Living La Vida Local
...continued

a 62 percent surge in loans for office properties, a 37 percent rise in loans for hotel properties, a 26 percent gain in loans for multifamily, a 25 percent increase in loans for retail properties, and a 14 percent increase in loans for industrial properties. Impressive or scary: The level of commercial/multifamily mortgage debt outstanding grew by 2.5 percent in the first quarter, exceeding $3 trillion for the first time, according to the MBA analysis of the Federal Reserve Board Flow of Funds data. The $3.001 trillion in commercial/multifamily mortgage debt was an increase of $72.4 billion from the fourth quarter of 2006.

"Issuers of commercial mortgage-backed securities (CMBS), collateralized debt obligations (CDO) and other asset-backed securities (ABS) were responsible for almost 60 percent of the increase in commercial/multifamily mortgage debt outstanding," noted Jamie Woodwell, MBA's senior director of commercial/multifamily research.  "Looking just at the multifamily market, CMBS, CDO and other ABS issuers were responsible for a full 70 percent of the growth."

Commercial banks continue to hold the largest share of commercial/multifamily mortgages, with more than $1.3 trillion, or 43 percent of the total. Many of the commercial mortgage loans reported by commercial banks are reputed to be "commercial and industrial" loans to which a piece of commercial property has been pledged as collateral. It is the borrower's business income -- not the income derived from the property's rents and leases -- that drives the underwriting, pricing and performance of these loans. Recent MBA research found that among the top 10 commercial real estate bank lenders, 48 percent of their aggregate balance of commercial (non-multifamily) real estate loans were related to owner-occupied properties.

Global Homogenization

According to recently a study released by Rreef Research, cap rates are becoming homogenized globally. In 2000, average cap rates on office space in the U.S. were above 8%, while the same rates were below 6% in Europe, according to Rreef. Since then, the large movement of capital into real estate has depressed cap rates worldwide, but also compressed international cap rates into a small zone between 5% and 6%. Rreef notes that Moscow is the only major city today where cap rates soar north of 10% - largely due to perceived risk. Tokyo is the lowest, with cap rates under 4%. The rest of the developed world is between 5% to 6%.

Suddenly Southern California doesn’t looks so bad…

Check out the Commercial Forecasts. We score well in most areas of commercial real estate investment:
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Office Market

MBA's quarterly survey found an increase in loan originations across all property types and most investor groups, "Led by increases in commercial mortgage-backed securities (CMBS) conduit loans and loans financing office properties," declared Woodwell.

 “So far this year, 60 percent of all commercial real estate purchases have been in the office sector,” confirmed Cindy Chandler of Charlotte, N.C., chair of the Realtors® Commercial Alliance.  “We expect the flow of capital into commercial sectors to remain strong throughout the year, driven by large portfolio transactions and REIT privatizations, as investors continue to value diversification.  This could make 2007 another record year for commercial investment.”

Nationally, there is a clear preference for quality space.  Pent-up demand for quality office space has driven construction in many areas, while space in older properties sometimes is left vacant for some period of time, resulting in sluggish absorption.

Office vacancies are projected to increase to an average of 13.3 percent by the fourth quarter of this year from 12.6 percent in the final quarter of 2006.  Annual rent growth in the office sector is expected to be 4.1 percent this year after rising 5.6 percent in 2006.

Second quarter projects show areas with the lowest office vacancies include New York City; Ventura County, Calif.; Honolulu; Orange County, Calif.; Los Angeles; and Miami, all with vacancy rates of 9.7 percent or less.
In Los Angeles, the cost of leasing office space varies a great deal from neighborhood to neighborhood, but in 2006 the overall average price was up 4.7%. Average rents in Westwood rose 29% between 2003 and 2006 to $3.77 per square foot per month, Cushman & Wakefield said. Santa Monica rents were up more than 33% to $4.09.

The Los Angeles County market has not seen much office construction since the recession of the early 1990s.  There was a burst of development as rents grew during the dot-com boom around 2000, but expansion was quickly quashed by the 2001 recession.
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Industrial Market

Booming trade continues to bolster the demand for warehouse and distribution facilities across the country, with the strongest demand in coastal markets followed by inland ports and distribution hubs.  There is significant construction of build-to-suit industrial projects, while obsolete structures are being converted to other uses in stronger markets.

Vacancy rates in the industrial sector are likely to average 9.3 percent by the fourth quarter, slightly below the 9.4 percent rate at the end of 2006.  Annual rent growth should be 3.0 percent by the end of this year, up from a 1.4 percent annual rise in the fourth quarter of 2006.

The areas with the lowest industrial vacancies include Los Angeles; Orange County, Calif.; San Francisco; Tampa; Albuquerque; and Portland, Ore., all with vacancy rates of 5.3 percent or less.  Elsewhere, the slowdown in the automotive industry is hurting some markets.

Q1 industrial vacancies measured 8.15 percent, versus 8.11 percent during Q4 and 8.51 percent during the year-ago quarter. Warehouse rents increased by 1.9 percent in Q1, after rising by only 0.4 percent during the fourth quarter of 2006. This left rents up 8.5 percent over the year.

First quarter absorption was disappointing, with occupied space increasing by just 27.3 million square feet (msf), compared with 36.9 msf in Q4. Industrial absorption totaled 40.0 msf in 1Q 2006.

Net absorption of industrial space in 58 markets tracked will probably total 162.9 million square feet in 2007, down from 202.8 million last year.  Industrial transaction volume in the first four months of 2007 was $11.9 billion, down 13 percent from the same period in 2006.

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INDUSTRIAL VACANCY RATES

LOCATION   
Q1'07 VACANCY (%)
Q1'06 VACANCY (%)
Honolulu, HI
1.9
2.3
Los Angeles, CA
3.0
2.8
Bakersfield, CA
3.4
3.5
Charleston, SC
3.8
6.5
Orange County, CA
4.0
4.0
Ft. Lauderdale /Broward County, FL
4.2
3.7
Columbia, SC
4.2
0.5
Las Vegas, NV
4.5
4.2
Miami, FL
4.6
4.4
Tampa, FL
4.7
4.6
Riverside/San Bernardino - Inland Empire, CA
4.9
5.4
Nashville, TN
5.0
5.3
Jacksonville, FL
5.1
6.2
West Palm Beach, FL
5.5
4.1
Oakland, CA
5.6
5.4
Orlando, FL
5.6
6.7
San Francisco Peninsula - San Mateo, CA
5.7
5.5
Boise, ID
5.8
5.7
Cincinnati, OH
6.0
5.9
Reno, NV
6.1
4.9
Fresno, CA
6.3
7.6
St. Louis, MO
6.3
6.5
Seattle, WA
6.4
6.4
New Jersey - Northern
6.4
5.9
Indianapolis, IN
6.4
6.3
Louisville, KY
6.6
6.7
Denver, CO
6.7
7.2
Houston, TX
7.1
6.6
New Jersey - Central
7.5
7.5
Milwaukee, WI
7.6
7.7
San Diego, CA
7.8
6.9
Portland, OR
7.8
10.4
Kansas City, MO
7.9
8.4
Philadelphia, PA
8.7
8.7
Cleveland, OH
8.7
8.9
Chicago, IL
8.9
9.0
Charlotte, NC
9.2
9.7
Washington, DC
9.5
9.4
Phoenix, AZ
9.7
9.0
San Jose/ Silicon Valley, CA
9.7
10.0
Dallas-Ft. Worth, TX
9.9
10.0
Minneapolis, MN
9.9
10.3
Stockton/ San Joaquin County, CA
10.2
9.1
Hartford, CT
10.2
8.6
Pleasanton/Walnut Creek, CA
10.7
8.6
Columbus, OH
10.9
10.5
Atlanta, GA
11.4
11.8
Sacramento, CA
11.8
11.4
Greenville, SC
12.6
12.8
Detroit, MI
13.3
13.5
Memphis, TN
14.3
14.1
Raleigh, NC
15.7
14.5
Baltimore, MD
16.9
15.2
Little Rock, AR
17.7
9.4
Boston, MA
22.5
21.8

Info courtesy of Colliers
**

Retail Market

Same-store retail sales are decelerating, which is dampening the demand for retail space. Vacancy rates in the retail sector are estimated to rise to 8.6 percent in the fourth quarter from 8.1 percent at the end of 2006.  Average retail rent is forecast to rise 2.4 percent in 2007, following a 4.1 percent increase last year.

Retail markets with the lowest vacancies include San Francisco; Orange County, Calif.; Miami; San Jose, Calif.; Las Vegas; and Washington, D.C., all with vacancy rates of 5.4 percent or less.

Net absorption of retail space in 54 tracked markets is expected to be 15.7 million square feet this year, up from 10.6 million in 2006.

Retail transaction volume doubled in the first four months of this year to a total of $27.7 billion, in contrast with the same period in 2006.  Institutional investors and foreign investors together accounted for 60 percent of transaction volume.

Multifamily Market

In many areas, buildings constructed as condos are now being turned into rental projects.  The demand for apartments remains strong, but new supply is essentially matching leasing activity.

In the apartment rental market – multifamily housing – vacancy rates are projected to average 5.8 percent in the fourth quarter, almost unchanged from 5.9 percent in the fourth quarter of 2006.  Average rent should increase 2.1 percent in 2007, after a 4.1 percent rise last year.

Multifamily net absorption is likely to total 212,300 units in 59 tracked metro areas this year, down from 229,300 in 2006.

The areas with the lowest apartment vacancies include Northern New Jersey; Pittsburgh; Salt Lake City; San Jose; San Francisco and Norfolk, Va., all with vacancy rates of 2.7 percent or less.

Multifamily transactions in the first four months of this year totaled $23.2 billion, down 25 percent from the same period in 2006.  Essentially half of the purchases were by private investors; condo converters accounted for only 5 percent of acquisitions.


The next Commercial Leading Indicator index will be August 21; the next commercial real estate market forecast is scheduled for September 18.