Browse Month: August 2012

NAR Outlook: Commercial Real Estate Recovery Slows

Geographic center of the contiguous United Sta...

While underlying fundamentals remain positive and continue to support all commercial real estate sectors, ongoing tight loan availability and a slowdown in job creation has softened growth in some areas, says the NAR quarterly commercial real estate forecast.

Exports and jobs

NAR Chief Economist Lawrence Yun finds mixed results among the commercial sectors.  “Job creation in the second quarter was about half of what we saw in the first quarter, which is moderating demand in the office sector,” he said.  “Industrial and warehouse space is holding on better because imports and exports have advanced.  While exports to Europe generally are down, trade has been robust with India, China and other Asian nations, along with Brazil, Mexico and our strongest trading partner – Canada.”

Although still positive, dampened demand is slightly moderating rent growth with the exception of the multifamily market.  “Sharply higher demand for apartments is causing rents to rise at faster rates,” Yun said.  “A return to normal household formation will mean even lower vacancy rates and higher rents in the future.”

Credit crunch continues

The current commercial real estate cycle has been driven by shifts in demand without an oversupply of new construction.  “The difficulty small businesses have in getting commercial real estate loans for leasing or purchase is keeping a lid on demand,” Yun explained.  “Multifamily is the only commercial sector with a notable growth in new space, with some lending provided through government loans.”

With the exception of multifamily, vacancy rates remain above historic averages seen since 1999.  Over that timeframe the typical vacancy rate has been 14.4 percent for the office market, 10.1 percent in industrial, 8.1 percent for retail and 5.8 percent in multifamily.

Vacancy rates are marginally declining and rents are modestly rising in all of the sectors, but significant changes in the outlook are unlikely before the end of the year.  Many corporate decisions on spending and job hiring are on hold given uncertainty over the upcoming elections, whether Congress will effectively avoid a “fiscal cliff,” and unsettled issues such as health care and banking/financial regulations.

“Overall companies hold plentiful cash reserves, but they are hesitant to hire without clarity over how these outstanding issues will impact the bottom line,” Yun said.

“Commercial real estate gains could be thwarted if lending from small and community banks dry up from excessive regulatory compliance costs, and if international big-bank capital rules are applied to smaller lending institutions,” Yun added.

The sectors

NAR’s latest Commercial Real Estate Outlook1 offers projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets.  Historic data for metro areas were provided by REIS, Inc. a source of commercial real estate performance information.


  • Vacancy rates in the office sector are expected to fall from an estimated 16.1 percent in the third quarter to 15.6 percent in the third quarter of 2013.
  • The markets with the lowest office vacancy rates presently are Washington, D.C., with a vacancy rate of 9.4 percent; New York City, at 10.0 percent; and New Orleans, 12.8 percent.
  • Office rent is projected to increase 2.0 percent this year and 2.6 percent in 2013.  Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, should be 24.1 million square feet in 2012 and 47.8 million next year.
  • Industrial vacancy rates are forecast to decline from 10.7 percent in the third quarter of this year to 10.5 percent in the third quarter of 2013.
  • The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 4.6 percent; Los Angeles, 4.8 percent; and Miami at 6.8 percent.
  • Annual industrial rent is likely to rise 1.7 percent in 2012 and 2.4 percent next year.  Net absorption of industrial space nationally is seen at 59.8 million square feet this year and 67.2 million in 2013.
Retail Markets
  • Retail vacancy rates are projected to decline from 10.9 percent in the third quarter to 10.7 percent in the third quarter of 2013.
  • Presently, markets with the lowest retail vacancy rates include San Francisco, 3.8 percent; Fairfield County, Conn., 3.9 percent; and Long Island, N.Y., and Orange County, Calif., both at 5.3 percent.
  • Average retail rent is forecast to rise 0.8 percent this year and 1.3 percent in 2013.  Net absorption of retail space should be 10.3 million square feet this year and 20.1 million in 2013.
  • The apartment rental market – multifamily housing – is expected to see vacancy rates drop from 4.3 percent in the third quarter to 4.2 percent in the third quarter of 2013; vacancy rates below 5 percent generally are considered a landlord’s market with demand justifying higher rents.
  • Areas with the lowest multifamily vacancy rates currently are Portland, Ore., at 2.0 percent; New York City and Minneapolis, both at 2.2 percent; and New Haven, Conn., and San Jose, Calif., both at 2.4 percent.
  • Average apartment rent is likely to increase 4.1 percent in 2012 and another 4.4 percent next year.  Multifamily net absorption should be 219,300 units this year and 236,600 in 2013.


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The Stalled Escalator: Rigged LIBOR And Rent Increases

Under Repair

Brokers and landlord reps use of the escalation clause in a commercial space lease is a common one. These clauses provide for increases in rent over a specified period of time. Often, these increases are determined not by actual increases in the landlord’s operating costs, but are instead keyed to an index, such as the consumer price index (CPI) or the London Interbank Offered Rate (LIBOR).

Longer-term office leases so often involve the landlord’s lender that negotiations over lease provisions can seem to be between a tenant and lender rather than tenant and landlord. When a lender is in a position of underwriting the cash flow of a building, it’s that lender’s job to scrutinize closely the creditworthiness of a prospective tenant.

And therein lies the rub these days. The capacity of lenders to scrutinize creditworthiness has been called into very stark question thanks to a continuing series of scandals and financial meltdowns, the latest of which probably directly affects the lease on your table today. The LIBOR number — an interest rate that drives the rent escalation clause math in untold numbers of commercial space leases — looks like it is, was, and continues to be, in a word, rigged by banks. Banks, under investigation for engaging in book-cooking to cover their derivatives traders and to pretend to the wider market that the cost of money is lower than they actually pay, have distorted the LIBOR number to the point that holders of financial transactions that are keyed to it are hurriedly reviewing their portfolios in a hunt for lost money. And there’s plenty to find — LIBOR lives in the beating hearts of $350 trillion worth of contracts according to the Financial Times.

Going Up? No, actually

One argument about LIBOR in commercial space leases is that the bank scandals benefited tenants at the direct expense of landlords using escalation clauses tied to LIBOR. If, as allegations claim, starting in 2007, large banks began underreporting their costs of borrowing in order to stave off a rising sense of panic in the credit markets, that means that during those quarters, commercial landlords using LIBOR indexing in their escalation clauses were left holding the bag on rent — charging tenants less than they would have been due under the lease terms had LIBOR not been corrupted for the purposes of the banks’ charade.

One of the truisms in this business for both prospective tenants and landlords is to protect yourself — to secure your own representation at the deal table or otherwise run the risk of having your interests overlooked. But when our pinstriped friends the bankers are at the same table, offering both sides index numbers that amount to broken instruments designed to cover some derivative trader’s rear end instead of either the tenant or the landlord’s — how do you protect from that?

(Photo credit: Jeremy Brooks)

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Drought Fueling Surge In Farmland Prices

Source: CNN

On top of a doubling over the last five years, plains states farmland prices have risen 26% in the quarter ending June 30.  Current drought conditions are slowing the market down somewhat, but what’s the long-term picture for agriculture?

A report of survey published this week by the Kansas City Federal Reserve Bank  noted that farmland values across its region rose less than 3% versus the prior quarter, half the rate seen earlier this year. More than 75% of the survey’s respondents expected farmland values to stay roughly flat for the rest of the growing season, which ends in early fall.

RLI President Ray Brownfield of the John Green land company spoke on This Week In Agribusiness on land values and cash rates:  Right now land values are strong with buyers, and if the drought stays as a one-year effect, the long term putlook is good. Ray also mentions seeing 1031 transactions bringing nonfarm interest  –  new investors for smaller tracts.  Want to get started and understand th einevenstment in agriculture.

In the KC Fed report, Nebraska reported the biggest gains, land values for nonirrigated land climbing 37% from a 2011 and irrigated land gaining 35%. Missouri, especially hard-hit by the drought and has little irrigation, saw the value of its farmland climb only 18.6%.

Ian Berry reports:

Much of the Fed district has a relatively dry climate conducive to wheat farms and ranches, although irrigation and improved seed technology has in recent years boosted the amount suitable for corn.

Ranchland values have continued to lag behind land used for crops, as the higher feed costs and lack of pastureland due to the drought has hurt ranchers’ margins. The Fed reported ranchland values in the district, which also includes Colorado and Wyoming, were up 16.2% versus a year ago.

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New Developments In The Covered Bond Market

Cover of Covered Bonds magazineCovered bonds are a way to increase credit flow to the commercial real estate industry.  A covered bond is a way for a bank to issue a bond backed by a pool of real estate assets that are backed not only by the assets contained therein, but also by the bank’s promise to repay.

NAR has been advocating for a commercial bond market because of the benefits it would bring to the industry in terms of credit availability.  An April podcast by NAR Treasurer Bill Armstrong discusses the market and regulations on the table.

What’s new this month is that ratings agency Fitch seems to be working ahead of the coming growth in covered bonds by adjusting their rating criteria for covered bonds.  Those of you recalling Fitch’s (and Moody’s and S&P’s) enormous roles in enabling the 2008 subprime mortgage meltdown might be surprised to learn that ratings agencies actually have criteria they use to make their ratings, but indeed, they do, and here’s Fitch’s new rules for covered bonds:

Fitch has made several changes to its criteria, all of them being limited in terms of rating impact.

The three main changes are the introduction of a benefit for tenant granularity, the consideration of additional securities related to the cover assets, and an adjustment of the default modelling for loans secured by multifamily properties (MFH).

With the updated methodology, Fitch recognizes the benefit of tenant granularity in its recovery analysis for loans that are assumed to default immediately based on their current property income. Whereas previously the assumed property income was adjusted downwards under the assumption that all tenants would default in a stress scenario, now Fitch uses a rating dependent default rate to adjust the property income until lease expiry. Additional securities will now be considered in the recovery analysis if they are solely available for the benefit of the bondholders, held in cash or highly rated sovereign bonds, and assumed to have a material impact on the portfolio’s expected loss.

Additional information is available on

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Corporate Real Estate Veteran To Younger Brokers: Ditch The Spreadsheets

Picture of a legal padIt’s not possible to patrol the commercial RE beat online without finding Coy Davidson. A Senior VP at Colliers with twenty years in the business, Coy writes The Tenant Advisor, one of the better blogs dedicated to commercial property markets with a focus on corporate real estate and tenant representation and office solutions.

His recent post is titled Know Your Numbers.  And when he says “know”, he’s not kidding.  His advice to agents is to embrace the math in the financial analysis spreadsheets by learning it away from spreadsheets — old-school — to the benefit of everybody at the table. He writes:

Today, computer software makes it easy to crunch the numbers and produce impressive looking reports.  However, I am often surprised at how many agents even with a few years experience lack the financial expertise to speak the CFO’s language and effectively advise their clients. 

I learned the economics of a lease transaction with a financial calculator and a legal pad and I think young brokers should do the same.  If you are going to lay that impressive spreadsheet on your client’s desk, you should be able to explain what the numbers mean and more importantly “why they are what they are.”

Mr. Davidson’s not wrong.  In fact, in a financial era marked by disasters rooted in financial opacity, “innovation” and outright fudging as could only be enabled by Excel and its like, any call to get back to the math underpinnings in finance is a refreshing voice of sanity.

The good news about spreadsheets is they simplify presentation and provide incredible flexibility and customizability.  The bad news about spreadsheets is…they simplify presentation and provide incredible flexibility and customizability. What’s good for presentation is often no good for content.  It’s too easy to copy and paste blocks of cells from one deal template into another without ever considering the applicability of such terms to the specific client or to the investor. The ends might not even come close to justifying the means, but whether the user chooses a method either out of a shaky grasp on the fundamental math, or worse, out of a single-minded focus on the bottom line, the spreadsheet dutifully represents and enables.  Which is both a shame and a warning to not do all your work in a spreadsheet.

Opening up, as Coy suggests, a legal pad and a financial calculator before opening a spreadsheet brings real understanding to dealmaking by teaching principles of valuation, and more importantly, teaching how to arrive at valuation principles – not just taking them as a given as inherited from cells D26-36.

To help fight financial innumeracy, Coy laid out three of his earlier posts on financial analysis. Pick up one of these  and one of these and check them out


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Earn NAR’s Green Designation

NAR's Green Resource Council websiteWhen the news on climate change includes longtime holdouts surrendering their positions to acknowledge that manmade heat and emissions are contributing in a real way to our climate, it’s probably time to look again at the ways we use energy in our commercial properties.  For years, NAR has been ahead of the curve in our industry’s green research and education with the Green Resource Council, a leading source for facts, tools, education and strategies for going green.

The Green Resource Council and NAR’s Green Designation were established by the Real Estate Buyer’s Agent Council (REBAC), a wholly-owned subsidiary of the National Association of REALTORS® in the spring of 2008 as a response to the increased interest by real estate buyers, sellers and practitioners to go green. With a panel of subject matter experts, the council developed a comprehensive designation program in the summer of 2008. That fall, we launched the pilot course to a live classroom of students.

Since then, NAR’s Green Designation program has taken off. Almost 1,300 students and over 100 instructors completed one of the courses in its first few months, and as of March 2010, over 4,000 individuals have been awarded NAR’s Green Designation and membership to the Green REsource Council.

Green Business Network

Appraisers to Title Companies, the Green Business Network links dozens of industry categories and puts NAR green Designees together with providers to form solutions, Learn more about the Green Business Network and search it here. 

8 Essential iPad Apps For Commercial Real Estate


Image representing iPad as depicted in CrunchBase
Image via CrunchBase

I’m an Android guy, but I can’t pretend the wider offerings of software for the iPad and iPhone don’t make me a little green with envy once in a while.  Here are eight great apps for any commercial real estate pro:

Photoshop Express Because managing your property photos can be a pain — cropping and color correction and brightness are a must-have for property shots –  photo management should happen fast and on-site, Photoshop Express is the iPad’s leading solution, bringing much of the power of the world’s leading photo software to your pad.  Compatible with iPhone, iPod touch, and iPad.Requires iOS 4.2 or later.

AutoCad WS View, edit and share AutoCad drawings with anyone from the site with AutoCad WS. Easily open DWG and other file types and get close with your prospective tenants on improvements while on-site.

Dragon Dictation Voice recognition app that allows you to easily speak and instantly see your text or email messages. Up to five times faster than typing on the iPad keyboard. Tap to record, tap again to pause, doubletap when complete.

Dragon Recorder Use the free Dragon Recorder app with your iPhone, iPad or iPod touch (4th gen) to conveniently dictate complete memos, reports, or articles – anytime, anywhere. Play back, rewind and fast forward the audio recordings. Then wirelessly transfer the audio files to your Mac or PC for quick and accurate transcription with Dragon speech recognition.

Dropbox Emailing yourself a file so you’ve got access to it at your desktop or mobile device is a hassle.  Dropbox cuts out the hassle – its’ a free service that lets you bring all your photos, docs, and videos anywhere. Any file you save to your Dropbox is accessible from all your computers, iPhone, iPad and even the Dropbox site.

ArcGIS by ESRI Ideal for building data on top of locales using maps.  You can get to key demographic and market indicators, map distances, run keyword searches and manipulate layers.  Ideal for access plans.

Pro HDR So much of onsite photography depends on light factors that we can’t control.  But you can make up for the shortcomings using High Dynamic Range photography that takes multiple shots at once, then sums them together for the best looking exposures – all automatically.

Sign-N-Send  Sign any Microsoft Office document or PDF and send to anywhere with Sign-N-Send. Universal app that works on all iOS devices.

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LIBOR: How You Probably Got Burned

Interest Rates
Interest Rates (Photo credit: 401(K) 2012)

So did any of the commercial property deals you touched in the past five years or longer use financing?  Let me guess: the answer is yes, of course.  Developers acquiring or improving commercial assets such as land or buildings tend not to self-finance. They often turn instead to our pinstriped friends at the banks for adjustable-rate loans – adjustable, more or less because long-term fixed-rate commercial loans are offered less and less by banks.

Enjoy Your Uncertainty

Why is fixed-rate financing out of favor?  “Too much risk,” mumble our pinstriped friends. That they complain about risk while having recently presided over a disaster of sub-prime, liars loans and the like, well, never mind.

What do the loan terms do to the performance of commercial property? Quite a bit.

Service to these floating-rate loans to a great degree constrains what a commercial space broker can do in terms of flexibility on a lease.  The way a landlord financed an improvement speaks volumes to what a broker or rep can expect to see out of the property even when perfectly matched with ideal tenants.

To put it another way: we on the leasing side of the proposition could do our jobs perfectly, but if the loans up the line are riding an adjustable interest rate — and these days, most are — the perfect tenant and the perfect space far too often have to miss each other because cash flow and debt service raise their heads to address the uncertainty. Uncertainty we didn’t always have to deal with before, but do now.

That’s the role of the banks: to provide capital at interest rates that reflect the market for capital. But as with so many things our pinstriped friends are supposed to be doing, the reality turns out to be very different.

Gosh, This Thing We Sold You Looks Risky: Good Thing We Sell Protection From It, Too

Most variable-rate loans get the varying rate from one of the numbers published daily as LIBOR – the London Interbank Offered Rate. The problem with variable-rate loans, of course, is that they tend to make it impossible to know the total borrowing cost. Which is why our pinstriped friends offer the chance to exchange, at some point down the road, the variable-rate with a fixed-rate that’s higher.  This is called the swap.  It, too, is keyed off of LIBOR.

So the banks, rather than accept the uncertainty of a fixed-rate long term loan, pass along to our industry the uncertainty of floating interest rates, then sell us the protection against floating interest rates.

That’s a lot of dependence on LIBOR.

Wouldn’t it be incredible if it turned out that the constantly-adjusting interest rates our pinstriped friends used to sell us the capital we need, then sell us the protection against the uncertainty of constantly-adjusting rates…were fixed?

By “fixed” I don’t mean “not floating”.  In this case, I mean “fixed” as in a “fixed fight” — a corruption, a cheat, a scam. Rigged. A fraud.

That’s exactly what it looks like today, as the lawsuits and criminal investigations pile up:

More at The Real News

It appears as if the LIBOR interest rate that governed your commercial property’s financing’s variable interest rate as well as the swap used to get a handle on borrowing costs was cooked for years to make member banks winners in their own derivatives trades.

To a broker or developer, this means you got left holding the bag and paid too much for capital.  To a tenant rep, this means you had to settle for less than the best match for space.  To a leasing agent or tenant, it means part of your rent calculations went not to either party but to cover our pinstriped friends.  And the list goes on and on.  It looks like the entirety of our industry — and every other that borrows, which is more of less all of them — has been once again punked by an out-of-control culture in banking.

Because keeping our pinstriped friends in pinstripes is apparently our responsibility, not theirs.


Women In Commercial Real Estate: Profiles In Success

Picture of a businesswoman and businessman shaking hands

In a traditionally male-dominated industry, the presence of women can too easily be seen as a novelty or an aberration.  Mistreatment and lack of respect has historically been the reflex of most commission-driven business sectors when faced with professional women where few or none were expected before. Thankfully, there are indications that commercial real estate has gotten over any shock at the idea of women as esteemed colleagues and market competitors and is simply getting down to business with all of us seated at the table — like we need to do in the 21st century.

Professionals On The Project

What got me thinking about this is the piece I noticed in the Charlotte Oberver by Kelly Mae Ross profiling three women in commercial real estate.  One is a developer, one a officer space broker and a third a consultant.  What struck me about their stories was the depth of experience and focus on their projects in their entirety, from the perspective of several different skill-sets. If I have a bias about women in business, it’s that time and again I see professional women demonstrate themselves to be excellent multi-taskers – sometimes with an edge over guys in the keep-it-together department – and I thought it was interesting to see this come up in these profiles.

CREW: Commercial Real Estate Women

It’s one thing for the industry to have graduated from a state of shock at seeing women managing commercial property projects, but it’s something else to challenge corporate cultures.  Two things that jumped out at me in the profiles above were the advice by consultant Wendy Field and leasing agent Rhea Greene concerning mentoring.  “Network and find a mentor. “The key is having a good mentor just to get your name out, just to introduce you to new people so if there is a new opportunity, you’re aware of it,” says Greene.

“Bridging the C-Suite Gap” is a mentoring program by Commercial Real Estate Women (CREW) geared to take on the boardroom and have corporate culture catch up with the rest of the world.  Applications for this year are closed, which suggests something about the depth of demand for career development programs focused on women in CRE.

Uneven Progress

NAR’s own research reports the median age in the profession is 57. And men account for 76 percent of the trade group’s commercial members.  Addressing this is the Cleveland-based Real Estate Associate Program profiled here in the Plain Dealer.  The program, started in 1997 provides networking, education and sponsorship opportunities for minorities considering commercial real estate jobs.

Is the industry actively hostile to change or just a creature of habit?  I’d say the later.  But it’s true that there’s still a long way to go until commercial real estate more accurately represents and reflects the wider society it serves.



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REALTORS® Expo: August 15th Early Bird Registration Deadline Is Coming Up

NAR REALTORS Expo 2012 Logo

Here’s a quick reminder:

Not to be a nudge (okay, maybe a little), but we’re coming up on the August 15th deadline for Early Bird registration rate for the superlative, dynamic and difficult-to-top REALTORS® Expo in Orlando November 9-12.  We don’t want anybody missing out on the best rate for the single best national conference on commercial real estate, so register before the 15th and you won’t miss out.

The commercial team is working hard on the commercial education program, making sure the latest issues facing the 2012 market and very best speakers are on tap for attendees.  This is how we roll around here, as the following commercial links from 2011’s Expo may remind you:

As always, watch right here at The Source for highlights on the upcoming commercial program at the Expo!

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