Investment
Savannah Commercial Real Estate: 2010 Review & 2011 Outlook
Jan 19th
Time heals all wounds, but how much time is the big question. The bruises of the last few years are still there but, some signs of a turnaround are visible. Here is both a national & local look at 2010 and an outlook for 2011:
Office: National vacancy rates hit a 17 year high, but the 4th quarter was the first time in 3 years more space was leased than vacated. Locally, our office market continues to be soft and like the nation, vacancy rates will remain relatively flat. Limited office leasing produced some moves but few net-new users of any significance. GSA build-to-suits drove development, including Savannah’s first modern-day, Class-A building in the central business district. Slated to open in 2012, 70,000 SF will be constructed facing Ellis Square and house the U.S. Attorney’s office on four of its six floors.
RETAIL: US holiday sales were the best in 4 years. An increase in consumer buying power should lead to modest sales growth in 2011 with discount & grocery retailers benefiting the most. Oglethorpe Mall, nearly fully leased, reported 2010 store sales up slightly compared to a 3-4% decline in 2009. Broughton Street saw mixed results: some store sales were up over last year, but several closings still indicate there is work to be done to invigorate the corridor. Steady tourism improvements also helped increases in tax receipts and hotel occupancies.
Image courtesy of GPA.
Industrial: Vacancy rates peaked nationally around 14.1% & should finish 2011 around 13.1%. That’s far better than the near 20% vacancy rate in the Savannah area. Most large deals, including Coastal Logistics Group’s build-to-suit 320,000SF building and JLA Home’s 689,000SF warehouse purchase, were in some way related to the port. No other speculative big-box development is expected with 12-18 months or more of supply. Several smaller user-warehouses traded hands with an abundance of smaller 1500-5000sf lease spaces sitting vacant.
Multi-Family: Due to a slow economy and financing challenges in the single family housing market, the sector that showed real progress is 2010 was multi-family. US vacancy fell to a 2 year low of 6.6 % and rents rose .5%. The sector does lead in foreclosures due to most loans being underwritten at the height of the market. Locally, occupancy was steady if not grew with limited development activity in the Pooler area. Our multi-family developer clients are pursuing projects so, expect more development next year.
Investment: The target for most investment, top-tier markets have seen average asking prices increase. As of 3rd quarter 2010, Moody’s reported apartments led with a 16% increase from the year prior. Office increased 4.4% while Retail and Industrial fell 12% & 4.4% respectively. Look for continued oversees investment as the US is by far the number one choice of foreign real estate investors. Don’t expect that demand to translate into activity in our market except for very few institutional grade properties.
What to expect: Until we start seeing repeated months of 300,000 new jobs a month nationally & strong improvements in the consumer confidence index, the economy has long way to get back to “normal.” Savannah’s infrastructure and relatively low cost of living is ready and able to support all those retirees that want to move here but can’t sell their homes. The commercial market should make some modest strides in 2011 thanks to the port and manufacturing announcements, but it will be slow and steady recovery into 2012.
NAI Savannah Sponsors Economic Webinar:
Today at 1pm EDT, NAI Global’s Chief Economist and Wharton School of Business professor, Dr. Peter Linneman, will give his quarterly Global Economic Outlook related to commercial real estate. To register, send an email to: outlook@naisavannah.com.
Rex Benton is a Savannah Commercial Real Estate agent with NAI Savannah, the commercial division of Mopper-Stapen, Realtors and is a contributing columnist for “BiS-Business In Savannah” weekly business publication and is an active CRE blogger. www.naisavannah.com 912-358-5600 Office Space, Retail Space, Industrial Space, Investment Real Estate
Senior Housing Poses Opportunities for Investors
Oct 28th
In spite of a sluggish national economy and skittish capital markets, the outlook is extremely bright for the senior housing industry. While other asset sectors continue to suffer from a lack of liquidity, recent data suggest that high demand and a return of capital to the senior housing market will make for a rich deal making environment in the months ahead. 
According to several recent reports issued by NIC, senior housing has weathered the economic downturn better than other asset types and offers a higher rate of return to investors. As of Q4 2009, the senior housing sector generated a cumulative return of 2.7 times its mid 2003 value, compared to the entire CRE sector, which posted a cumulative gain of just 1.5 times its mid-2003 value, according to the National Council of Real Estate Investment Fiduciaries (NCREIF).
Occupancy rates have stabilized while rents continue to grow, albeit slowly. Demand for senior housing will continue to rise substantially over the next few years, as the first wave of the 79 million members of the baby boomer generation have already passed the age of 60. The fact that Americans are living longer has created longer-term tenants and an increased need for facilities that accommodate the expanding needs of seniors. While demand flattened during the downturn, it has rebounded quickly and is growing at a faster rate than it was prior to the recession.
Meanwhile, construction starts for senior housing properties have dwindled over the past 12 months, which means leasing at existing properties will increase as demand from consumers continues to rise. In fact, the NIC reports that new construction for senior housing is down 32% from the same time period last year, while demand is outpacing pre-recession growth rates. Above average returns and the potential for significant growth are attracting a wide base of potential investors, including TICs, private equity groups, national banks and foreign investors.
Of course, not every senior housing project can succeed in today’s economy. Successful senior housing projects require a combination of strong balance sheets and extensive operating experience to be attractive to lenders. Debt capital is readily available for projects that can prove long term value with experienced owner/operators that have a track record of success.
Savvy brokers are taking advantage of these market opportunities and are reaping the benefits. For example, NAI Bluestone recently secured $14.3M in debt and equity financing for the development of the Arbors at Buck Run, an 85-unit assisted living and memory care facility located in Feasterville, PA. The financing was secured on behalf of Capital Health Group, LLC, one of the nation’s premiere senior housing and healthcare private investment companies, and Orens Brothers, an experienced developer and construction management firm with a long track record of successful projects throughout Greater Philadelphia. Despite the fact that the project required re-development capital in today’s challenging construction financing market, NAI Bluestone was able to identify the right debt and equity capital providers who shared its conviction that the sponsorship, project and its market represented a terrific risk/reward opportunity. Our ability to secure debt and equity re-development capital in today’s market proves that capital is available for strong projects, but it requires strong relationships with lenders, experience and a track record of success.
Looking ahead at 2011, we are going to see more and more activity in the senior housing sector. Brokers with strong lending relationships and experienced development partners will be poised to take advantage of this growing market, which will continue to outperform other asset types in the upcoming year.
-Matthew McManus
Matthew McManus is Chairman of Philadelphia-based NAI Bluestone Real Estate Capital, LLC.
Savannah Tenants and Landlords: new rules affect bottom line
Oct 5th
New accounting guidelines will immediately impact a company’s balance sheet and could have a negative effect on commercial Tenants and Landlords.
The Financial Accounting Standards Board and the International Accounting Standards Board are merging their generally accepted accounting principles (GAAP) with international standards. As a result, public and some private companies will be required to list almost all leases as liabilities and assets on their balance sheets. This includes real estate leases which are currently not listed.
The boards should finalize the standards next year and they could take effect as soon as 2013. The proposed rules would require Tenants to capitalize the present value of all “likely” lease obligations. This could be difficult to forecast because some tenants rents are contingent on escalations that vary depending on sales volume or the consumer price index. Renewal options and right-to-terminate clauses will also be considered.
Lease vs. Own
The lease vs. own question just got a little cloudier. Businesses deduct the full amount of lease payments for tax purposes. Those that own, depreciate a property’s improvements over 39 years. These rules will still apply, but it may make more sense for some companies to purchase real estate if it shows up on the balance sheet as a significant liability anyway.
Single-tenant building users would benefit the most from ownership and could drive down the demand for leased space. Smaller tenants that are in multi-tenant buildings are more likely to stay put.
Corporations already struggling with debt will take a hit as they record the entire outstanding balance of future rental payments as a liability. Public companies may look weaker to investors by affecting debt-to-equity ratios. It could also affect a business’ ability to borrow or trigger debt covenants in existing finance agreements.
Tenants should consider re-negotiating or re-structuring existing and future leases now. The natural result will be Tenants pushing for shorter term leases. This will have to be balanced with their willingness to give up incentives or lower rates as the Landlord takes on more risk, especially with an extensive build out.
Industries most affected will include: Retail, Professional Services, Transportation and Logistics, Telecoms, Healthcare and Real Estate. Here is a great overview of the new rules: New Savannah Tenant & Landlord Rules
Rex Benton is Savannah Commercial Real Estate agent with NAI Savannah, the commercial division of Mopper-Stapen, Realtors and is a contributing columnist for “BiS-Business In Savannah” weekly business publication and is an active blogger: http://www.savannahcommercialrealestate.blogspot.com/ www.naisavannah.com 912-358-5600 Office Space, Retail Space, Industrial Space, Investment Real Estate
Investment Real Estate 2010: Multi-family
May 6th
Even in Savannah, the dream of home ownership has caused many to wake up in a cold sweat. Since 2007, values have dropped nationally 18.4% on average and may drop another 10% before stabilizing this year.
A threat to stabilization, another potential wave of foreclosures, is a concern due to both unemployment, and an estimated 40% of all homeowners owing more than market value. Foreclosures are expected to impact 12 to 15 million people while decimating credit scores. Combine this with the challenge of obtaining financing in general and renting may look like a safer and easier alternative.
According to the Urban Land Institute’s recent report, “Housing in America: The Next Decade,” these concerns have created a shift in the perception of home ownership and could be viewed as a precursor for investors to consider multifamily.
For example Generation Y’s 83 million late teens to early thirties, are the prime age to start households. Instead, they have moved back home, doubled up or gone back to school while the economy drags along. As the job market improves they will move into the housing market but with a bias towards renting verses “risking” their limited incomes in homes that might lose value. Boomer’s in their 50’s, who on average have a home mortgage twice their income, will likely have to rent when they retire.
Overall, home ownership has dropped over the last 5 years. At a peak of 69% in 2004, it is predicted to continue creeping down to 62% to 64%, back to pre 1990 levels.
Supply and Demand
U.S. multifamily vacancy rates ended 2009 at 30 year highs. With most of the rent and vacancy declines leveling off, this is good news for investors because purchasing properties at present “depressed” incomes (down 10% to 30%) will allow your return to significantly improve as vacancies drop and rents rise.
2009 saw very few new deliveries. Only 100,000 units were delivered in 2009 with only 65,000 units projected for 2010. According to NAI Global’s chief economist Dr. Peter Linneman, we need 320,000 units per year just to replace those uni
ts that are destroyed by fire, flood, etc. As the economy improves, pent up demand combined with normal growth should outpace supply by mid 2011 with shortfalls through 2014 according to the National Association of Home Builders. Linneman believes we could see 3.2 to 3.4 million new households formed over the next 2 years that will help support both single and multifamily. Market rents will increase by 8 to 10 percent through 2012 and 4 to 7 percent through 2015.
Financing and Inflation
Lack of conventional financing is the major cause for low deliveries of new apartments. HUD’s 221(d)4 program has been fueling many new projects with 40 year terms and high loan-to-value financing. Freddie Mac and Fannie Mae offer refinancing at attractive fixed rates for 5 to 10 year terms.
As the potential for inflation increases over the coming years, especially for “all cash” buyers, the ability to hedge against inflation with higher rents makes investing in multifamily an attractive play.
It’s No Secret
Nationally, there has been an uptick in sales as the word has gotten out. 3rd quarter ’09 sales volume was up 40 percent over 1st quarter ’09. As a broker, I see real signs of increased interest and actual transactions in the sector that should start stabilizing prices. REITs and conventional lenders are warming back up to multifamily as well.
In the Savannah area, there has been very limited activity in land or existing product sales. There are potential multifamily deals here and in the region, but national markets targeted for investment include: Washington, D.C., San Diego, New York, Minneapolis-St. Paul, Raleigh, and others.
There could still be challenges through 2011 and investment in the sector should be made cautiously, but there are clear signs that multifamily will be the first sector to recover as the economy gets back on track.
Rex Benton is Savannah Commercial Real Estate agent with NAI Savannah, a division of Mopper-Stapen, Realtors and is a contributing columnist for BiS-Business In Savannah weekly business publication. www.mopper-stapen.com 912.238.0874 Office Retail Industrial Investment Real Estate
