2012 Year-End Review from CCIM

Throughout the past year, CCIM Institute had three top priorities: increase liquidity, prevent burdensome regulations, and create awareness of how federal tax policies impact commercial real estate. Read more.

Federal Tax Policy with Fiscal Cliff Updates

Federal tax code has not substantially changed for over two decades. 2013 brings a new set of rules and guidelines for all U.S. tax payers. Keep in mind that filing for 2013, is not due until April 2014. Individuals, families and businesses across the board (not only higher-income individuals or households) will be to some degree, impacted by federal tax rate changes negotiated through the fiscal cliff deal. Capital Gains/Carried Interest The capital gains/carried interest rate will increase to 20 percent for individuals with and adjusted gross income more than $400,000 and married couples with AGI more than $450,000. Individuals/couples below the $400,000/$450,000 AGI level will still pay 15 percent. 3.8 Percent Healthcare Tax Passed under the Affordable Care Act in 2010, the 3.8 percent healthcare tax will affect some real estate transactions. Individuals with AGI more than $200,000 and married couples with AGI more than $250,000 may be subject to the 3.8 percent healthcare tax. Payroll Tax In February last year, the payroll tax cut was extended until Dec. 31, 2012. Payroll tax includes Social Security payments that were cut to 4.2 percent instead of 6.2 percent. Without language included in the fiscal cliff deal, the payroll tax reverted back to the pre-recession level, 6.2 percent. It is estimated that the average worker will pay about $1,000 more in taxes annually, or about $42 per pay check. Alternative Minimum Tax Under the fiscal cliff deal, the AMT received a permanent fix and will adjust for inflation. The AMT will be less burdensome on lower-income levels with more exemptions for credits or tax deductions whereas higher-income levels will receive less exemption opportunities.  Exemptions and Deductions Individuals with AGI more than $250,000 and couples with AGI more than $300,000 should expect a phase out of the personal exemption of $3,800 and itemized deduction write-offs. Direction on the "Pease" provision was included in the fiscal deal ("Pease" is named after Congressman Don Pease (OH) who created an itemized deduction phase out in 1990). The itemized deduction phase out was avoided with the recession and Bush-era tax cuts. As clarified by the fiscal deal, the "Pease" provision will now eliminate up to 80 percent of deductibles for $300,000 AGI couples or $250,000 AGI individuals: including charitable donations and mortgage interest. Estate and Gift Tax Estate or gift taxes will be taxed at or above the $5 million (per person) level but the tax rate will increase from 35 percent to 40 percent in 2013. Depreciation ("bonus") Businesses may deduct up to 50 percent of expenses (property and equipment), not including real estate for the 2013 tax year. Leasehold Improvements There is a 15-year straight-line cost recovery for qualified leasehold improvements on commercial properties that extends through 2013 and is retroactive for 2012. Income Tax Rates The greatest change will be for individuals with AGI over $400,000 and married couples with AGI over $450,000; a new tax rate of 39.6 percent applies to this income level. For incomes below, the Bush-era tax rates became permanent. On January 3, 2013 the Internal Revenue Service released a guide on new federal tax rates, Updated Withholding Guidance for 2013. Read more. The fiscal cliff negotiations did not produce changes to federal tax policies on depreciation recapture or passive loss.

Final Fiscal Cliff Stages

CCIM Institute's summary of the fiscal cliff negotiation stages and final details preventing the U.S. economy from going over the cliff can be reviewed online. Read more.

Regulation

FASB Lease Accounting Proposed Rules The Financial Accounting Standards Board’s lease accounting proposal has the potential to reduce the U.S. GDP by $27.5 billion annually and cause a loss of approximately 190,000 U.S. jobs. It is expected that FASB will release more information by April 2013. Read more. Basel III/Dodd-Frank Act The Dodd-Frank Act requires federal agencies to protect consumers. Basel III is a proposed rule under Dodd-Frank. Basel III is overly complex and has the potential to hurt local economies. Read more.

Healthcare/Affordable Care Act

Individual Healthcare Mandate By 2014, the individual mandate upheld by the U.S. Supreme court will go into effect. Read more. CCIMs (and all U.S. citizens) will either continue having coverage through their employer, purchase insurance coverage through a health insurance exchange, or pay a tax penalty. Health Insurance Exchanges will be set up through their state or the federal government. States had to determine by 2012 whether they will create their own exchange or use the exchange the federal government creates.

Small Business

SBA’s 504 Refinancing Loan Program The Small Business Administration’s 504 Loan Program provided another refinancing opportunity for small business expansion plans, the program expired in 2012 but Congress is considering extending the program. Read more.

State Tax Policy

Internet Sales Tax Online retailers put brick and mortar storefronts out of business because there is an unfair advantage when tax season rolls around. Read more.

Summary of the Deal

Below is a brief summary of the key provisions of the compromise law which is formally entitled The American Taxpayer Relief Act. 

·                     Income tax rates: Current income tax rates are extended for families earning $450,000 or less and individuals earning $400,000 or less annually. Taxpayers earning more than these thresholds will be taxed at 39.6%, up from 35%.

·                     Investment tax rates: The top capital gains and dividend rate remain at 15% for those below the $450,000/$400,000 income thresholds, and are increased to 20% for those with incomes above those amounts. Current law remains in place for carried interest.

·                     Estate tax: The current $5 million per-person estate tax exemption remains (with the $5 million indexed for inflation) but the rate is increased to 40% from the current 35%.

·                     Tax extenders: Individual and business tax extenders are extended seamlessly through 2013.

·                     Allows businesses to recover the cost of certain leasehold improvements and restaurant and retail property over a 15-year period, rather than over 39 years

·                     Bonus depreciation: The 50% bonus depreciation provision is extended for one year.

·                     The Research and Development (R&D) tax credit was extended through 2013 and made retroactive for 2012

·                     Work Opportunity Tax Credit extended one year; Section 179 – keeps in place the 2010/2011 levels of a maximum amount of $500k and $2 million phase-out for 2012 and 2013;

·                     Accelerated Depreciation —provides for 50 percent expensing for qualifying property purchased and placed in service before January 1, 2014 (and January 1, 2015 for certain long-term assets and transportation).

·                     Alternative Minimum Tax (AMT): The individual AMT is patched permanently.

·                     PEP and Pease: The personal exemption phase-out (PEP) and overall limit of itemized deductions (Pease) is reinstated for families with incomes over $300,000 and individuals with incomes over $250,000.

·                     Other credits: The American Opportunity Tax Credit, the enhanced Child Tax Credit, and the enhanced Earned Income Tax Credit from the American Recovery and Investment Act (the "stimulus") are extended for five years.

·                     Doc fix:  The patch on the 29% cut in Medicare provider payments is extended for one year.

·                     Sequester delay:  The $109 billion spending cuts mandated by the Budget Control Act are averted for two months due to $12 billion in spending cuts split evenly between defense and non-defense spending and $12 billion of increased revenues applied as an offset.

·                     Extended unemployment insurance:  Federal extended unemployment insurance will continue for another year.

Additional details may be found in these two documents.

·         The full text of the compromise law can be found at: http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf .

Ironically, the net result of the compromise is that President Barrack Obama effectively embraced the preponderance of the Bush tax cuts.

Looking Forward

Because the deal simply moved the trigger date for the “sequester” of automatic spending cuts totaling $1.2 trillion over nearly a decade from January 1 to March 1, expect renewed debate to begin with the start of the 113^th Congress on a long-term plan for deficit reduction.  By most estimates, the U.S. government will reach its $16.4 trillion borrowing limit by the end of February – so wrangling will also renew the debt ceiling, entitlement reforms, and spending cuts.  Additionally, the current stopgap spending measure expires on March 27, setting up either an additional catalyst for a broader brinksmanship scenario or yet another moment in a series of showdowns that continues from last year.

Prospects for comprehensive tax reform and entitlement reform remain uncertain, with both sides appearing unwilling to reach meaningful compromises without an imminent deadline with severe consequences. Since Congress is now likely to be consumed by a series of short-term budget battles, such partisan wrangling may distract Congress from the complicated process of achieving comprehensive tax and entitlement reform.

Update on Fiscal Cliff: What's at Stake for Real Estate

As we go into the final weekend of 2012, Congress continues to wrestle with what to do about the fiscal cliff, the hundreds of billions of dollars in automatic tax increases and federal spending cuts that take effect at the end of the year unless Congress acts to avert it.

NAR is monitoring the situation closely. To help explain the real estate interests at stake, NAR Chief Economist Lawrence Yun and NAR Director of Tax Policy Linda Goold sat down today for a short discussion on the issues.

With Congress and the White House expected to negotiate through the weekend, NAR will be sending out another update on the fiscal cliff situation next week.

Click the link below to access a 6-minute video of their conversation and a short post summarizing their remarks.  

http://speakingofrealestate.blogs.realtor.org/2012/12/28/update-on-fiscal-cliff-whats-at-stake-for-real-estate/

ACA is Boost for Medical Office Real Estate- By guest blogger Mark Alexander, CCIM

                             

Mark is a specialist in medical office
and national team leader for Sperry Van Ness

                                              

Regardless of how you feel about the Affordable Care Act (ACA), the cloud of uncertainty has been removed. The ACA was passed by Congress and signed into Law by the President on March 23, 2010 and upheld by the Supreme Court on June 28, 2012.  This new direction for health care will ensure dramatic change in demand for real estate used by hospitals and doctors. This is especially true locally given the large number of elderly Americans that retire in Florida, combined with our large proportion of poor uninsured and under-insured who will soon be added to the ranks of medically insured.

There are two main segments of medical office real estate: hospital-controlled buildings and doctor-controlled buildings. The problem over the past three uncertain years during health care reform debate was that neither hospitals nor doctors knew how health care reform was going to wind up. Well, now we know. 

Hospitals

Health care (HC) systems have been more proactive regarding their real estate needs than doctors over the past three years while the debate raged. While not knowing for sure how reform was going to shake out, most hospitals felt change, was inevitable in one form or another, which would lead to more Americans becoming medically insured.  Many HC systems have already taken steps to expand their real estate needs to accommodate this anticipated increased demand for care.  Now that the Presidential election is over, eliminating any reasonable speculation about ACA repeal, many hospital systems across the U.S. are accelerating their expansion plans.  HC systems are partnering with developers to construct new projects while others are using Sale/leaseback transactions involving existing facilities to self-fund their expansion.

Doctors 

Most private practice physicians adopted a “maintain the status quo” attitude over the past three years while hoping for an eventual repeal of ACA. This MD uncertainty fueled today’s pent up demand for medical real estate that is now being released. This is a new environment for doctors and is causing them to change the way they manage their businesses. I find that doctors focus on the bottom line today more than ever before.

For example, over the past twenty years it had become common for doctors that owned their own medical buildings to have their medical practices pay themselves (as Landlord) rent that often exceeded fair market rental rates. This was a popular way for doctors to create exceptional “in-house investments” where their medical office building (MOB) investment returns where often quite remarkable. But this meant their practices often paid very high rental rates that sometimes exceeded fair market rental rates by as much as 200%. When many of these doctor/MOB owner’s decided to sell their buildings prior to retirement, they quickly learned that a sale/leaseback to an investor created much higher sale prices than selling to another doctor or even to their own practice.

The reason for this phenomenon is that owner occupied MOB’s get appraised as though vacant because the appraiser is not allowed to use the existing lease (that would normally drive value higher) because the lease is between related parties and not deemed “arm’s length”. This is great for the acquiring practice but it causes the seller to leave a lot of money on the table.

On the flip side, when the MOB is sold in an arm’s length transaction to an investor and the MOB is then leased back by the medical practice, the appraiser must use the lease to calculate value. The market rent lease steers price much higher and in some cases by as much as 40% higher compared to selling the same MOB to another doctor. 

Consequently, over the past 20 years, doctors that understood these advantages employed the sale/leaseback approach, often choosing the highest rental rate possible to set the highest possible sales price.  This “pushing the envelope to the top” of fair market rental rates created some eye-popping sale prices and saddled medical practice tenants with very high future rents. While this was not a significant issue under the old way of doing business for doctors over the past twenty years, it is today.  Now that ACA is anticipated to bring lower reimbursement rates to doctors in the future, doctors are very concerned and look to keep overhead as low as possible.

Today I see doctors doing the opposite of the past two decades and are either choosing a moderate rental rate for their lease back future; or they pick a below market rent sufficient to retire debt so they can lock in the lowest possible rent to maximize future practice profitability. This is a sound business move as doctors’ incomes are expected to be reduced. This is the fiscally responsible approach, in my view, and it is one example where ACA is helping to reduce the overall cost of health care in America.

Since ACA rewards doctors who work in bigger groups or alliances, there is a trend for single practice doctors to merge with larger medical practices or switch employment to hospital systems. Since stronger tenants are preferred by MOB investors, this trend of smaller groups merging into bigger medical groups is helping the single practice MD get a better price for his MOB than he would have when he was a solo practitioner.

Some forward thinking medical groups were ahead of this curve and started alliances years ago. Others are just getting started. But the trend is clear. Large medical groups are becoming more prevalent.

The Affordable Care Act is not perfect, and most doctors don’t like it because it reduces their future income. But ACA will add millions of individuals to the roles of the medically insured, and this will create higher future demand for health care services. This, in turn, will create higher future demand for medical office space for doctors to treat patients.  There are strong, long-term, underlying business fundamentals for medical office building investments. 

Terrorism and Real Estate Update

On September 11, 2012, Linda St. Peter, Operations Manager for Prudential Connecticut Realty in Wallingford, CT, testified on behalf of NAR at the House Financial Services Subcommittee on Insurance, Housing, and Community Opportunity hearing on “TRIA at Ten Years: The Future of the Terrorism Risk Insurance Program.”  In her testimony (attached), Ms. St. Peter urged Congress to extend the Terrorism Risk Insurance Act (TRIA) beyond its current December 2014 authorization to ensure that adequate insurance coverage is available for our nation’s businesses.

Following the Sept. 11 attacks private insurers backed out of the terrorism insurance marketplace prompting Congress to enact TRIA in 2002, a federal insurance backstop that allows the federal government and private insurance companies to share losses in the event of a major terrorist attack. The program has since been reauthorized by Congress twice – in 2005 and 2007.  TRIA helped stabilize commercial real estate markets by making terrorism coverage available and more affordable over time.

While the cost and availability of terrorism insurance has generally improved, currently there is concern that the uncertain future of TRIA may cause insurance prices to fluctuate and prompt insurers to drop coverage.  This became evident in both 2005 and 2007 when private insurers became reluctant to offer terrorism coverage due to the uncertainty regarding the program’s extension.  Ultimately, the uncertainty of insurance pricing impacts the net operating income of businesses and property values.  The potential unavailability of terrorism coverage could impact financing agreements and potentially hurt the fragile commercial real estate recovery.

Yesterday’s hearing is just the first step in a much longer journey to extend the federal government’s role in the terrorism risk insurance market.  Despite our successful legislative efforts in 2002, 2005 and 2007, and the fact that terrorism remains a clear and present danger, most anticipate this next effort to extend a federal program will be the most challenging.  While the program does not sunset until 2014, efforts to reauthorize the federal program will begin in earnest in 2013.  

Furthermore, a copy of the witness list is attached along with the hearing memo and a Congressional Research Service report on TRIA.  Also, the following link provides an archived webcast of the hearing:

http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=307443

A Report from Wayne Caplan on Commercial Real Estate Political and Regulatory Issues

Wayne Caplan

As Council Chair of Political and Regulatory Affairs, the time has come for an update on some of the current issues facing the commercial real estate industry.

There are many issues to discuss at any given time.

While we are to a large degree paralyzed as far as anything getting resolved until after the November Presidential election, below is information on three of the more important / questioned items at the present time.

1.       The 3.8% TAX

Firstly,  there have been several requests out there for clarification on the 3.8% Tax that will be implemented as part of the Affordable Care Act (aka “Obamacare”, or ACA).

While there are a number of new taxes buried within the ACA, this particular tax has been falsely labeled as a tax on all real estate sale transactions (commercial and residential).

This is not the case, as it is an investment/income based tax, not one based on a given real estate transaction. However, there are ramifications to this tax, specifically to higher income earners.

This, in addition to a potential capital gains tax increase (which will happen if the Bush tax cuts expire at years end as scheduled) could be a reason for some investors/property owners to unload commercial property before the end of calendar year 2012, especially if they are not going to engage in a 1031 tax free exchange.

Below is a link to NAR’s description of the 3.8% tax for anyone who would like some clarification:

http://www.realtor.org/topics/health-care-reform/the-38-tax-and-health-care-reform

2.       Lease Accounting Standards

The Financial Accounting Standards Board (FASB) and their international counterpart (IASB) has proposed eliminating all operating leases, forcing companies to capitalize their lease liabilities on their balance sheets.

This change, if it goes into effect, would create large devaluations of all companies, big and small, with any leasehold exposure, not to mention greatly affect the length of lease terms that corporations are willing to commit to. All in all, this would have dire ramifications on both the leasing and investment sales parts of our brokerage businesses.

Below is a link to ICSC’s public policy page discussing this matter which has lots of links and discussion on the subject.

http://www.icsc.org/government/gr_issues/issue_details.php?s=5

While NAR, ICSC, and other real estate trade organizations have, if nothing else, delayed and clouded this potentially harmful new policy, it is still expected to be implemented in some fashion.

There cannot be enough discussion on this item with our elected officials and regulatory community.

3.       Sales Tax Fairness

The Main Street Fairness Act to level the playing field on sales tax collection between on-line and physical retailers has seen lots of progress.

There are bills in the House and Senate to ensure that physical retailers are able to fairly compete with on-line retailers.

While we all have enjoyed tax-free internet shopping, most people agree that traditional retailers are being endangered by on-line retailers having the advantage of not having to charge sales tax in many instances.

Below is a link to ICSC’s page on Sales Tax Fairness, and where it stands to date.

http://www.icsc.org/salestaxfairness/index.php

Rental Property Rules Get Clarification

Governor signs SB3405 into law

I am happy to report that SB3406 has been signed by the Governor and is now the law.  The bill was an initiative of IRPOA and adds language to both the sanitation and building codes that requires the following also be included in a violation notice.

a citation to the specific code provision

or provisions alleged to have been violated, a description of

the circumstances present that constitute the alleged

violation

IRPOA proposed this change in the law because we had  reports  our members were receiving violation notices that were not specific and so were difficult to comply with.  The notices would include general statements like "Porch in Disrepair"  or "Plumbing not to Code".  Those types of notices seemed  more common when inspections are done in response to tenant conduct.   Also, many of our member groups operate under regulations that include annual inspections.  Those ordinances apply multiple code standards to rental properties.  It is very difficult to know where to look up a code when the city can impose regulations from nine different code books.   

With this change, you should now be able to reference a code book and read the code that is in violation.  You should also receive a description of what is wrong on your property so you know exactly what action to take to correct the violation.  We believe this will make dealing with code enforcement much easier.

State Senator Dave Syverson sponsored this bill in the Senate.  Representative Chapin Rose was our primary house sponsor and Representative Sidney Mathias was a house co-sponsor.  If you live in, or own property in, these legislators districts, please contact them and thank them for their support.  

To read the text of SB3406, now Public Act 097-1088 CLICK HERE

Apartment Market Shifting Focus To New Supply

CoStar article by: By Randyl Drummer May 16, 2012

Current Lull In Multifamily Fundamentals Expected To Be Overtaken by Demographics, Jump In New Construction

The ongoing recovery of the U.S. apartment market is entering a new phase, one marked by an increasing level of permits and construction starts for multifamily development projects. The upwelling in new development is expected to increase supply across many markets starting in 2013 after years of almost zero growth.

The new phase follows the dramatic vacancy declines and strong apartment rent growth that has occurred in the tightest and more desirable coastal markets, and a rare moment of solid income growth even in vacancy-challenged markets.

The rising supply pipeline, coupled with the gradually improving market for single-family housing, is expected to help bring some equilibrium to an apartment market which experienced strong renter demand and plunging vacancies from late 2009 through middle to late 2011.

Demand has tapered off somewhat since last summer due to slower seasonal leasing -- and perhaps some sticker shock among tenants that have watched asking rents eclipse pre-recession highs in some supply-challenged metros, according to Michael Cohen , head of advisory services for CoStar Group’s economic and market forecasting company, Property and Portfolio Research (PPR).

Cohen, along with PPR’s new director of multifamily research Luis Mejia and senior real estate economist Erica Champion, made the observations during CoStar’s First Quarter 2012 Multifamily Review and Outlook.

"Vacancies have been slipping in the apartment sector for several years due in large part to favorable cyclical demand factors and little-to-no new supply," Cohen said. "But the next chapter in the apartment recovery is going to look pretty different, particularly on the supply front."

Overall, the national apartment vacancy rate has dropped by a precipitous 170 basis points through the first quarter of 2012 since peaking at 8.3% at the end of 2009, with the lion’s share of occupancy gains recorded during the six-quarter period between fourth-quarter 2009 and second-quarter 2011. That's equal to demand for about 270,000 additional units, two-thirds of them occupied in 2010 alone, the single strongest year for multifamily demand since 2005.

Rent Hikes Bring Sticker Shock

But demand has eased in the last six months, with the year-over-year vacancy closing the first quarter at 6.6%, down only 60 bps. Several tight coastal markets have already reached or are approaching pre-recession vacancy lows, however, and it’s likely the seasonally weaker pace of demand over the last two quarters will pick up over the rest of 2012, the analysts said.

Four of the top five rental markets that experienced the sharpest vacancy declines are fast-growing southern metros, led by Charlotte, Austin and Raleigh, NC. Detroit, with its surprising auto industry rally, ranked an impressive fourth place, followed by San Antonio. Apartment vacancies have not dropped as sharply in markets like Washington, D.C. and Seattle, where new supply is already starting to come on line.

The recovery has shifted away from the southern metros and toward West Coast markets in the last six months, much of it driven by strength in technology sector. Los Angeles was ranked first in the nation in the first quarter in year-over-year nominal demand growth with about 12,000 units, followed by Dallas, Chicago, New York and Houston.

Ranked by the percentage rise in demand growth, Richmond, VA, led all markets with a year-over-year gain of over 4%. Charlotte, Raleigh, San Antonio and Houston garnered the other top five spots.

Salt Lake City and the San Francisco Bay Area metros saw the largest declines in vacancy. But at least 30 of the top 54 U.S. metro areas have seen their vacancy rates increase at least slightly over the last six months.

"I’m not suggesting that’s indicative of the health or the trajectory of the market, but it’s not a straight line down in absolute vacancy improvement. There is a little bit of a lull," Cohen said.

Although job losses and the housing collapse are still fresh in the minds of 20-to-34-year-olds who make up the bulk of the renter base, and mortgage underwriting standards are stricter, the math is becoming more appealing for people deciding to buy a home or condominium over renting an apartment, Cohen said.

Those decisions are being influenced by spiking rents that have already pierced their pre-recession highs in such markets as San Jose, Oklahoma City, Denver, East Bay, San Francisco, Chicago, Portland and Pittsburgh.

Apartment Starts Ramping Up

While only 60,000 new apartment units are expected to be added this year, well below longterm average, construction starts and permitting activity are beginning to pick up from historical industry lows not seen since 1993.

"In advising our clients on market selection, we are starting to get calls with concerns about the rate of supply and net completions," Cohen said.

But developers who have delayed decisions to build are seeing the window close as capitalization rates reach record lows.

"2013 will be the first year we’ve seen deliveries above 100,000 units. We need to readjust our perspective on supply for Chapter Two (of the recovery). We haven’t seen 100,000 units come to market since 2009."

CoStar's outlook for supply is moderate through 2015, with between 100,000 and 130,000 units delivered per year, a rate expected to achieve equilibrium between supply and demand, Cohen said.

Homeowner Distress Continues To Help Apt. Investors

Meanwhile, apartment investors continue to reap benefits from the current weak housing market, with the flow of distressed homeowners-turned-renters still above average, while the flow of renters turning into buyers is still quite low, according to Mejia, who recently joined PPR as director of multifamily research.

A comparison of homeownership and foreclosure trends confirms that the homeownership rate could continue to decline -- possibly falling below 65% -- until the delinquencies and foreclosures that have plagued homeowners finally ease.

In the early 2000s, optimism about rising home prices and loose underwriting standards helped push the ownership rate up to almost 70%, leading to a price bubble that began to deflate in 2006, causing a surge in foreclosures and sending the homeownership rate tumbling.

"Apartment markets will continue to see additional demand while the foreclosure rate remains above pre-crisis levels and potential home buyers are cautious about committing to a purchase, even amid all-time low mortgage rates," Mejia said.

Mejia also pointed that as foreclosures remain elevated and renters mull their home-buying decisions, the ownership rate will likely continue to decline, although the extent of the decline depends on the length and strength of the housing recovery.

All Commercial Real Estate Sectors Continue to Improve, Multifamily Strong

Shaking off a prolonged impact from the recession, fundamentals are gradually improving in all of the major commercial real estate sectors, according to the National Association of Realtors quarterly commercial real estate forecast. The apartment rental sector has fully recovered and is growing.

The findings also are confirmed in NAR’s recent quarterly Commercial Real Estate Market Survey, which collects data from members about market activity.

Lawrence Yun, NAR chief economist, said new jobs are the key. “Ongoing job creation, which is at a higher level this year, is fueling an underlying demand for commercial real estate space, assisted by a steady increase in consumer spending,” he said. “The pattern shows gradually declining commercial vacancy rates, with consequential but generally modest rent growth.”

Yun expects the economy to add 2 to 2.5 million jobs both this year and in 2013, on the heels of 1.7 million new jobs in 2011, assuming a new federal budget is passed before the end of the year. “Although we need even stronger job growth, by far the greatest impact of job creation is in multifamily housing, where newly formed households striking out on their own have increased demand for apartment rentals – this is the sector with the lowest vacancy rates and strongest rent growth, which is attracting many investors.”

Rising apartment rents also are having a positive impact on home sales because many long-time renters now view homeownership as a better long-term option, Yun noted.

A large problem remains for purchases of commercial property priced under $2.5 million. “Our recent commercial lending survey shows that there is very little capital available for small business, which is significantly impacting commercial real estate transactions, although funding is less restrictive for bigger properties.”

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.,2 a source of commercial real estate performance information.

Office Markets

Vacancy rates in the office sector are projected to fall from 16.3 percent in the second quarter of this year to 16.0 percent in the second quarter of 2013.

The markets with the lowest office vacancy rates presently are Washington, D.C., with a vacancy rate of 9.3 percent; New York City, at 10.0 percent; and New Orleans, 12.6 percent.

Office rents should increase 2.0 percent this year and 2.5 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, is forecast at 24.7 million square feet in 2012 and 48.0 million next year.

Industrial Markets

Industrial vacancy rates are likely to decline from 11.0 percent in the current quarter to 10.7 percent in the second quarter of 2013.

The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 4.7 percent; Los Angeles, 5.0 percent; and Miami at 7.2 percent.

Annual industrial rent is expected to rise 1.6 percent in 2012 and 2.4 percent next year. Net absorption of industrial space nationally is seen at 44.1 million square feet this year and 62.4 million in 2013.

Retail Markets

Retail vacancy rates are forecast to decline from 11.3 percent in the second quarter to 10.7 percent in the second quarter of 2013.

Presently, markets with the lowest retail vacancy rates include San Francisco, 3.7 percent; Fairfield County, Conn., at 4.0 percent; and Long Island, N.Y., at 5.0 percent.

Average retail rent should rise 0.8 percent this year and 1.3 percent in 2013. Net absorption of retail space is projected at 8.0 million square feet this year and 21.9 million in 2013.

Multifamily Markets

The apartment rental market – multifamily housing – is likely to see vacancy rates drop from 4.5 percent in the second quarter to 4.3 percent in the second quarter of 2013; apartment 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 New York City, 2.1 percent; Portland, Ore., at 2.3 percent; and Minneapolis at 2.4 percent.

After rising 2.2 percent last year, average apartment rent is expected to increase 4.0 percent in 2012 and another 4.1 percent next year. “Such a rent increase will raise the core consumer inflation rate. The Federal Reserve, in turn, may be forced to raise interest rates, possibly as early as late 2013.”

Multifamily net absorption is forecast at 215,900 units this year and 230,300 in 2013.

The Commercial Real Estate Outlook is published by the NAR Research Division for the commercial community. NAR’s Commercial Division, formed in 1990, provides targeted products and services to meet the needs of the commercial market and constituency within NAR.

A Look At The Year Ahead From Kevin Maggacimo-President of Sperry Van Ness

As we look forward to a new year, I am pleased to share my thoughts on the very memorable 12 months past, and to offer my outlook for the commercial real estate market in 2012. Before I do, I would be remiss if I did not thank the Sperry Van Ness clients, Advisors, staff, and fellow brokers for their contributions in driving us forward in spite of the unpredictable times. I know that I speak for all SVN Advisors and staff when I wish you a prosperous New Year.

A Year of Fits and Starts for Commercial Real Estate

During a year of extraordinary economic and political uncertainties, commercial real estate held its position as a crucial safe haven for investors in 2011. Investment into the sector reached a peak in the second quarter, supported by CMBS conduit originators and more active life company and bank lenders. Even as economic and employment trends fell short, leasing activity for well-positioned assets strengthened. During this period, investment into segments of the market that had lagged during 2010, including commercial properties in secondary and tertiary markets and value-add opportunities, showed signs of firming, as well.

In spite of the rising momentum, commercial real estate investors revealed they were not entirely immune to the obstacles facing the wider recovery in business confidence. As I suggested in my New Year’s message one year ago, this has been a period of fits and starts. Over the summer, renewed disruptions of capital and credit that were largely unrelated to the property sector threw the conduit into disarray and slowed the pace of transaction activity more broadly. For many borrowers, lending sources pulled back once again, with the result that a larger share of pending sales has struggled to reach closing.

While sales volume in the third and fourth quarters will not match the spring’s flurry of trades, the shifts in the market must be understood in the context of a turbulent economic and political environment. Where investors have retrenched, it is often under the force of external pressures. It nonetheless remains clear from the current diversity of investors and lenders that commercial real estate is high on the investment hierarchy. In fact, many of the last twelve months’ most notable and most visible deals only came to fruition as the year drew to a close. The fundraising activities of the major REITs support this assessment, as well. US REITs raised $37.5 billion in equity in 2011, a new record that easily surpasses the previous high of $32.7 billion set in 1997. They raised another $13.8 billion in unsecured debt.

A Persistent Imbalance

In the final tally, investment sales in 2011 will easily surpass the $120 billion benchmark set in 2010 and will roughly triple the record lows set in 2009. As a wider range of buyers and sellers have reengaged, pricing in the most actively traded markets has exhibited the sharpest improvements. In the extreme, some highly coveted trophy properties have prompted aggressive bidding by domestic and cross-border buyers and have ultimately sold at higher prices than during the market peak in 2006 and 2007.

While the most visible investments affirm institutional investors’ confidence in the sector, they offer only one perspective on the market. As I pointed out at this time last year, the headline statistics do not fully convey the unevenness of the recovery or the diversity of its investors. The market for assets that do not dominate their respective cities’ skylines is necessarily recovering along its own trajectory. In the current market, that has meant a balance of tailwinds and headwinds that has weighed in favor of the latter.

Core investors whose scope may be limited to a subset of metropolitan areas have argued that rising prices and falling cap rates will inevitably spill over into other segments of the market. In one respect, this is correct. Yields on mid-cap investments are higher than for any trophy property. But that assessment also overlooks the uniqueness of the market for small- and mid-cap commercial properties and the very different makeup of the investor and lender base. Understanding these differences is crucial to assessments of what the next year will hold for commercial real estate.

The Economy, Jobs, and the Political Deadlock

As in previous cycles, the recovery in small- and mid-cap property investment is proving more sensitive to underlying drivers of cash flow than the market for the largest properties. This inevitably means that a strong economic recovery will be one of the requisites for more robust investment. While companies have seen their profits rebound, surpassing their previous peaks from 2007, an environment of extraordinary economic and political uncertainty has constrained decision-making and investment in new tools and people.

In the first days of 2012, the employment outlook looks brighter. For commercial real estate – and for millions of families across the country that have struggled with unemployment – this is the critical missing link to a more balanced recovery. Although the data on job creation in 2011 only shows a modest improvement over the prior year, leading indicators of firm hiring have turned more positive. Job openings have been trending up consistently over the last year. More recently, first-time applications for unemployment insurance have fallen back to their lowest levels since early 2009. Further, employment gains in temporary help services have picked-up over the past 5 months, which lends well to permanent job creation. Even though single-family housing shows no definitive signs of an inflexion, other metrics indicate that marginally stronger growth in 2012 will support a healthier pace of private sector job creation.

Regrettably, an environment of political dysfunction qualifies the outlook, both at home and in Europe. In fact, the latter presents one of the most credible threats to global growth. In the United States, the uncertainties presented by unusually intrusive policymaking may resolve over the next year, given the need for all parties to clarify their political positions and objectives as Election Day approaches. Needless to say, a business environment where the rules of the game are more predictable is more conducive to growth and job creation.

Investment Sales and Financing

As much as it depends on a stronger economic trajectory, the outlook for small- and mid-cap investment also relies on buyers’ access to financing. In financing their investments, large REITs may offer shares or issue unsecured bonds; trophy investments have also been supported by favorable lending terms from life companies and large international banks. These scenarios are not reflective of the market for smaller assets where the sources of risk and its mitigating factors can be very different. Given the historically dominant role of regional banks and CMBS lenders in facilitating this segment of the market, these lenders figure prominently in the assessment of what the next year will hold.

Although the CMBS market has struggled to reassert itself since last summer’s interruption, plans for new issuance in the first quarter of 2012 indicate a gradual increase in conduit origination activity. Surprising as it may seem, stability in global bond markets is an important condition for well-functioning CMBS markets, since the spreads on the latter’s bond yields are influenced by corporate bond market trends, as well. In the first half of 2011, more than half the CMBS loans securitized had origination balances of less the $10 million. It remains the case that a more active CMBS market is required for the small and mid-cap segments to flourish, in particular, as a large number of seasoned CMBS loans mature over the coming year.

Outside of the apartment sector, where generally improving fundamentals and the contributions of Fannie Mae and Freddie Mac are facilitating both sales and new development, commercial property investors are dependent on bank financing given an absence of other debt sources. For the last several years, that has presented a problem. Banks have been preoccupied with the management of their distress portfolios and have hesitated to extend new credit, even in the best of cases. The most recent data show those priorities changing. Banks’ default rates on their commercial and apartment loans have fallen consistently over the last year. Coinciding with the stronger performance of the legacy balance sheets, many banks are accelerating the liquidation of bad loans and real estate-owned. A growing minority are lending again, increasing their exposure in segments of the market where an absence of competition and low interest rates are affording opportunities to extend credit. Improvements in bank lending and CMBS issuance will have a disproportionately positive impact on the mid-cap market. Access to historically low-cost credit in 2012 and the likelihood of higher interest rates in 2013 signal an unmatched window of opportunity for acquisitions over the next 12 months.

Conclusions

The economic and jobs outlook is improving. With so many of the underpinnings of a stronger recovery in place, we can afford a degree of optimism. Politics and the possibility of external shocks, primarily from Europe, still qualify that optimism.

While prices in the largest markets have recaptured a significant share of their lost value, other assets have lagged the headline measures. Combined with historically low borrowing costs, there is tremendous upside potential for borrowers with access to financing who can identify well-positioned assets.

While the process has been frustratingly slow, more banks are moving distress off their balance sheets. This process has the potential to accelerate in 2012, given banks’ stronger positions generally, an evolving regulatory environment, and the potential for distress from maturing CMBS. That will create some pressures on the market, but it should also deepen the pool of distressed assets and notes for sale.

Attention will necessarily turn to the small and mid-cap market as the economy improves and financing options broaden. Given our experience in this arena, we are anticipating a high volume of advisory work to identify and market investment opportunities before consensus firms. Timing will be the crucial differentiator in this market – the intersection of low-cost financing and first-mover advantage demands that we act deliberately.

Watch Paul Tatman's Interview on One on One With Alex Ruggieri

“Paul Tatman is and has been a mover and shaker in the business world, throughout the Midwest, radiating from his base in east central Illinois. Many have been the times when others believed an effort by Paul Tatman to be hopeless or useless, but he has managed to make it successful with apparent ease. Paul is a consummate entrepreneur - conceiving, creating, developing, and birthing business ventures, solo, as well as in concert with others. I can't count the number of successful start-ups he has kicked off, many times turning them over to, or selling them to others to administer, and most of these are still successfully in operation. He has started and operated a variety of business plans starting with his very successful multi-location collision repair business, a construction company focusing on commercial properties, a towing and recovery operation, several real estate ventures, and other endeavors. Paul Tatman is painfully honest, works tirelessly, has an extremely logical, creative, and analytical mind, and is comfortable in settings with persons of all stations in life. His most outstanding character trait, by far, is his faultless integrity. He is also a wisely generous man, with many individuals and entities owing him a debt of gratitude for his financial and personal help.” To view my interview with Mr. Paul Tatman in its entirety CLICK HERE

SPERRY VAN NESS TO OFFER RENEWABLE ENERGY AND ENERGY EFFICIENCY SERVICES

· SVN Forges Strategic Alliance with GreenPoint Partners to Deliver Sustainability Solutions For Commercial Real Estate Owners and Users

IRVINE, CA – OCTOBER 14, 2010. Sperry Van Ness International has joined the GreenPoint Network, an alliance of real estate firms dedicated to helping clients achieve profitable sustainability. SVN Advisors in over 150 offices nationwide will receive training and resources to help clients identify energy initiatives that reduce operating expenses, increase building values, and capture financial incentives. GreenPoint’s engineers will perform energy audits and implement energy efficiency projects and solar installations.

“In the U.S., commercial buildings account for nearly 40 percent of total energy consumption and over two-thirds of electricity consumption,” said Sperry Van Ness CEO Kevin Maggiacomo. “And over the next decade, energy costs will likely be the fastest-growing component of building operating expenses. If a building consumes more energy than its peers, it will attract fewer tenants and trade at lower valuations. Through our partnership with GreenPoint, SVN Advisors can make an impact that not only increases a client’s bottom line, but is also good for the planet.”

Said GreenPoint CEO Dustin Gellman, “Energy efficiency and renewable energy are a real estate play. Green building retrofits impact cash flows, and real estate professionals can help property owners better understand the financial impact of energy initiatives on asset performance. We are delighted to work with Sperry Van Ness, an organization with a legacy of progressive thinking and innovation in the real estate industry.”

Sperry Van Ness Advisors will begin offering sustainability services beginning October 2010. The suite of services includes energy audits, competitive procurement, project management, incentives acquisition, and LEED certification. For more information, visit: www.SVNgreen.com

About Sperry Van Ness International

Founded in 1987, Sperry Van Ness is has approximately 900 advisors in more than 150 locations throughout the U.S. Sperry Van Ness delivers results for clients through a proven business model that provides advanced marketing and technology tools. Based in Irvine, Calif., the firm provides brokerage, consultation, asset management, property management, leasing, accelerated marketing, and auction services. Sperry Van Ness transactions total more than $11 billion annually in office, multifamily, retail, industrial, self-storage, hospitality and land transactions. For more information, please visit www.svn.com

NEW SBA INITIATIVES POISED TO HELP CRE INDUSTRY

WASHINGTON, D.C. — President Obama unveiled several proposals this week aimed at helping small business owners. The proposals will expand two critical Small Business Administration (SBA) lending programs, one of which could help some in the commercial real estate industry.

One of the new SBA initiatives will temporarily allow for the refinancing of owner-occupied properties under the SBA 504 program, which provides guarantees on loans for the development of real estate and other fixed assets but could not be used to refinance maturing debt up until this point. Under the new initiative, businesses with a loan maturing in the next year, and who are current on their loan payments, will be able to refinance up to 70 percent of the current property value, with the SBA helping with the remainder. For less established lenders, the SBA will take on up to 40 percent of the property's value for the refinancing.

The program will be funded through additional fees for refinancing projects instead of through a Congressional appropriation. The refinancing proposal will help refinance up to $18.7 billion a year in commercial real estate that would otherwise be foreclosed on or liquidated.

In a statement, SBA Administrator Karen Mills said, "Thousands of good, creditworthy businesses find themselves caught by declining real estate values as a result of the recession. With many of them now facing mortgages coming due in the next few years, the ability to refinance into SBA's 504 loan will give them the chance to lock in long-term, stable financing, as well as protect jobs by protecting small businesses from foreclosure."

New Episode of One on One with Alex Ruggieri featuring David Hodge

When I first met David I had invited him to come on my radio show Central Illinois Business to talk about his recent acquisition of Porter Athletic. It was then that I got the opportunity to learn about him and his personal story. I was particularly impressed with his sincerity, his humility and his disarming charm. He started working for Gill Sports in accounting at a very tumultuous time. The company was struggling and even though Gill had a long and storied history in the industry, during that period, it looked like the entire enterprise might not even make it. One day the owner (Vince Atkins) called him into his office. David was sure he would be fired but that's not what happened. Instead Vince made David the president of the company! And he also made him a promise. He told him that if he would do all in his power to make the company work, to turn things around successfully, then at the end of ten years he would sell the company to him. Well it wasn't as easy as it sounds. Those ten years were sometimes harrowing and difficult but this quiet unassuming man exercised all his faculties and his faith and did turn the company around. Today David Hodge with his holding group Litiana Sports, Inc. is a major force in the industry and a significant employer in our community. Take the time to watch his interview I promise if nothing else it will leave you inspired! Watch Now!!