A Review of Commercial Real Estate In the 21st Century
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1 By: John Boyer
Table of Contents Over the first decade in the 21st century, there were several key events / factors that had a major impact on the commercial real estate business. This document examines the following topics:
General Commercial Real Estate…..3 Dot-Com Bubble…..4 September 11, 2001…..5 Base Realignment and Closure 2005….6 The ―Prosperous Times‖…..7 Credit Crunch & Housing Market…..8 Technology’s Effect…..9 Individual Property Types…..10-17 Vacancies Transactions Cap Rates Volume Price / SF Absorption
What has Changed…..18 What the Future Holds?.....19 About Coldwell Banker Commercial..20 © 2010 Coldwell Banker Commercial Affiliates. A Realogy Company. All Rights Reserved. Coldwell Banker Commercial Affiliates fully supports the principles of the Equal Opportunity Act. Each Office is Independently Owned and Operated. Coldwell Banker Commercial, the Coldwell Banker Commercial Logo are registered (or unregistered) service marks licensed to Coldwell Banker Commercial Affiliates. Information was provided by sources deemed reliable. The views express herein this document do not represent the views of the Coldwell Banker Commercial organization.
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Commercial Real Estate in the 2000s About this Document To say the least, the first decade of the 2000s was a very interesting era in commercial real estate. It was unlike any preceding decade and will go down in history as a benchmark. The industry has drastically changed over the last 10 years and this document will examine some of the major challenges the industry faced. There is a subsequent PDF timeline available for visual reference. By no means does this cover everything that happened during this time period, but it will look at the major events and the impact on commercial real estate.
Change in Prices over the Decade1 The chart below highlights the change in price of some common items over the decade. Interesting to note the significant increase in prices related to a declining household income.
Item
2000
2009
% Change
Car (Toyota Corolla base)
$17,518
$19,395
11%
Average Income per year
$40,343
$39,423
(-1%)
Average Monthly Rent
$675
$780
13%
Average Cost of a gallon of Gas
$1.26
$2.56
49%
33 cents
44 cents
25%
$1.72
$2.49
31%
89 cents
$1.37
35%
US Postage Stamp Loaf of Bread Dozen Eggs
See More: www.walletpop.com/blog/2009/12/29/then-vs-now-how-prices-have-changed-since-1999/ As for commercial real estate, as the charts in the later part of the document indicate, across all sectors, sales and prices rose for eight straight years, followed by two very down years. To say the least, this decade was a very intriguing time for commercial real estate.
Industry Happenings During the early part of the 21st century, mergers and acquisitions are the key words that come to mind. Several firms either merged or were acquired by others, causing the commercial real estate market share to shift dramatically. CBRE acquired Insignia CBRE acquired Trammel Crow Spaulding & Slye merged with Jones Lang LaSalle (JLL) Staubach merged with Jones Lang LaSalle (JLL) Oncor International was purchased by Realogy Corporation Equity Office Property Trust (the largest owner of office buildings in the US) was acquired by Blackstone Group Colliers International and First Services Real Estate Advisors join to become known as Colliers International. Colliers Turley Martin Tucker, Cassidy & Pinkard Colliers, Colliers Pinkard, Colliers ABR, BT Commercial, BRE Commercial, and Colliers Houston rebrand as Cassidy Turley. Now, lets take a look at the first major event that effected Commercial real estate in the 2000s: the Dot-Com bubble.
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Dot-Com Bubble Dot-Com Bubble The first decade of the 2000s started off with a bang, or ―BURST‖ that is. After Netscape launched the first successful Internet browser in the early 90s, the Internet industry exploded and a period began that is now known as the ―Dot-Com‖ bubble. Hundreds of start-up internet companies or ―dot-coms‖ popped up and thousands of jobs were formed. Venture capital flowed into the new companies and investors bought up stocks in companies that were highly over-valued, and a number of dot-com millionaires were born. Many of these companies engaged in unusual business practices with the hopes of dominating the market. The mantra was growth over profit, assuming that if they built up their customer base, their profits would rise as well. At the height of the boom, it was possible for a promising dot-com to make an initial public offering (IPO) of its stock and raise a substantial amount of money, even though it had never made a profit. Investors responded to daring business practices with money; lots of it. The US stock market rose dramatically during the this period, with hundreds of companies being founded weekly, especially in tech hot spots like the Silicon Valley near San Francisco. Some companies engaged in lavish internal spending, such as elaborate business facilities and luxury vacations for employees. Then the bubble burst in March of 2000. Investors began selling off stock in large quantities, putting the market into a precipitous fall for the next two years until it finally bottomed out. Billions of dollars vanished and thousands lost their jobs. 2 Follow the complete timeline
Future Effect Recent research suggests, however, that as many as 50% of the dot-coms survived through 2004, reflecting two facts: the destruction of public market wealth did not necessarily correspond to firm closings, and second, that many of the dotcoms were small players who were able to weather the financial markets storm. Also, much of the sublease inventory opened the doors for tenants to enjoy Class A space at reduced rates.
Web 2.0 Bubble? Commercial Real Estate Effect Cities all over the US sought to become the "next‖ Silicon Valley by building network-enabled office space to attract Internet entrepreneurs. There was false demand for commercial real estate that was fueled by the dot-com companies and their insatiable appetite for growth. Many professionals achieved great success quickly moving tenants into 100,000 SF facilities — much of which was unneeded space. In the beginning of the bubble, Data Centers — facilities housing computers, servers, telecommunications and storage equipment, and systems to backup and protect data, power and cooling systems — were the popular purchase. When the bubble burst, much of these Data Centers and office space were left vacant. The cost of transferring Data Centers back to usable office space was very expensive. Over-committed tenants quickly dumped their unneeded space, quadrupling the available sublease inventory in the span of six quarters to 146 million SF3. The flood of sublease space was concentrated in technology hubs such as San Francisco, San Jose, Seattle, Austin and Boston. Silicon Valley and San Francisco were hit the hardest. Rents plummeted in both areas. San Francisco's office demand in the 91block former industrial area known as South of Market, had 49% vacancy after the burst. The citywide office vacancy rate climbed to 23% in the fourth quarter of 2001 from 1.8% in the third quarter of 2000. Office space from failed companies such as Pets.com were turned into Apartments. Employment in Silicon Valley high-tech industries declined by about 17% and rent fell 30%. 4
In 2007, new Internet technologies prompted another rush of start-ups to tap the energy associated with Web 2.0 - wikis, blogs, podcasts, widgets and social media — to quickly extend their Internet real estate. But while the Web 2.0 phenomenon may have some things in common with the Dot-Com bubble, experts note that there are also differences, including the low cost of entry for companies launching blog, wiki or social networking businesses. The main difference, however, is that this time around, consumers are driving the adoption of the technologies rather than companies trying to force their Internet sites onto users.5
Opportunities Today The business need for Internet speed is rising exponentially in the digital era of Google, Yahoo, Netflix, YouTube, Facebook, Twitter, online gaming and smart phones. Such "cloud" data must be stored offsite at colossal data centers. Data center property niche has been one of the few commercial real estate sectors to generate sizzle through the recession. Granted, data center sales, leasing and development transactions slowed considerably in 2008 and 2009 as construction and acquisition financing dried up. However, pent-up demand since 2005 has sparked a new flurry of construction, acquisitions and equity raising activity by data center builders and investors, with hundreds of thousands of square feet of new data center facilities 4 were announced in 2009-2010.6
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September 11, 2001 Just as the economy was showing signs of bouncing back from the Dot-Com bubble, the September 11, 2001 attacks on the U.S. occurred.
About the Attack September 11, 2001 - terrorists hijack four U.S. airliners. The attack of planes leveled the World Trade Center and inflicted serious damage to the Pentagon in Arlington, VA, causing nearly 3,000 total deaths. The fourth plane was heroically crashed by passengers when they learned of the plot, preventing destruction of another structure. The plot was attributed to the AlQaeda organization led by Osama Bin Laden. The U.S. then began the War on Terrorism and attacks Afghanistan. View some of the costs of the attacks.
Effect on NYC In NYC, 13.4m SF of Class A office property was destroyed and another 14.4m SF damaged. This would negatively affect the national absorption numbers for the office sector. Lower Manhattan lost approximately 30 percent of its office space. This was more than the total vacant space in an already tight New York City office market. After 9/11, some tenants spread to multiple locations, including suburbs, and, in many cases, moved to low-rise buildings. In New York City, about $2.8 billion in wages were lost in the three months following the 9/11 attacks. The economic effects were mainly focused on the city's export economy sectors. The city's GDP was estimated to have declined by $27.3 billion for the last three months of 2001 and all of 2002.7 View the complete World Trade Center study by FEMA. View a Detailed report on Tenants that were effected in NYC
Effect on Commercial Real Estate & the Economy8 As a result of September 11, consumer confidence was low. Air travel was more difficult due to enhanced security and people were afraid to fly. Retail spending was down. There was a lot of speculation that ―trophy‖ buildings would suffer, but that would prove not to be the case. The effect of 9/11 was short-lived in that aspect. With hindsight, we can see that the U.S. economy was already suffering and the 9/11 attacks did not have a significant effect on economic growth either nationally or in New York. In the months that followed, there was a flock to secondary markets, especially in the retail and apartment sectors, but that would also prove to be short-lived. The 9/11 attacks had a profound impact on the attitudes among corporate real estate executives. Most firms were adopting a number of new security and safety measures, revisiting all communication procedures and engaging in general disaster and business recovery planning. Some firms moved their business to more suburban areas. Total occupancy costs, as a result of security and insurance costs, were said to increase by 1% to 3% on average with greater increases on central business district high-rise properties. At the same time, it appeared that lenders would not finance property if terrorist insurance was not part of the coverage. The cost of insurance for office space went up from $0.24 to $0.40/SF. Some of these costs were pushed down to the tenants.
Security In 2001, the cost of security in privately-owned office buildings was approximately $0.50/SF. By 2003, that cost had doubled to more than $1.00/SF. The increased expenditures covered items such as: identity cards, scanners, security cameras and personnel. In government-owned buildings, which have installed security codes, concrete barriers, structural reinforcement, wider stairways and enhanced communication systems, the costs go as high as $2.00/SF. On the other hand, the cost of office security in the suburbs is considerably less than it is in the cities. Moving just 15 to 20 miles outside of the city can reduce the cost of security by as much as 60 percent. Moreover, studies show workers feel safer when situated just a few miles outside the urban areas, so several firms did move their shops to suburban areas. Back-Up Sites Another result was the potential need for some firms to create back-up sites. Firms were wary of concentrating their data in one place. The cost, time and manpower to research catastrophe preparedness, and the investment in additional real estate and equipment to set up dual locations can be considerable. Looking on the Bright Side This is not to say that heightened security measures are all negative. In fact, the number of robberies and break-ins committed in New York City office buildings has declined. With gated and secure parking areas, there have been fewer car thefts. Over all, commercial buildings are safer than ever before. 9 5 View other sections: www.crereview.com
Base Realignment and Closure (BRAC) 2005 Base Realignment and Closure 2005 What is BRAC (Base Realignment and Closure)? By definition, BRAC is a process of closing excess military installations and realigning the total asset inventory to reduce expenditures on operations and maintenance. More than 350 installations have been closed in four BRAC rounds: 1989, 1991, 1993, and 1995. The most recent round of BRAC completed in the fall of 2005 and with the commission's recommendations became law in November 2005.10
Major facilities slated for closure: Fort McPherson, Georgia Fort Gillem, Georgia Naval Submarine Base New London in Connecticut (removed from list August 24, 2005) Portsmouth Naval Shipyard in Kittery, Maine (removed from list August 26, 2005) Naval Air Station Brunswick in Maine Ellsworth Air Force Base in South Dakota (removed from list August 26, 2005) Cannon Air Force Base in New Mexico (temporarily removed from closure August 26, 2005) Fort Monmouth in New Jersey Defense Finance and Accounting Service in New York Fort Monroe, Virginia Willow Grove Naval Air Station in Pennsylvania Naval Station Ingleside, Texas Otis Air National Guard Base, Massachusetts (removed from list August 26, 2005) Navy Supply Corps School
Major facilities slated for realignment: Army Human Resource Command (HRC) in Missouri, moving to the Fort Knox in Kentucky. Walter Reed Army Medical in Washington, D.C. Naval Station Great Lakes in Illinois Naval Air Station Oceana in Virginia (extent contingent on reopening the former Naval Air Station Cecil Field in Florida) Grand Forks Air Force Base in North Dakota Eielson Air Force Base and Elmendorf Air Force Base in Alaska Rome Laboratory in New York Wright Patterson Air Force Base in Ohio
Effect on Commercial Real Estate & the Economy When a military facility closes, the effects ripple throughout the surrounding community as families lose their neighbors, businesses lose their customers and workers lose their jobs. It also may affect transportation in many cities as workers are moved around to the alignment. A positive impact is the ―buffer‖ space around the bases may become available for development. Although the report came out in 2005, the effects of it may not have been seen yet. Many of the bases scheduled to close either have been removed from the list, or haven’t closed yet. September 2011 is the date that many of the facilities listed will be closed. We will know in the years to come the economic impact of the BRAC 2005. Just to give you an idea of the effect of a BRAC, the closure of Norton Air Force Base in 1994 had a devastating impact especially to the City of San Bernardino. There has been some redevelopment since then, however, the financial impact on the city is still being felt today. So what will communities do with the empty base space? These are massive spaces that had a very specific function, and are typically in secure, remote areas. Several plans have been put into place as to what to do with the empty base space. These plans are guided by “Local Redevelopment Authorities.‖ These plans include city centers, green centers, biomedical research parks, residential and other commercial uses. An issue to deal with is because of the security levels of some bases, the street grid and other necessary items are not extended out into the community. So the challenge becomes finding a way, as the bases are redeveloped, to make those connections; new roads, removal of security gates, etc.
View the Final Updated BRAC 2005 List11
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Prosperous Times Prosperous Times
CRE Sales Volume 2004-2007 ($5m+) Millions
There was a period in the first decade of the 2000s, during 2005-2007, which one can refer to as ―Prosperous Times;‖ where it seemed like everyone was prospering within commercial real estate. As shown in the graphs to the right or in the later part of this document, across all property types, sales were up, vacancies were down, CAP rates were at historic lows and rents were rising. Development was fast paced – construction and other bridge financing was readily available and inexpensive – the market was enjoying quite a ride.
$250,000
$200,000
Office
$100,000
Retail
Apartment
$50,000 $0
Debt capital was abundant. Not only for home purchases, refinances and other real estate related financial transactions—but for corporations and private equity. Many Buyers/Users looked to future projected income (in most cases excessively optimistic) to justify present values that were unsound. Leverage buy-outs were abundant—the large banks, Wall Street and pension fiduciaries were spending into the economy like they had not done in the recent past. Things were really good!
Industrial
$150,000
2004
2005
2007
Source: Real Capital Analytics
In 2007 $423B of commercial real estate assets traded hands.
CRE Avg. Price/SF 2004-2007 $300
$271
$250 Virtually all of the significant transactions (displayed on the following pages) were completed during this time. In fact, there were several record-setting quarters for the individual property types. Competition among buyers for the largest and best assets remained fierce. Condo Converters were running strong during these years. The prices they paid for multi-family properties outpaced the conservative business mind of the investor buyers.
2006
$200
$225
$196
$175
$150
$145
$155
$175
$187
Office
$100
$50
$74
$65
$59
Industrial
$76
Retail
$0 2004
2005
2006
2007
Source: Real Capital Analytics
It seemed liked everyone wanted to be in commercial real estate. National commercial real estate trade shows, such as ICSC, experienced record levels of attendance. Commercial real estate companies seemed to grow in size, more offices opened up, more professionals would be licensed. To say the least, it was a great time to be in commercial real estate. The commercial industry lagged slightly behind the Housing Boom, which took place between 2003-2005.
Housing Market The ―Housing Market Boom,” a period between 2003-2005; where home prices dramatically increased, bidding wars were frequent, contracts were above asking prices and houses remained on the market for short periods of time. For a while, it seemed you could pay almost anything for a home, wait a few months and make a profit selling it. During this time, consumer confidence soared. Home owners were building equity at a rate that outpaced their savings; and as such, many stopped putting money aside and were looking to their future net worth to be a product of the value of their largest investment – their home. This in turn, led to many homeowners stretching the envelope as to what they felt they could afford. However, it appeared to be a false “Prosperous Times” and this all led to...
Source: Fannie Mae
“You could do less than half the things right and still have an awesome year…” anonymous
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During the ―Housing Market Boom,‖ inflated confidence in prices led lenders to give mortgages to unqualified buyers, which led to spectacular short-term gains. These "subprime" loans were packaged into groups that were traded like securities and purchased by some of the largest investment houses including Citigroup and Merrill Lynch.
7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
$245 $225 $205 $185 $165 $145 $125 $105 $85 $65 $45 $25
Median Home Price (000s)
After a short period of ―false‖ economic prosperity (See Prosperous Times), Americans experienced an economic crisis. In 2008, the National Bureau of Economic Research announced that we were officially in a recession. Unemployment rates sky-rocketed with well over a million jobs lost in 2008.
U.S. Home Sale Units (in millions)
Credit Crunch & Housing Market
20002001 200220032004 20052006 200720082009
U.S. Homesale Units
Median Home Price
Then, in 2007, home prices began a rapid decline. This occurred as mortgage loan terms changed and interest rates rose, causing homeowners to begin defaulting on the loans that they never should have qualified for in the first place. Many homes went into foreclosure and the excess supply of homes put downward pressure on prices. The relaxation of real estate valuation standards and real estate finance underwriting guidelines inflated loan to value ratios beyond levels that can be refinanced. The banks had to write down the value of their mortgage-backed assets. This created huge losses for banks in 4th quarter of 2007, and also restricted their ability to borrow and lend capital, which greatly reduced the capacity of banks to loan money, spurring a “liquidity" crisis. It came to a head when Wall Street hemorrhaged losses. Lehman filed for bankruptcy, Goldman Sachs and Morgan Stanley became bank holding companies, Wachovia merged with Wells Fargo, and Congress passed the Wall Street bailout package. A series of government measures to rescue ailing companies like AlG, Fannie Mae and Freddie Mac followed. The ―big three‖ car companies (General Motors, Ford, and Chrysler) asked Congress for a bail-out to prevent the auto industry from going bankrupt. Fearful Americans stopped shopping, and the retail industry hit a 40-year low.
Timeline of the entire Crisis12 Effect on Commercial Real Estate 250,000
CMBS Issuances
200,000
In August 2007 on the commercial side of the business – as a result of the subprime mortgage debacle – the securitized debt markets became virtually non-existent. See CMBS Issuances Chart
150,000 Credit became unavailable due to the global financial meltdown. As such, virtually every aspect of the commercial real estate industry was impacted. Establishing current values was near impossible due to lack of market activity, comparable sales and short sales.
100,000 50,000 0 2005
2006
2007
2008
2009 Investors were basing investment decisions on pure cash returns vs. using leverage to bolster yields. According to Real Capital Analytics, values declined considerably, by as much as 45% . Many would-be sellers were holding properties off the market and in many cases, find themselves today in ―negative equity purgatory‖. There was a huge gap between buyer and seller expectations. The result was a 88% decline in overall volume of assets traded from $423B year-end 2007 to $51.4B in 2009 (the lowest of the decade). 2009 would go in the record books as a devastating year for commercial real estate. Price / SF also declined and development was virtually non-existent. Average cap rates rose, causing prices to fall. Vacancies rose to record levels and there are many debt maturities on the horizon. As a result, many projects were put on hold: View 10 CRE projects put on hold
Many distressed properties started to come to the market (with more slated to hit), and some commercial real estate professionals were taking advantage of this new-found opportunity.
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Technology Technology Technology seemed to explode in the 2000s. Devices such as portable MP3 players, Nintendo Wii, Xbox, Netflix, DVR, Blue-Ray and iTunes all revolutionized consumer behaviors. Let’s examine some of the major technological advancements and their effect on commercial real estate.
Availability of Information The Internet explosion took the commercial real estate business by storm. Information become more readily available. While sites such as CoStar and LoopNet (which went public in 2006, although both technically launched in the late 1990s) became increasingly popular, and in fact, became the ―norm.‖ It seemed as if commercial real estate companies needed access to one or both. Information such as comparables, that were traditionally coveted and indeed, a professional’s differentiator, were now readily accessible, and leveled the playing field for professionals. In residential real estate, this has become more prevalent with Listing Hubs, Zillow and Trulia; because now the information is accessible to the general public instead of agents controlling what their clients see. The question to ponder is, will commercial real estate follow in residential’s footsteps, as it typically does, in making information even more readily available and accessible to the public? Read an interesting LinkedIn conversation about information becoming more accessible.
Internet Shopping Internet shopping wasn’t developed in the 2000s, but its popularity grew by leaps and bounds over the last decade. From a commercial real estate perspective, this had a direct effect on the retail sector. Music downloading sites such as Napster and iTunes severely damaged the CD industry, causing such stores as Tower Records to close their doors. Netflix has really put a dent in Blockbuster’s market dominance; and online discount shops have hurt retail sales, causing stores to close. View the list of companies that have recently closed shops. It isn’t all bad news though. There has been a recent shift in these shops requiring more warehouse space and shipping needs to house their internet distribution goods.
Smartphones Without a doubt, the single technological advancement that changed commercial real estate the most in the 2000s was the advent of the Smartphone. The nature of the business is persistent and consistent contact with clients. The Smartphone allowed the convenience of being more accessible and ability to retrieve and send emails while on the go, instead of at your desk. These days, it’s rare to see a commercial real estate professional without a Smartphone. If you do see one, would you conduct business with him?
Social Media Social Media exploded in the 2000s, especially the latter part of the decade. I don’t think we’ve fully experienced the ramifications of Social Media yet for commercial real estate, but it is coming. Social Media created a shift in the way we traditionally think about marketing. Typically, you would market your properties to your sphere of clients via email, which was very localized and had little interaction. Also, Social Media created a shift in the way we think about networking. Typically, most networking took place at an industry event. You handed out a couple of business cards and talked shop with a limited number of people. Most of the people were from your market. With Social Media, these boundaries can be broken. You can network with and market to thousands of people on a local, regional and national basis; at the click of a button! You can also reach many more people with your marketing efforts.
Video With the launch of YouTube in 2005, videos became more accessible to the public. Like Social Media, Video hasn’t quite translated into the commercial real estate world, but many in the industry believe it will. As video gets cheaper and easier to produce, you will see more ―virtual tours‖ and less flyers of a building.
What’s Next There are a couple of new technologies on the horizon that could have a dramatic effect on commercial real estate such as Augmented Reality and QR Codes to be aware of. You will have the ability to include more information on building signs, business cards or property flyers; that a user can download directly to their Smartphone. View other sections: www.crereview.com
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Office 2001—2009 5,000
Office Transactions & Avg Cap Rate
4,000
12%
200,000,000
10%
150,000,000
8%
3,000
100,000,000
6% 2,000
50,000,000
4%
1,000
2%
0
0
0%
-50,000,000
CAP
-100,000,000
Trans
01' 02' 03' 04' 05' 06' 07' 08' 09'
Source: Real Capital Analytics
$250,000
Office Absorption
01' 02' 03' 04' 05' 06' 07' 08' 09'
Source: CoStar
$35.00
$500
Office Volume & Price/SF
$200,000
Office Rental & Vacancy Rates
$30.00
$400
12%
$25.00
$150,000
$300
$20.00
$100,000
$200
$15.00
$50,000
$100
$0
8%
$10.00
4%
$5.00
$0 01' 02' 03' 04' 05' 06' 07' 08' 09'
Millions
16%
$0.00
P/SF
Rental
Source: Real Capital Analytics
0% 01' 02' 03' 04' 05' 06' 07' 08' 09' Vacancy
Source: CoStar
Significant Transactions: CBD Name
City, ST
SF
Price
$/SF
Buyer
Year
666 Fifth
New York, NY
1,550,000 $1,800,000,000 $1,161
Boston Properties JV Goldman 2008 Sachs JV Meraas Capital Kushner Companies 2007
WorldWide Plaza
New York, NY
1,600,000 $1,739,000,000 $1,087
Macklowe Properties
2007
MetLife Bldg
New York, NY
2,840,000 $1,720,000,000 $606
Tishman Speyer Properties
2005
Travelers Complex
New York, NY
2,600,000 $1,575,000,000 $606
SL Green Realty Corp
2007
General Motors Bldg
New York, NY
1,925,000 $2,853,000,000 $1,482
Significant Transactions: Suburban Twin Towers Complex
Arlington, VA
1,100,000 $670,000,000
$609
Monday Properties
2007
Twin Towers Complex
Arlington, VA
1,100,000 $495,000,000
$450
Beacon Capital Partners
2005
Waterview Office Twr
Arlington, VA
633,908
$435,000,000
$686
Paramount Group
2007
One & Two Fountain Sq
Reston, VA
616,178
$420,000,000
$681
Beacon Capital Partners
2007
Polk & Taylor Bldgs
Arlington, VA
886,447
$419,000,000
$473
Beacon Capital Partners
2007
Source: Real Capital Analytics
View next page for a breakdown of the Office Sector by year
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Office Breakdown
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Retail 2001—2009 5,000
Retail Transactions & Avg Cap Rate
4,000 3,000
12%
50,000,000
10%
40,000,000
8%
30,000,000 20,000,000
6% 2,000
10,000,000
4%
1,000
0
2%
0 01' 02' 03' 04' 05' 06' 07' 08' 09'
Trans
-10,000,000
0%
-20,000,000
CAP
-30,000,000
Source: Real Capital Analytics
$80,000
$70,000
Retail Absorption
00' 01' 02' 03' 04' 05' 06' 07' 08' 09'
Source: Reis
Retail Volume & Price/SF
$60,000 $50,000
$250
$18.00
$200
$17.00
$150
$16.00
$100
$15.00
$50
$14.00
2
$0
$13.00
0
Retail Rental & Vacancy Rates
10 8 6
$40,000 $30,000 $20,000
4
$10,000 $0 Millions
12
01' 02' 03' 04' 05' 06' 07' 08' 09'
Rental
P/SF
Source: Real Capital Analytics
01' 02' 03' 04' 05' 06' 07' 08' 09'Vacancy
Source: Reis
Significant Transactions: Strip Malls Name
City, ST
SF
Price
$/SF
Buyer
Year 2008
Bay Street Emeryville
Emeryville, CA
383,055
$234,000,000
$611
LaSalle Bank JV Madison Marquette
Suburban Square
Ardmore, PA
360,501
$215,000,000
$596
Kimco Realty
2007
Jack London Square
Oakland, CA
460,484
$191,000,000
$414
Nat Electrical Benefit Fund
2007
Villa Marina Mktplace
Marina del Rey, CA
450,000
$189,000,000
$420
RREEF Funds
2006
Winter Garden Village
Winter Garden, FL
758,988
$180,000,000
$238
Cole Capital Partners
2008
Significant Transactions: Malls Mall of America
Minneapolis, MN
4,200,000 $1,800,000,000 $429
Triple Five Group
2006
Sawgrass Mills
Sunrise, FL
1,991,491 $1,025,000,000 $515
Simon Property Group
2007
Grand Canal Shoppes
Las Vegas, NV
445,151
$1,721
General Growth Properties
2004
Potomac Mills
Prince William, VA
1,606,000 $520,000,000
$324
Westfield North Bridge
Chicago, IL
680,933
$756
Simon Property Group 2007 Macerich JV Alaska Permanent 2008 Fund Corp
$766,000,000
$515,000,000
View next page for a breakdown of the Retail Sector by year
Source: Real Capital Analytics
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Retail Breakdown
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Apartment 2001—2009 7,000
12%
120,000
10%
100,000
8%
80,000
6%
60,000
4%
40,000
1,000
2%
20,000
0
0%
0
CAP
-20,000
Apart Transactions & Avg Cap Rate
6,000 5,000 4,000 3,000 2,000
Trans
01' 02' 03' 04' 05' 06' 07' 08' 09'
Source: Real Capital Analytics
$120,000
$160,000
$1,050
9 8 7 6 5 4 3 2 1 0
Apart Rental & Vacancy Rates
$1,000
$120,000
$80,000
$950
$60,000
$80,000
$40,000
$900 $850
$40,000
$20,000
$800
$0
$0 01' 02' 03' 04' 05' 06' 07' 08' 09'
Millions
01' 02' 03' 04' 05' 06' 07' 08' 09'
Source: Reis
Apart Volume & Price/SF PPU
$100,000
Apartment Absorption
$750 P/SF
Source: Real Capital Analytics
01' 02' 03' 04' 05' 06' 07' 08' 09' Vacancy
Rental Source: Reis
Significant Transactions: Garden Name
City, ST
Units
Price
$/Unit
Buyer
Year
Empirian Village
Greenbelt, MD
2,877
$275,000,000
$95,586
Empire Equity Group
2008
Jefferson at Bay Mdws
San Mateo, CA
575
$220,000,000
$383
Archstone
2006
Palazzo East
Los Angeles, CA
610
$199,000,000
$327
AIMCO
2005
The Avant
Annandale, VA
1,065
$198,000,000
$186
Stellar Management
2007
The Park Kiely
San Jose, CA
948
$190,000,000
$201,248
Laramar Group
2008
11,232 $5,400,000,000 $481
Tishman Speyer
2006
Significant Transactions: High / Mid Rise PeterCooper & StuyTown
New York, NY
Trump Place
New York, NY
12,330 $809,000,000
$658
Equity Residential
2005
Villas Parkmerced
San Francisco, CA
3,486
$675,000,000
$194
Stellar Mgmt
2005
Manhattan House
New York, NY
587
$623,000,000
$1,061
Richard Kalikow
2005
Presidential Towers
Chicago, IL
2,346
$475,000,000
$202
Waterton Associates LLC
2007
Source: Real Capital Analytics
View next page for a breakdown of the Apartment Sector by year
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14
Apartment Breakdown
15 View other sections: www.crereview.com
Industrial 2001—2009 7,000
12%
250,000,000
10%
200,000,000
8%
150,000,000
6%
100,000,000
4%
50,000,000
1,000
2%
0
0
0%
-50,000,000
CAP
-100,000,000
Industrial Transactions & Avg Cap Rate
6,000 5,000 4,000 3,000 2,000
01' 02' 03' 04' 05' 06' 07' 08' 09'
Trans
$100
Industrial Volume & Price/SF
$50,000
$80
$40,000
$8.00
Industrial Rental & Vacancy Rates
10%
8% $4.00
6%
$40
$20,000
$20
$10,000 $0
$0
01' 02' 03' 04' 05' 06' 07' 08' 09'
P/SF
12%
$6.00
$60
$30,000
Millions
01' 02' 03' 04' 05' 06' 07' 08' 09'
Source: CoStar (Flex & Warehouse combined)
Source: Real Capital Analytics
$60,000
Industrial Absorption
4%
$2.00 2% $0.00 Rental
Source: Real Capital Analytics
0%
01' 02' 03' 04' 05' 06' 07' 08' 09' Vacancy
Source: CoStar (Flex & Warehouse combined)
Significant Transactions: Flex Name
City, ST
SF
Price
$/SF
Buyer
Year
Dallas Market Center
Dallas, TX
4,800,000 $249,000,000
$52
CNL Income Properties
2005
Sun Microsystems Cmplx
Burlington, MA
805,000
$212,000,000
$263
Nordic Properties
2007
Sunset Gower Studios
Los Angeles, CA
415,000
$205,000,000
$493
Hudson Capital
2007
San Diego Tech Center
San Diego, CA
647,000
$185,000,000
$286
Maguire Properties
2005
Northlake Data Center
Melrose Park, IL
700,000
$181,000,000
$259
Microsoft
2009
$372,000,000
$483
Pfizer Corp
2004
Significant Transactions: Warehouse Pfizer La Jolla Campus
La Jolla, CA
770,000
Metro Chicago
Chicago, IL
3,743,211 $231,000,000
$62
RREEF Funds
2005
Pacific Gateway Ctr
Torrance, CA
1,252,708 $195,000,000
$156
Prudential RE Investors
2006
Chino South Business Park Chino, CA
1,807,421 $147,000,000
$81
John Hancock Insurance Co
2008
110-112 Hidden Lake
786,778
$171
Lexington Corp Prop. Trust
2005
Duncan, SC
$135,000,000
Source: Real Capital Analytics
View next page for a breakdown of the Industrial Sector by year
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Industrial Breakdown
17 View other sections: www.crereview.com
What has changed What has changed Now that you understand what happened during the first decade of the 2000s, let’s take a minute to understand what has changed. Over 200 Coldwell Banker Commercial® professionals from across the U.S. responded to a survey about what they felt has changed in the commercial real estate industry. If you've been in the business for more than 12 years, what is different in the way you do commercial real estate now, than in times before the year 2000? Less Personal—Smartphones have made it easier to become accessible. However, it also made it easier to ―text‖ answers to questions. There are a lot less face-toface meetings. The personal meetings to develop strategic decisions and action plans are drawn out by streams of piecemeal emails. The transactions may initiate with a face-to-face meeting, but much of the follow up is done via texting and emailing. Although we haven’t fully transitioned away from it, the ―old school‖ style of brokerage is slowly fading and may fade more in years to come. However, it may never die, technology will just integrate more. More Information—Increased sophistication of marketing tools via the internet along with "user-friendly" software and sites allowed more users access to materials that were easy to understand, increasing the public's awareness and exposure to deals that were typically only available to "A" list and institutional clients. We can no longer use our ―possession‖ of the information to attract clients. Instead, we must focus on how clients use the information - helping them - understand it, interpret it, analyze it, simplify it and utilize it. Less Localized—The internet has paved grounds for wider dissemination of marketing material and improved communication. We are doing more regional and national business than we’ve done in the past. Networking is also much easier. You can connect with many more professionals and potential clients on the various social media sites in a matter of minutes. This would have taken years in the past. What are clients doing differently? Demand information faster—Most want property offering brochures sent by electronic means, not by fax or regular mail. They want you to text them regularly to keep them updated. They don’t want to sit down for an hour lunch; they are happy with you emailing the necessary info. Shift in what they need—Clients don’t need someone who is just going to complete the transaction. Sites such as Craigslist are assisting small property owners to market their property without the help of an agent. Clients now need an advisor. On the leasing side, they are using space more efficiently and using an open plan "bullpen" set up more and more. They are getting smarter with the amount of ―actual‖ space they need. Due Diligence—Since information has become more readily available, clients are spending more time "crunching the numbers.‖ They are being extremely patient, waiting for the right opportunities. Many clients are only buying when the seller and buyer can make a deal without the banks participating; or, there is a deal below a reasonable market price. Many are also purchasing based on cash flow rather than appreciation. Clients are pre-qualifying professionals they hire by visiting websites which include personal sites, national websites, listing database sites and social media sites. They expect more and won’t work with you if you are not qualified! Expect You to be Prepared—As a result of the client's due diligence regarding professionals, clients now expect their professionals to know something about their property and/or their corporate structure at the initial meeting. Professionals must be prepared to discuss various strategies with their clients before their first face to face meeting or first conference call. Feeling the effect of the Credit Crunch—Most transactions only occur when the sellers are willing or able to sell at steep discounts compared to the asking price of a couple of years ago or are able to provide some form of owner financing or some combination thereof. As a result, most sellers with better options are sitting on the sidelines while waiting for values to return. Even when sellers have sufficient motivation to sell and they and ability to lower their price, buyers often times cannot secure sufficient financing to complete a transaction with loan-to-value ratios being as low as 65% or lower. While owner financing is usually an option, many are not inwww.crereview.com a position to offer it which results in many deals that fall through. View sellers other sections:
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What the Future Holds What the Future Holds Although the last two years of the decade saw historic lows in property transaction volume due to the Credit Crunch, according to Real Capital Analytics, 2010 has started off on a positive note. The first and second quarter results show the progress made in the investment markets and the overall change in attitude from just a year ago. Sales volume increased from Q2’09 with every property type registering higher volume. Core rather than distressed sales were primarily behind the volume gains despite the huge overhang of distressed situations. Analysis also reveals that lenders are far more likely to restructure and extend rather than liquidate troubled assets. One sign of recovery is the increase of CMBS issuances which totaled 4 billion during the first quarter of 2010; whereas, only 3 billion were issued in 2009.
When speaking of the future of commercial real estate, there are several questions to ponder: What other mergers will take place within CRE? What will be the lasting effect of the BRAC? How long will the Credit Crunch effect commercial real estate and the economy? When will the economy as a whole turn around? Will internet sales continue to restructure the retail business? What is the next technology that will come out? Will data be made more available to the public? What effect will the new NAR Realtors Property ResourceTM (RPR) an online real estate library/archive with data on every property in the U.S.—have on the CRE industry? Yes, commercial information will be included. Read their blog for more info What new technologies will help evolve the Green movement? What new products / materials will have an effect on CRE building designs? What new technologies will increase operating efficiencies? What will drive leasing and sales in the coming years? When will the wave of distressed assets actually hit the markets and when will this activity slow down?
Sources: 1—www.thepeoplehistory.com/pricebasket.html 2—Dot-com bubble 3—www.commercialpropertyinfo.net/images/Office_Market_Report.pdf 4—Vacant Dot-Com Sites in San Francisco Turn Into New Apartments 5—Web 2.0: A new dot-com bubble in the making? Mar 19, 2007 6—Data Center Development Flying High Again In New Era of Cloud Computing. June 9, 2010 7—The Implications of September 11, 2001 New York attacks on U.S. Cities’ Urban Functionality and Corporate Location 8—9/11/2001 impact on trophy and tall office properties 9—The Economic Impact of Heightened Security Measures on the Commercial Real Estate Market, Post 9/11 10—Base Realignment and Closure, 2005 11—Final updated BRAC list 12—Economics of Crisis: Timeline of the entire Crisis
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About Coldwell Banker Commercial速
The collective commercial real estate experience and know-how found in the Coldwell Banker Commercial system is without comparison in the industry - giving us insight into the complex challenges both corporate occupiers and owners face each day. We understand that commercial real estate is a fluid and ever-evolving process. By delivering precise solutions, customized to your specific requirements, we can assist you to anticipate and capitalize on changes as they arise. Each office around the globe is empowered to provide clients with critical market knowledge and support. Additionally, CBC offices collaborate and leverage their global presence through industry-leading technologies, enabling CBC professionals to effectively serve their clients.
When working with a CBC professional, you are connected to a full range of capabilities and expertise in every major property type. SERVICES Acquisition and Disposition Services Brokerage & Transaction Management Corporate Services Capital Markets Property and Facilities Management Project Management Construction Management Auction Services Investment Analysis Market Research & Analysis Relocation Services Real Estate Owned Services * Includes franchisees within the Coldwell Banker franchise system that are licensed to use the Coldwell Banker Commercial marks. 1 - Displayed on CBCWorldwide.com May 2010
Number of Companies
220*
Professionals
2,200 +
Countries
22
# of Listings
16,300 1
Industry Leading Technologies A wealth of commercial real estate experience
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A Review of Commercial Real Estate In the 21st Century 800-222-2162 www.cbcworldwide.com View other sections: www.crereview.com
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