Jackson Cooper

The ICSC (International Council of Shopping Centers) is spearheading a movement to get Congress to hasten the resolution of distressed loans. Congresswoman Shelley Berkeley (D-NV) introduced H.R. 5943, the “Community Recovery and Enhancement Act of 2010,”  in late July. Devin Nunes (R-CA) and Joseph Crowley (D-NY) are co-sponsors of this bill which has been referred to the House Ways and Means Committee.

The bill encourages third parties to provide equity in circumstances when a borrower is in trouble. If passed, the new investor would benefit from a 50% bonus depreciation on the amount invested and would obtain a minority stake.

The lender would have to restructure the mortgage while getting a large portion of the mortgage repaid immediately. The distressed borrower would use the investment to pay debt, give up an interest in the property, and use 20% of the new equity on capital improvements.

The bill was created in response to “extend pretend,” a prevalent practice, especially among regional and community banks, of granting extensions to bad loans with hopes they’ll recover.  The bill’s proposed tax break is designed to encourage more money to enter the market. Read more at retailtrafficmag.com.

Below are analyses of select commercial real estate sectors from Real Capital Analytics’ quarterly Special Reports.

Medical Office: The recent healthcare reform is expected to add insurance to 32 million more Americans, thus dramatically increasing the demand for outpatient services in the U.S. This is a high favorable prognosis for medical office buildings.  Transaction volume through the first half of 2010 was $1.2 billion, an increase of 71% from the first half of 2009.  Public and private REITs have been the main investors in this sector; healthcare REITs alone have accounted for five of the sector’s top ten buyers.

Student Housing: Sales of student housing facilities have shown a marked improvement in 2010. Overall sales have totaled $350 million so far this year, up 21% over the same period in 2009. Total unit sales, however, dropped slightly, indicating an increased property dollar value.  Private investors have accounted for 67% of acquisitions; universities have purchased the remaining 33%. Historically, public REITs have led the way in student housing, but have been absent in 2010. Compared to the larger apartment sector, student housing has fared well against default, foreclosure, and bankruptcy.

Drug Stores: While drug stores account for only a small percentage of total retail sales, their staple products of necessary pharmaceuticals and everyday household items are considered recession proof. Drug stores’ 7.6% cap rate in the second quarter of 2010 was forty basis points lower than the retail sector as a whole, reflecting a low risk profile.

Single Tenant Industrial: Unlike most sectors, the sales of single-tenant industrial properties remained largely unchanged in the first half of 2010 compared to the same period in 2009. Despite this inactivity, cap rates have improved to 8.2% in the second quarter, forty points lower than a year ago.  This stagnancy is not expected to last long as major players have recently begun to invest.

Below is the Boise/Nampa retail market summary for the second quarter of 2010:

 1. Retail Net Absorption was positive 31,489 square feet as compared to negative 7,364 after the first quarter of 2010.

2. Retail Vacancy increased to 8.4% from 8.3% in the first quarter; this rate has risen slightly over each of the past four quarters. The amount of vacant sublease space has decreased to 56,997 square feet from 101,021 square feet in the third quarter of 2009.

3. Largest Lease Signings:  15,000-square-foot lease signed by Stevens-Henager College at Treasure Valley Crossing; 10,000-square-foot deal signed by Plato’s Closet at Franklin Towne Plaza; and the 9,120-square-foo -lease signed by Precision Countertops at Franklin Towne Plaza.

4. Retail Rental Rates are at $12.10 per square foot per year; this is a decrease of 9.59% from four quarters ago.

5. Inventory & Construction:  Five buildings totaling 98,584 square feet were completed.  Over the past four quarters, 307,378 square feet of retail space has been built. At the end of the second quarter there was no retail space under construction. Notable completions in 2010 include a 55,000-square-foot facility on 3547 N. Eagle Rd, and the 55,000-square-foot Nampa Gateway Center- Edwards Theaters.

6. The Shopping Center market consists of 294 projects totaling 12,160,393 square feet of retail space in 716 buildings.  The shopping center quarter-to-quarter vacancy rate has remained unchanged at 12.3%.  Rental rates dropped to $12.48 per square foot from $13.89 per square foot at the end of the first quarter. Net absorption for the quarter was positive 28,348 square feet, totaling positive 227,162 for the year.

7. The Power Center average vacancy was 12.7%, down from 13.4% after the first quarter.  Net absorption for the quarter was positive 58,291 square feet, up from negative 140,404 in the first quarter. There was 50,000 square feet of new deliveries for the quarter. No space was under construction at the end of the quarter.

8. General Retail Properties, freestanding buildings not within a center, reported a vacancy rate of 3.9% at the end of the quarter.  Average rental rates are at $10.87 per square foot per year.  In Boise/Nampa there is a total 3,140 buildings with 19,384,554 square feet of general retail space.

9. Specialty Centers are comprised of outlet centers, airport retail and theme/festival centers. There are four in Boise/Nampa totaling 551,347 square feet of retail space. Net absorption for the year is at negative 362 square feet. The vacancy rate is 12.5% and the average rental rate is $13.33 per square foot.

10. Malls recorded net absorption of negative 14,120 square feet after the second quarter. The vacancy rate has risen to 17.6% from 17.1% after the first quarter.  Rental rates have decreased to $12.18 per square foot from $12.57 after the first quarter.

Source: CoStar Property®

-notes from Real Capital Analytics’ May 2010 Month in Review

1.  Markets are picking up momentum in terms of transaction activity. In May, there was $5.1 billion dollars in sales for all property types.  This is up 55% since last year.  

2. The strongest gains are in the apartment and office sectors, but there is a pronounced divide between top office properties, like those in New York and Washington DC, and everything else.  Weak prices continue in secondary and tertiary markets.

3.  Pricing for distressed assets continues to decline:  The average price-per-square foot for distressed property sales is $109, for non-distressed it’s $185 per-square-foot. This trend parallels office occupancy rates which are below 60% for distressed properties and over 80% for non-distressed properties.

4. In any given month, a quarter to one-third of apartment and hotel sales are related to distress.  This is why these are the property types with the shortest term lease structure, which will benefit and recover the quickest with any economic rebound.

5. There is demand in commercial real estate across the full spectrum of investors. Banks reclaiming assets, REITs, private REITs, and foreign investors are all adding to their portfolios right now. There’s capital coming from the institutional pension fund sector and private equity funds are sitting on a large amount of capital.

6. While it’s problematic to some market participants that banks and other lenders remain the most active in terms of additions to their portfolios in 2010, over a period of time as the financial system begins to stabilize, the market can begin to absorb a larger number of these assets. While banks are acquiring now, the ultimately don’t have the flexibility to retain those assets over an extended period of time.

7. People need to be patient, because what investors are really looking for is some clear sense of where the overall economy is headed. There are certainly reasons to be optimistic about the momentum built in the last several months. Although a number of jobs have been lost over the last couple years, five consecutive months of private sector payroll increases makes this recovery more consistent than the recovery in the 2002-03 recession.

8. Caution is required when looking at bidding, acquisition prices, and cap rates for some of the office and apartment trades over the last couple months.  There is the expectation that improvement in the labor market and economy will continue. Some of those improvements haven’t taken place yet, and a reversal or slow down in the current economic trajectory could ultimately impact pricing.

9. Some of the programs and changes in IRS regulations are playing out in the market the way regulators and policy makers hoped for. A significant share of new distress is related to a transfer of assets to special servicing where the loans are still current, but where potentially in a year from now there may be trouble refinancing the debt when the last extension option expires. Attacking the problem early is exactly what these programs were designed to do.

10. The new buyer landscape is diverse. The largest groups are private REITS, newly minted REITs, and foreign firms. In 2006-2007, the height of the market, thousands of one-shot investors bought into the upswing. A thousand buyers each put out acquisitions of $100 million or more during 06-07; only 125 of those have been active in any meaningful way over the past 18 months.

11. There’s a lot of money that wants to be in real estate, but with the limited options, it’s tough to get into. It is unclear at this point where the money will go, but development is being mentioned as a viable alternative as construction costs are down in the U.S.

12. Ultimately, the risk/reward opportunity in real estate investments still remains very attractive compared to other options.