Please enjoy an excerpt from the Fall issue of The Linneman Letter by Dr. Peter Linneman, PhD, Chief Economist for NAI Global and Principal of Linneman Associates. Mr. Linneman will also be the featured speaker of the upcoming 2017 NAI Florida Forum.
“How “at risk” are different property investments to an economic downturn? To address this question, we examined a variety of simplified investment profiles. Specifically, we simulated the returns for an 8-year hold period for 3 hypothetical multifamily investments: a class A property with a low yield and high NOI growth in a Gateway market (“Gateway A”); a class A property with a mid-range yield and medium NOI growth in a secondary market (“Secondary A”); and a class B property with a high yield, but low NOI growth, in a tertiary market (“Tertiary B”). We chose to model multifamily because of the simplicity of mark-to-market rents, though our insights can be generally applied to other property types. Each investment is analyzed for a Base Case with constant (but different for each property) NOI growth. For all investments, we assume a purchase price of $100 million, cash flow margins of 83% of NOI (reflecting on-going capex), and exit transaction fees of 3%.
The Gateway market A investment has a going-in cap rate of 4%, NOI growth of 4% per annum for 8 years, and an exit cap rate of 4.5%. The Secondary market A investment has a going-in cap rate of 6%, NOI growth of 2.5% per annum, and an exit cap rate of 6.5%. The Tertiary market B investment has a going-in cap rate of 7.5%, NOI growth of just 1.5% per annum, and an exit cap rate of 8%. For each property, we overlay 3 leverage scenarios: no leverage, 50% LTV, and 75% LTV. This yields a total of 9 “Base Case” scenarios. In both the 50% and 75% LTV scenarios, we assume 10-year debt with a 3.5% interest rate and 30-year amortization.
We also simulated how returns and (interest and debt) coverage ratios are affected by reduced NOI growth due to a cyclical downturn. We refer to these 9 scenarios as the “Realistic” scenarios, as NOI never grows smoothly upward forever. These scenarios assume -6% NOI growth in years 3 and 4 (that is, an aggregate 11.6% NOI decline spread over 2019 and 2020) of the investment horizon. Thereafter, the originally modeled growth rates resume through year 8. In total, we simulated 18 investment scenarios and their corresponding return profiles: 3 different investments, with 3 leverage ratios and 2 economic environments.
While highly simplified, this analysis is fairly realistic and provides insights on the impacts of leverage, property type, and the economy. As to leverage, as long as original pro-forma growth occurs, increased leverage increases both the equity IRR and the equity multiple. For example, the Gateway A property generates an equity IRR of 5.2% with no leverage, 6.3% with 50% leverage, and 8.5% with 75% leverage, while the equity multiple increases from 1.4x to 1.6x to 2.0x over the 8 year hold.”
CLICK HERE to read the full excerpt.
We were honored to host the BDB’s Commercial Real Estate Professionals Round Table on Tuesday, October 11th at Flagler Waterview in West Palm Beach. Flagler Waterview is located at 1515 N Flagler Drive and presents tenants a one-of-a-kind opportunity to enjoy Class-A office space with stunning Intracoastal views, complimentary valet parking, a free tenant parking garage, 24/7 security and an on-site Walgreens pharmacy.
The topic was “Trends in the Market Place” and featured panelists Rex Kirby (Verdex Construction), Tammy O’Rourke (Glidden Spina), and Ignacio Reyes (Leo A Daly Architects). Cheri Pavlik (Leo A Daly Architects) served as the panel moderator. Overall, the panelists agreed that new office space is trending towards more common areas like communal kitchens and employee lounges, enabling the SF per person to reduce as more employees work in these collaborative and common spaces vs. traditional individual offices. Another noted item was the increase in demand to repurpose industrial warehouses in urban areas for professional office and retail users. Ignacio Reyes noted that the increase in technological capabilities will shift how employers and employees work, especially with the boost in telecommuting and public transportation like Uber, which could eventually affect space needed for parking as fewer workers will be using their personal vehicles.
We look forward to seeing how these innovative and modern trends influence new workspaces locally and across the world.
CLICK HERE for more information about the BDB.
CLICK HERE for more information on leasing space at Flagler Waterview.
PRESS RELEASE: Palm Beach Garden’s Newest 63,500 SF Office Technology Complex, Gardens Innovation Center, Breaks Ground
West Palm Beach, Fla. – NAI/Merin Hunter Codman, Inc., Palm Beach County’s leading commercial real estate services firm, is proud to announce their latest assignment, Gardens Innovation Center. This Palm Beach Garden’s 63,500 square foot office and technology complex features ‘green’ eco-friendly construction with innovative and modern architecture situated within the convenient and prestigious PGA National Commerce Park, located on Hiatt Drive and Northlake Boulevard. The developer, LRP Properties II, LLC retained NAI/Merin Hunter Codman to lease the center and KAST Construction to build the project. Groundbreaking commenced in July 2016.
Gardens Innovation Center’s two professional office buildings are poised to attract the finest professional office users, as well as leading technological, bioscience and life science firms. Innovative, resourceful, and cost effective energy-efficient details were at the forefront of the design process. Eco-friendly architectural, construction and aesthetic features will be found throughout the center, as both buildings will apply for LEEDs certification. The center offers users large flexible floor plates in both the two-story, 37,500 square foot building and the 26,000 square foot, one-story building. If convenience is at the top of your wish list, Gardens Innovation Center can be found nestled within PGA Commerce Park, minutes from the Florida Turnpike, I-95 and the area’s finest amenities, including PGA National Resort. Meticulous site selection and workspace planning contribute to the success of employees and businesses. Gardens Innovation Center is designed to lead, collaborate and inspire tenants.
CLICK HERE FOR THE FULL PRESS RELEASE!
Construction is underway at Palm Beach Gardens newest contemporary office/tech park: Gardens Innovation Center! Tenants will enjoy the crisp, clean lines and modern flair of contemporary and eco-friendly architecture located in a refined and desirable Palm Beach Gardens location.
The property will feature: two new contemporary office buildings, innovative and modern design with high ceilings and first class finishes, and a wide variety of efficient floor plans.
Gardens Innovation Center is located at the signalized intersection of Hiatt Drive and Northlake Boulevard, in the prestigious PGA National Commerce Park. The property offers easy access to the Florida Turnpike and is minutes away from I-95, PGA National Resort & Spa and the Gardens Mall.
CLICK HERE for more information.
West Palm Beach, Fla. – NAI/Merin Hunter Codman, Inc., Palm Beach County’s leading commercial real estate services firm, is proud to announce that Chairman, Neil E. Merin, SIOR, CCIM will be honored as 2016 Chairman of the Year by the South Florida Business & Wealth (SFBW) magazine. The annual SFBW Apogee Award program recognizes distinguished South Florida business leaders who hold C-Suite positions. The awards are based on nominations by the public and are selected by SFBW. The third annual, 2016 Apogee Awards will honor three executives in each leadership role — Chairman, CEO, President, COO, CIO, CFO, CMO and Senior Human Resource Executive representing Miami-Dade, Broward and Palm Beach counties.
“The South Florida Business Wealth now joins the South Florida Business Journal, CoStar and Easter Seals in recognition of Neil’s dedication to his craft and community. As the CEO of NAI/Merin Hunter Codman, and as Neil’s personal friend, it is my distinct pleasure to congratulate Neil on well-deserved recognition,” Jordan Paul, CEO of NAI/Merin Hunter Codman.
SFBW will recognize 2016 Apogee Award honorees in the December 2016 issue of the South Florida Business Wealth and during the October 27 ceremony being held at NSU Art Museum in Ft. Lauderdale.
CLICK HERE to see the full press release.
PRESS RELEASE: Christian J. Johannsen, CCIM of NAI/Merin Hunter Codman Completed $38,650,000 of 1031 Exchange Investment Sales and Secured $25,825,000 of Financing
West Palm Beach, Fla. – NAI/Merin Hunter Codman, Inc., Palm Beach County’s leading commercial real estate services firm, is proud to announce that Christian J. Johannsen, CCIM, Managing Director of NAI/Merin Hunter Codman has executed three acquisitions to complete the outbound leg of an IRS Section 1031 Exchange totaling $38,650,000. Mr. Johannsen also placed $25,825,000 financing for the three sale transactions. All three acquisitions were NNN (Triple Net) leased to creditworthy tenants.
Christian J. Johannsen, CCIM is a commercial real estate veteran who specializes in capital advisory services at NAI/Merin Hunter Codman. Utilizing his expertise, he was able to defer his client’s immediate tax liability by taking advantage of a provision in the tax code (Section 1031) that permits property owners to exchange like properties, under certain criteria, to defer recognition of gain or loss and therefore defer the tax that may have occurred in an outright sale.
Representing Garner Advance, LLC, Mr. Johannsen advised his client on the purchase of White Oak Crossing, an 87,446 square foot retail plaza containing signature national tenants Burlington Coat Factory, Staples and Dollar Tree. White Oak Crossing is located at 1210-1230 Timber Creek Drive in Garner, NC and was purchased for $12,300,000 from NC Garner White Oak, LLC. Mr. Johannsen also secured a 10-year, non-recourse loan in the amount of $7,380,000 at an interest rate of 2.64% on behalf of the purchaser. The seller NC Garner White Oak, LLC was represented by J. Tyson Glasser, CCIM, of Realty Link, Greenville, SC.
In Florida, Mr. Johannsen represented Celebration Advance, LLC in the purchase of Celebration Office Center III, a 100,924 square foot, 3-story office building located at 1390 Celebration Boulevard, Kissimmee FL for $17,200,000. Mr. Johannsen also secured a $12,040,000, 10-year loan at 2.64% interest on behalf of his client, Garner Advance, LLC.
On the Treasure Coast of Florida, Mr. Johannsen identified a 51,627 square foot office / call center located at 300 Business Center Drive, Port St. Lucie, FL as an investment for his client PSL Advance LLC. Mr. Johannsen’s client purchased the property from QVC St. Lucie for $9,150,000. In order to complete the acquisition, Mr. Johannsen secured the $6,405,000 financing in a 10-year, 2.64% non-recourse loan.
Jordan Paul, CEO of NAI/Merin Hunter Codman said, “Christian J. Johannsen, CCIM personifies the signature brokerage service and customer service for which NAI/Merin Hunter Codman is known. Utilizing the NAI Global platform Mr. Johannsen was able to select 1031 Exchange properties in and outside of the state to fit each of his client’s unique needs. Mr. Johannsen, did not stop there, he also asked, “How can I help you next?”, and secured the financing needed to finalize the deals”. Continuing Mr. Paul stated, “Congratulations to “CJ” for a job well done.”
CLICK HERE to view the full press release.
“The Linneman Real Estate Index (LREI) monitors the supply of real estate capital, as proxied by the aggregate flow of commercial real estate debt (the numerator), with the fundamental demand for space, as measured by nominal GDP (the denominator). Excluding the net real estate equity flows from the numerator modestly understates capital oversupply situations and overstates an undersupplied market. The LREI captures whether debt for commercial real estate is growing more quickly or slowly than the economy. When the index is rising, it means that mortgage debt available for commercial real estate is rising more rapidly than the economy, and vice versa. The index is set to 100 with a base year of 1982, when the supply of real estate capital was roughly in balance with demand.
The index rises when mortgage debt rises more rapidly than the economy grows (“easy money”), and declines when money is tight relative to economic growth. The LREI peaked at 171 in 2009, but steadily declined before hovering between 136-139 from 2012 through 2014 as the Financial Crisis reverberated. The index increased to 143 in the first quarter of 2016, a clear indication that a new capital cycle is underway. As banks expand their mortgage lending, the era of massive real estate deleveraging has come to an end. Our research shows that, historically, the best investment periods for real estate have occurred while the LREI is declining or in the first 2 years of rising.
The LREI tends to run in long cycles, and we believe we are still in the early phases of another capital boom. We expect lending to outstrip the growth of the economy, resulting in huge capital flows to real estate for the next three years. This bodes well for prices over the next couple of years. The risk is that if you are looking to sell 3-4 years from now, you could hit the side of the mountain. When capital is being taken out of a capital intensive business, values go down far more than NOI goes down. If you are a long-term holder (10-30) years and can see your way through the valleys, you will do quite well, but if you are a 2-3 year holder, note that we are actually entering a dangerous window. That is, yes, there is a lot of capital flowing, but investors could find themselves having a difficult time exiting if the capital cycle reverses in 3-4 years.”
CLICK HERE to read the full excerpt.
Thank You Easter Seals!
Neil E. Merin and NAI/Merin Hunter Codman Awarded Easter Seals Florida Corporate Partner of the Year
West Palm Beach, Fla. – NAI/Merin Hunter Codman, Inc., Palm Beach County’s leading commercial real estate services firm, is proud to announce that Chairman, Neil E. Merin, SIOR, CCIM and NAI/Merin Hunter Codman have been awarded Corporate Partner of the Year highlighting commitment to Easter Seals Florida. Upon receiving the awards, Heather R. Weisbrod of Easter Seals Florida, Inc. stated, “Neil, you have always been an Easter Seals enthusiast from the start and we could not be luckier to have you as a leader in our organization. Thank you for the impact you have made by co-creating Get Down To Business and continuing to be a part of the magic now 10 years later. Neil has not only supported Easter Seals through his company but has been committed to the legacy of his family and children by giving each year through his family foundation. Get Down to Business has raised over a half million dollars and rising and that would not have been possible without Neil and NAI/Merin Hunter Codman.”
CLICK HERE to read the full press release.
In a resounding repudiation of the political class, on June 23, 2016, the citizens of the U.K. overwhelmingly voted to leave the European Union by a margin of 52% (17.4 million voters) to 48% (16.1 million). The “British exit”, commonly known as “Brexit”, was opposed by all 5 U.K. political parties, as well as President Obama, Chancellor Merkel, and almost every political leader around the globe. The vote was framed as a choice between maintaining economic and political stability (the “stay” camp) versus national sovereignty (the “leave” camp).
CLICK HERE to read the rest of The Linneman Letter.
On average, Red Cross helps more people after home fires than all other disasters combined. To combat this threat, Red Cross and its partners have launched an initiative that aims to reduce deaths and injuries caused by home fires by 25% in the next 5 years with the Home Fire Campaign. NAI/Merin Hunter Codman’s REAL Leaders took part in this campaign on Friday, June 10th. Over 15 volunteers worked together going door to door in a local community to install over 40 smoke detectors, distribute fire safety information packets and educate families on the importance of having a Home Fire escape plan.
Home Fire Facts:
- Seven times a day, someone dies in a home fire. Every 40 minutes, an injury from a fire is reported
- Nearly 1,000 times every day, fire departments are called to home fires
- Damage from US home fires is bigger than the entire annual sales of many Fortune 500 companies
- Data shows that the 4 percent of homes without smoke alarms represent nearly 40 percent of the home fires, and that working smoke alarms can double someone’s chance of surviving a fire
To see how you can help the American Red Cross and their campaign, CLICK HERE.