but many of the aspects are directly related to how the private sector will compete for GSA leases. Some of the more interesting proposals include the following.

• The simplified lease model for leases up to the SLAT (Simplified Lease Acquisition Threshold), currently $150,000 net average annual rent;
  
• A petition to increase the SLAT to $500,000;
  
• Applying industry space measurement technology consistently by specifying ABOA (ANSI/BOMA Office Area) as the GSA standard for the area where people and furniture
  are housed;
  
• A "one and done" acquisition plan, no longer a living document that must be revised; and
  
• Adoption of the Master Format standard for costing and pricing tenant improvement construction costs.

Adjusting lease terms is also up for major changes. GSA has traditionally negotiated a 10-year lease term with five years firm, providing the government with termination rights any time after the fifth full year of occupancy. The rest of the market, typically signs 3- to 5-year leases with the right to renew for additional periods at the end.

Under the new plan, GSA is examining the cost impact of termination rights. Among other options the GSA will consider is allowing for longer firm terms beyond five years (6, 7, 8, 9, or 10-plus years, not to exceed 20 years firm). These options would enable lessors to arrange better cash flow for financing, GSA to better manage project workload, and customers to lease space according to true need. If the Simplified Lease Model is used, the standard default for leases with terms of five years or less will be firm, with no termination rights.

CoStar Group http://bit.ly/m4gRkE

CRE Vacancy Compared to Unemployment Patterns

Below is a graph of actual apartment, office and retail vacancy patterns from 1984 to 2010 and a forecast through 2013. The national unemployment rate is projected by Moody's Economy.com to remain virtually unchanged in 2011. However, the Federal Reserve is projecting that the unemployment rate will decline to 8.4%. In Q1 2011, office vacancy declined, albeit slightly, to 17.5%. Plus, the vacancy rate for the apartment sector peaked at 8.0% back in Q4 2009. On the other hand, retail vacancies across the nation continued to tread water in Q1 2011, with the vacancy rate flat at 10.9%.

ReisReports | Window onto the Real Estate Market
https://www.reisreports.com/

How to Terminate A Tenant’s Lease

This is a major concern for Landlords and is a question which comes up frequently.  So I am posting an article from the AAOA Blog.

The number of landlords facing lawsuits due to lease termination has increased tremendously in the last couple of years, according to legal expert Helen Hunter. This has caused many landlords to unnecessarily face legal procedures.

Landlords can avoid problems when terminating tenant lease if they follow the correct procedures.

For instance, Hunter points out there are many state and federal laws that prevent landlords from terminating leases without any reason.

She also warns landlords not to immediately give a lease termination letter to the tenants. If the landlord wants to terminate the lease, he or she should first give the tenant a warning letter. “When tenants violate the terms of the lease, landlords should first issue a warning letter and allow the tenant an opportunity to rectify the violation.”

Once the warning letter has been issued, the landlord should keep a strict watch on the tenant. Any further violations of the lease agreement can give the landlord legal right to terminate the agreement.

The landlord should ensure that he or she too keeps to the terms of the agreement. The property should be habitable and any complains from the tenant should be dealt as soon as possible, so that the tenant does not have any grievance against the landlord. When the landlord maintains his or her position, and the tenant does not, then the landlord has the right to terminate the agreement.

Usually, if the tenant falls behind in payment of rent, many state laws allow the landlord to terminate the lease by giving a 3-day or 5-day notice. The same is also true if the tenant creates a nuisance and ruckus and thereby disturbs the peace of the building or neighborhood. No tenant is allowed to use the rented property for criminal or unlawful activities. If the landlord finds out that the property is being used for unlawful activities, he or she has all the rights to issue a tenant lease termination letter.

The termination should be done in writing and state the reason. Invariably, landlords find it difficult to draft lease termination letters. In such cases, the Internet proves to be a boon. Hunter suggests the website legalcybertips.com for sample letters of tenant lease termination. The website is of great help to landlords who are looking for advice and tips on how to avoid legal problems when evicting tenants.

Many tenants claim that the landlord is at fault and file a counter case. This can prove to be financially sapping, and the landlord may end up paying court fees from his or her own pocket. Hence, a common question amongst landlords is should a landlord form an LLC to avoid legal as well as financial issues when the tenant decides to take the landlord to court because of the lease termination letter.

Hunter’s advice to all landlords is that an LLC can prevent the personal assets of the landlord from being claimed against damages should the court unfortunately decide in favor of the landlord. Also, all expenses related to maintenance and repairs of the house are borne by the LLC.

At the same time, Hunter warns that there are some obligations that the landlord is personally responsible for and not the LLC. Therefore, a landlord should fulfill those obligations.

“Landlords should also spend some time understanding how landlord insurance works,” claims Hunter. The insurance can help pay for any intentional damage caused by the tenant when being evicted from the property. “Unfortunately, it has become a norm among evicted tenants to thash the apartment before leaving the premises.” Having landlord insurance can help the landlord undertake major repairs and maintenance work. The insurance will also protect the landlord in case of natural calamities like floods or hurricane.

American Apartment Owners Association (AAOA) offers discounts on products and services for landlords related to your rental housing investment, including rental forms, tenant debt collection, tenant background checks, insurance and financing. Find out more at http://www.joinaaoa.org/.

Commercial Real Estate CI 103 Class Next Week - Aug 9th!

Here is a little plug for those who instruct these CCIM courses.

Ok, you found property or space for a client, now what?  Do you find you need to beef up you analysis skills to compete in the market?  Do you find you are unable to properly provide information or answer client's questions? Well here is a chance to even the playing field.  Enroll in CCIM's CRE CI 103 course NOW.

Course Location:
Addison Conference Center
15650 Addison Road
Addison, TX 75001

Register by Clicking Here.

Leases are the engines that drive the value of commercial real estate. Keeping this concept at the forefront, this course explores all pertinent aspects involving the valuation and costs of commercial leasehold interests from the user's perspective. Common terminology involving lease preparation will be defined, and negotiation tactics will be discussed.

Participants will also learn strategies needed to counsel clients on the critical decision of leasing versus owning, building versus buying, as well as alternative strategies to a conventional lease. Examples of lease options will be addressed through several real-world case studies.

For more information on this or other CCIM Courses, call 800-621-7027 or Click Here.

Real estate in 2nd half of 2010

Here is what to expect in the 2nd half of 2010 while looking at the first half of the year in commercial and residential real estate markets.

Global markets continue an uncertain recovery faced with significant risks. On the minds of investors are such issues as continuing concern over government finances in a number of European countries, Chinese efforts to cool the pace of real estate investment domestically and concern that another global correction in the finance markets is at hand. Despite these concerns, investment capital continues to flow into Asian markets, European markets and into an improving domestic U.S. market. All these are signs of a growing strength of the recovery.

Domestic commercial real estate markets have begun to show life after a long dry spell. There is talk and signs of a return of a CMBS finance market. Only time will tell if the investment community is willing to again accept risks presented by these pooled mortgage investment vehicles. On the transaction side, particularly in the local Boston market, there are signs of life. However these well publicized initial transactions appear limited to the Class A property market in most instances. Reports are that competition has been heated for stable, fully leased investment properties. There has also been spirited competition for troubled properties that have strong upside potential. These trends are not as apparent in the Class B and Class C commercial and retail sectors.

The S&P/Case-Shiller Home Price Index shows that although most markets improved this spring, there are no solid signs of a sustained recovery. The Greater Boston market has faired better than most posting a 4.9% increase over the 12 months ending April 2010. The major concern in this market is the "hangover" impact of the homebuyer tax credit over the previous nine months. Concern is focused on the fact that accelerated activity resulting from this tax credit may have "stolen" sales from the second half of 2010. The answer to this question will likely be told in the September/October/November time period after the end of the summer doldrums.

So what does this mean? The positive signs in all three markets are clearly an indication that recovery is occurring, although at a much slower pace than hoped for. The major question for many investors (and consumers) is whether we will experience a double dip recession. Although opinions vary on this question, I don't see this occurring in the Greater Boston or New England market. There clearly is the potential in certain western and southern states for this to happen, but it will likely be a local occurrence and of limited duration.

Having survived a very difficult two-year period, there are many signs for optimism going forward. Stay tuned.

Courtesy of Avery Associates

CCIM Course to kick off your education in Commerical Real Estate

If you been unsuccessfully trying to get into commercial real estate or struggling at every turn, then let's be honest.  There could be a lack of education happening.  Here is a new year and a new opportunity to start the year off with the beginning of commercial real estate done right.

During the first week, Feb. 1-5, the CCIM course CI 101 - Financial Analysis for Commercial Investment Real Estate will be offered at the Addison Conference Center in Addison, TX.  Please go to the link and don't be shy by asking about discounts, scholarships, etc!

http://www.ccim.com/courseflyer/11C1019

Get fired up about real estate for 2010!  With the right education, tools and networking you can turn it around and be truly successful!