According to Dodge Data & Analytics, commercial real estate construction will witness a “6% increase on top of the 12% gain estimated for 2016”. The report also indicates increases in construction activity in the single-family, institutional, and manufacturing plant markets ranging from 6%-9%. Conversely, Dodge Data estimates that the multi-family and utility plant construction markets will decrease by 2% and 29%, respectively.
Source: CoStar News
By: Mark Heschmeyer
Date Posted: November 16, 2016
One group of business owners hasn’t benefitted from the rebound in property prices. Once a real estate mainstay, owner/user purchases of commercial properties by small businesses have declined over the first three quarters of this year, reversing four straight years of increasing sales, CoStar Comps data shows.
Through the first three quarters of this year, owner/user purchases of office, industrial and retail properties ranged from $150,000 to $1.5 million and totaled $8.79 billion. That is down 11% for the same period last year.
By way of comparison, owner/user purchases of properties of more than $1.5 million are ahead of last year’s pace: $20.76 billion for the first three quarters of this year vs. $19.7 billion for the same period last year, which marked a post-recession high.
Higher property prices may be to blame. Property prices in the small business category have been skyrocketing from a low in 2012 of $51.46 per square foot. At the end of September 2016, the average price per square foot for this category had climbed 28% to $66.08 per square foot, fast approaching the 2009 average price peak of nearly $69 per square foot.
By property type, office properties sold in the $150,000 to $1.5 million price range bought by owner/users climbed from an average of $91.12 per square foot in 2012 to $98.61 per square foot at the end of the third quarter of 2016.
Retail prices for such properties bottomed in 2013 at $85.41 per square square foot and are now selling for more than office properties at an average of $99 per square foot.
Prices for industrial properties in the same price range have climbed from an average of $32 per square foot to $42 per square foot for the same period.
At the same time, banks have been cutting back on their real estate lending to small businesses.
Bank lending to small businesses secured by non-residential properties peaked in June 2008. Banks had more than 1.2 million such loans ranging from $100,000 to $1 million on their books at that time totaling $346.6 billion, according to data from the Federal Deposit Insurance Corp. That total had fallen 22% to $271.3 billion at the end of June 2016, the latest data available.
As an interesting side note though, banks make up five of the largest six sellers of properties to small business owner/users in the last two years. Wells Fargo accounted for about $37 million in such sales; PNC Financial Services, $26 million; Fifth Third Bank, $18.5 million; SunTrust Banks, $16.4 million; and Bank of America, $13.5 million, according to CoStar data.
Meanwhile, capital outlays by small businesses has been trending down, according to the National Federation of Independent Businesses, a small business trade group. The percentage of owners surveyed monthly making an outlay peaked for this recovery in July 2015 at 61% and held close to that through January 2016 but has faded since, according to NFIB’s October data.
The percent of owners planning capital outlays in the next three to six months was 27%, an historically weak number. Seasonally adjusted, the net percent expecting better business conditions fell 7 percentage points to a net negative 7%, which means that now, more owners expect that conditions will worsen. Only 9% of small business owners thought that now is a good time to expand.
Link to full article: CoStar-Small Business Lending Decline
According to The Registry, Blackstone is in the process of acquiring approximately 12 million square feet of properties with a $1.5 Billion price tag. Most of the properties being purchases are located in California, with a focus on Bay Area industrial product.
Source: CoStar News
By: Randyl Drummer
Date Posted: July 20, 2016
Prologis, the world’s largest developer and owner of industrial real estate, reported the first six months of 2016 were the strongest in its company’s history as moderate levels of new supply paired with a strong appetite by e-commerce and other companies created the tightest market for tenants since the first internet boom of the early 2000s.
The San Francisco company owns or has interests in 3,347 buildings totaling 666 million square feet of property in 20 countries, including nearly 380 million square feet in the US. As such, the publicly traded REIT serves as a bellwether stock for the global warehouse and logistics market.
The REIT’s same-store net operating income increased 6.1% in the second quarter, securing an average 17.8% rent increase at lease expirations while delivering $621 million in new projects. Prologis had more than $3.7 billion in cash liquidity, its highest on record.
“All in all, the last six months have been the best in our company’s history,” said Hamid Moghadam, chairman and CEO of San Francisco-based Prologis (NYSE:PLD). “E-commerce and supply chain reconfiguration continue as big drivers of demand for our product. The Class A market is where the action is.”
Building Fast, Leasing Faster
CoStar and other CRE services firms, including CBRE Group, Inc. and JLL, noted the increasingly limited availability of U.S. industrial space at midyear as online sellers, third-party logistics firms, food and beverage and consumer goods firms scoop up newly constructed bulk warehouses and other industrial buildings as fast as they are built.
Even though developers added 158 million square feet of new warehouse/distribution space over the past 12 months, the overall vacancy rate for industrial property continued to inch down to 5.5% as of June 30 of this year.
According to a preliminary analysis by CoStar of midyear logistics and industrial property leasing data, that’s nearly 2 percentage points lower than the 2004-2007 expansion cycle, and within a few basis points of the lowest vacancy rate for industrial property since the Internet-driven demand boom of the late 1990s and early 2000s.
CBRE said it expects the global economy will continue to sustain demand for industrial space.
“While we’ve had some shocks to the global economy, the U.S. economy still is moving along at a slow and steady space and that will sustain industrial demand,” said Jeffrey Havsy, CBRE chief economist for the Americas. “Retail sales have been above expectations, posting pretty strong gains in April and May. That will help both the retail and industrial sectors.”
More than 210.5 million square feet of industrial space was absorbed by tenants over the last year, according to CoStar. The nearly 46.9 million square feet of net absorption in the second quarter, while down just under 10% from a year earlier, remains consistent with the average pace of demand growth throughout the long expansion, said CoStar Senior Real Estate Economist Shaw Lupton, in a preview of the company’s midyear industrial market review and forecast webinar scheduled for July 28.
Link to article: Demand for Warehouse Space Skyrockets
Source: Bisnow
By: Aswin Mannepalli
Date Posted: May 26, 2016
Online retail economics is changing the face of industrial real estate. With consumers demanding quicker and quicker delivery of online purchases (i.e. Amazon’s two-hour delivery in the Bay Area), the future demand for distributional warehouse space with modern infrastructure and design is transforming.
Click here to read the 6 Ways the Supply Chain is Changing Industrial Real Estate
Highest Growth Levels since 2007
Source: CoStar
By: Mark Heschmeyer
Date Posted: March 23, 2016
For commercial property owners, 2015 was a very good year. According to early analysis of securitized loan results through February of 2016, the commercial properties backing the loans posted strong net operating income (NOI) growth, increasing 3.8% on average in 2015.
Average NOI for commercial property backing CMBS loans showed a big jump in 2015, compared with 2.66% in 2014 and 2.64% in 2013, according to analysis by Wells Fargo Securities.
The Wells Fargo analysis is based on NOIs reported for more than 6,000 loans in conduit CMBS transactions.
While Wells Fargo cautioned the results are preliminary, if the growth rate stays near the current level, it would mark the highest change since the financial crisis, surpassing the 3.4% annual NOI average increase in 2012.
Hotel, self-storage and multifamily properties backing CMBS loans were the lead profit-centers, driving average NOI increases of 8.6%, 8.5% and 7%, respectively.
Link to article: NOI Growth
Economic, Regulatory Headwinds May Slow Lending Pace in 2016
Source: CoStar
By: Mark Heschmeyer
Date Posted: March 2, 2016
The total amount of commercial real estate loans held by U.S. banks and savings and loans saw a noticeable jump in the fourth quarter of 2015 over the previous quarter. The total amount of CRE loans outstanding held by FDIC-insured institutions increased 3.1% to $1.85 trillion at year-end from three months earlier. That followed an increase of 2.7% from mid-year to third quarter, according to the FDIC.
The $1.85 trillion year-end 2015 total CRE loans outstanding compares to $1.63 trillion at the last peak of the CRE markets at the end of June 2007.
Multifamily loans continued to increase at the fastest pace quarter to quarter, going up 4.6% to $15 billion from third quarter 2015 to the year-end total of $344 billion.
Non-residential commercial real estate lending totals jumped by $25 billion (3.6%) to $733 billion during the same timeframe.
Construction and development loan totals jumped by $8.88 billion (3.3%) to $275 billion.
The asset quality of CRE loans on bank books also continued to improve. Delinquent CRE loan balances declined for a 22nd consecutive quarter. At year-end, total delinquent CRE loans on the nation’s banks’ books equaled $19.8 billion, down 5.5% from the third quarter of 2015.
At the last peak of the CRE markets, delinquent CRE loans totaled $27.6 billion.
The total dollar volume of foreclosed upon CRE properties on banks’ books equaled $8.3 billion at year-end, down 12.2% from the previous quarter. However, in June 2007, the CRE foreclosed total stood at just $2.5 billion.
Banks appear to be benefitting from the strong market for real estate in selling any repossessed properties. For all of 2015, banks posted gains of $215.7 million on the sale of foreclosed properties. That came despite posting a loss on sales in the third quarter of 2015.
The nation’s largest CRE lender, Wells Fargo Bank, which holds about $134 billion in CRE loans, posted a gain of $245 million last year on the sale of foreclosed properties.
FDIC-insured institutions reported aggregate net income of $40.4 billion in the third quarter down from $43 billion in the second quarter of 2015.
Of the 6,270 insured institutions reporting third quarter financial results, more than half (58.9%) reported year-over-year growth in quarterly earnings. That also is down slightly from the previous quarter.
Is a Bank Lending Slowdown on the Horizon?
Total loans and leases at banks increased by $199 billion during the fourth quarter of 2015, approximately 2.3%. That is about double the pace of loan growth in the third quarter and the highest total increase in bank lending in eight years.
The brisk pace of bank lending may cool this year after bank regulators issued an announcement during the fourth quarter that they planned to pay close attention to real estate lending activity among banks.
The FDIC warned in late December directing banks and savings and loans to “reinforce prudent risk-management practices” for their commercial real estate lending.
The FDIC regulators added that they would be paying close attention to bank CRE lending practices in their 2016 bank reviews. The last time the FDIC sent such a memo regarding real estate lending was in 2005.
Asked in Federal Reserve Bank January 2016 survey about their lending practices, senior loan officers reported tightening standards for multifamily loans, a moderate number reported tightening standards for construction and land development loans (CLD loans), and a small number reported tightening standards for loans secured by nonfarm nonresidential properties.
“The operating environment for banks remains challenging. Interest rates have been exceptionally low for an extended period, and we are seeing signs of growing interest rate risk and credit risk,” said FDIC Chairman Martin J. Gruenberg. “Recently, domestic and international market developments have led to heightened concerns about the U.S. economic outlook and prospects for the banking industry. Thus far, the performance of banks has not been impacted materially. However, the full effect of lower energy and other commodity prices remains to be seen. Banks must remain vigilant as they manage interest rate risk, credit risk, and evolving market conditions. These challenges will continue to be a focus of ongoing supervisory attention,” Gruenberg said.
Link to Article: CRE Lending
Plan to Revap S.F. transit, remove stretch of I-280 debuts
Source: San Francisco Business Times
By: Riley McDermid
Date Posted: February 23, 2016
The first part of a study that looks at razing a 1.2-mile stretch of Interstate 280 in San Francisco in order to revamp infrastructure ahead of the city’s Transbay Transit Center and high-speed Caltrain arrivals will debut Tuesday.
It will be the first look the public will get at the “Rail Yard Alternatives and I-280 Boulevard Feasibility Study” (RAB), which will be unveiled tonight at the Potrero Hill Recreation Center. A multiagency effort, the plan hopes to modify the Fourth and King rail yard and weave SoMa into the Dogpatch, Mission Bay and Potrero Hill, while freeing up 25 acres for possible development.
“The study will review construction methods and rail alignments, including the possibility of moving the Caltrain station at Fourth and Townsend streets to Third Street, between AT&T Park and the planned Warriors arena,” the San Francisco Chronicle reports.
“It will also look at the potential of creating a loop track at the Transbay Transit Center, rather than a stub, where trains have to end and exit on the same track. A loop track would increase the station’s overall capacity.”
But the plan already has some officials questioning parts of its reach, including how rail travel would be incorporated into the city.
The feasibility of creating a tunnel under 16th Street so that trains could travel on top of 16th Street and Mission Bay Drive is also worrisome to Gillian Gillett, director of transportation policy for the city, who told the paper it might make a dangerous zone for cyclists and pedestrians.
“Those two streets will be depressed at great expense, resulting in an urban form that is invasive and hostile,” Gillett said. “We don’t want our streets to get trenched. We did that to Cesar Chavez Street, and it doesn’t create a good environment.”
Even more worrisome? Where the funding would come from, given the increasing costs of the Transbay Transit Center itself, which has been mired in funding shortages and delays. The project has already has taken on a loan from Goldman Sachs that will cost taxpayers $37 million in charges and fees.
That amount is part of a $171 million “bridge” loan that Goldman Sachs (NYSE: GS) is lending the city so that it can continue building the project without a pause due to financial issues.
In December, the Chronicle reported that the price for the first phase of the Transbay Transit Center may jump another $244 million to almost $2.3 billion, and has now added another $4 billion for a related train track project that will run from the three-block building to Fourth and King streets.
Those sorts of operational challenges are why the city needs to get any overarching plan that includes removing a portion of I-280 right the first time, said officials.
“One of the reasons we are in the soup we are in is that development and transportation improvements have not been happening at the same time,” Gillett told the paper. “If you are going to invest in this big seismic shift from diesel to electric, which we have got to do, you also have to look at all the stations. Are the tracks in the right place? Are the stations in the right place so that we can create real connections to other systems?”
link to article: Transit Revamp
Source: San Francisco Business Times
By: Roland Li
Date Posted: January 14, 2016
Back in October, the audio giant Dolby Laboratories Inc. completed its move to 1275 Market St., heralding another tech arrival in San Francisco’s changing Mid-Market neighborhood.
With the relocation, Dolby (NYSE:DLB) vacated a 150,000-square-foot office at 999 Brannan St. in South of Market, and the building is close to being filled again. Airbnb Inc. is in talks to lease at least 100,000 square feet at 999 Brannan St., said three sources familiar with the property.
The pending deal is another affirmation that even as companies put up large blocks of sublease space on the market, suggesting a slowdown, other growing businesses are quickly snapping them up. Strong market activity, particularly from tech companies, has propelled San Francisco to become the most expensive office market in the country.
999 Brannan St. appears to be a natural expansion for Airbnb. The property is about a block from Airbnb’s current headquarters at 888 Brannan St., separated by Highway 80. The four-story property has a glass facade that wraps around its curving triangular structure, along with rooftop parking and a penthouse conference room, designed by Leddy Maytum Stacy Architects. The asking rent in the building wasn’t clear, but South of Market’s average office rent has surpassed $70 per square foot.
Dolby bought 999 Brannan St. from Shako Real Estate Management Inc. for $18.2 million in 1998, according to property records, but with renovations and a new tenant, the building would be worth exponentially more.,p>
Airbnb’s current location at 888 Brannan St. is evidence of the sharp jump in building values in the area. Last year, pension fund TIAA-CREF bought 888 Brannan St for $312 million from Beacon Capital Partners, a 69 percent profit on the $185 million that Beacon paid for the building in 2014. Airbnb leases 225,000 square feet, or more than half of the 400,000-square-foot building.
Airbnb, valued at $25.5 billion in its latest fundraising round in November, is the world’s third-most valuable private startup on paper, behind Uber Technologies Inc. and China’s Xiaomi Inc. The short-term rentals company also lobbied aggressively and spent $8.5 million to defeat Prop. F, a San Francisco ballot measure that would have added restrictions to its business. The company had around 500 San Francisco employees last year, according to Business Times research.
Jack Jackson of Tailwind Commercial, the leasing broker for 999 Brannan St., didn’t respond to requests for comment. A spokesman for Airbnb declined to comment.
Link to article: Airbnb Eyes Former Dolby Space
Interest Rate Hikes Reflect Expected Strengthening of Economic, Employment Conditions
Source: CoStar
By: Mark Heschmeyer
Date Posted: December 16, 2015
After seven years of worrying over raising interest rates, discussing the best time to raise interest rates, and debating the impact of raising interest rates, money from the federal government is no longer free.
In a unanimous vote, the board of the Federal Reserve voted to raise interest rates a quarter of a percentage point.
The hike has been anticipated for nearly six months, thanks to a thorough communication strategy from the Fed that all but eliminated the element of surprise for a jittery stock market. The increase became a foregone conclusion following strong employment growth numbers last month.
Additional interest rate hikes are expected going forward, but will come slowly as the Fed continues to take an accommodative stance supporting further improvement in labor market conditions and a return to 2% inflation.
The impact from the decision could also take some time to surface.
“We do not believe today’s move will have any impact on the commercial real estate markets and that the Fed likely has significantly more room to move before we begin to see real pressure on cap rates,” said Spencer Levy, head of research, the Americas for CBRE. “That said, certain markets may be more susceptible than others to interest rate increases.”
The other wild cards Levy said could have a bigger impact than interest rates include the price of oil, an economic crash or ‘hard landing’ in China, which would lead to pull back in Chinese capital flows, or some other “black swan” event which would impair global growth.
Any such event could easily cause the Fed to reverse course, neutralizing any potential capital outflows, Levy said.
“The flow of international funds-combined with domestic pension funds’ large pools of capital allocated to commercial real estate but unspent-will outweigh any potential increase in the cost of capital,” he added.
Hans Nordby, managing director of CoStar Portfolio Strategy in Boston, agreed that today’s Fed rate hike should have little or no impact in the near term for private sector commercial real estate investors.
“First, while nominal cap rates are very low versus history, the spread between going-in cap rates and comparable investment vehicles, including bonds, stocks and treasuries, is very high,” said Nordby. “Therefore, rates can come up a bit before cap rates need to rise.
“Second, the Fed chose to increase rates because the ‘real’ economy, most notably job growth, is strong. Strong economies increase demand for real estate, and therefore rents. So, these increased rates are in tandem with higher incomes for the real estate, all else being equal,” he added.
“Finally, the fed is unlikely to push rates very hard in near future, given that growth outside the U.S. is very low, and the dollar is very high. Pushing up rates would make American exports even less competitive, just as foreign markets’ demand for U.S. goods is declining.”
Jeffrey Rinkov, CEO of Lee & Associates, said he also expects the rate hike will have minimal impact on commercial real estate.
“Based on a strengthening and stabilizing economy, I believe this was a logical move by the Fed,” Rinkov said. “While the Fed is driven by data, I think this signifies its belief that the economy can operate in an environment with a normalizing monitory policy. Relevant to real estate investment, long term interest rates should remain at historical low levels which will continue to incentivize investment.”
Housing Could See a Boost
One area that could see relief from a higher-rate environment is housing.
Steve A. Schwarzman, chairman and CEO of The Blackstone Group, took an informal show of hands survey last week at Goldman Sachs U.S. Financial Services Brokers Conference, asking the audience how many thought rising interest rates would hurt housing prices and then how many thought it would help.
Hardly anybody raised their hands when asked whether housing prices go down. And about a third of the room put up their hands very slowly when asked whether housing prices go up.
“Well,25 over the last 26 times in history when interest rates went up the value of houses went up,” Schwarzman said. “Because when you have inflation or you have people making more money with the economy growing, that tends to push up the value of houses.”
The more interesting question about interest rates, Schwarzman said is how slowly prices go up.
“But if the markets want to be down on real estate values, that’s okay,” Schwarzman said, “because then we’ll just take out some huge companies, put out huge amount of money at very good prices and what happens at the underlying assets are always worth way more than the stock market is willing to value at the stage and a cycle.”
Martha Peyton, managing director of TIAA-CREF Global Real Estate Strategy & Research, acknowledged that there are fears rooted in the perception that rising interest rates will weaken property values and commercial real estate (CRE) investment performance.
“But, historical data show that higher interest rates have not necessarily derailed CRE total returns, Peyton said. “In fact, property performance has often remained resilient in the face of rising rates. Furthermore, there are a number of factors that may provide protection to overall property performance in a rising interest rate environment.”
The most important protective factor, she said is that rate hikes in the current environment reflect expected strengthening of economic and employment conditions.
Link to Article: Fed Raises Interest Rate