Economy will continue to weigh down the commercial real estate sector this year | Real Estate | PE.com | Southern California News | News for Inland So

Wednesday, January 6, 2010

By JACK KATZANEK

The Press-Enterprise

The economy will continue to weigh down the commercial real estate sector this year, but a company with a heavy presence in Inland Southern California believes the free-fall is probably over.

Grubb & Ellis Co., which offers leasing and investment services for commercial tenants and builders in Riverside and San Bernardino counties, is predicting demand for commercial space will be flat in 2010. The company's 2010 forecast suggests more declines this year, but also that a bottom is in sight.

The Inland economy did show some signs of stabilizing in November and December, but few are bullish about employers in the region adding significant numbers of new jobs in 2010. That means it is unlikely they will need additional office or warehouse space.

Job growth forecasts for the area vary, but the consensus suggests there will be little growth. Unemployment did decline in the two-county area in November, the most recent month for which there is data, and the region had some job growth in October and November.

That was among several indicators that signaled the recession ended in the second half of 2009. Grubb & Ellis' forecasters say that this means some fresh investment could enter the game in the form of bargain-hunters.

"Buyers with cash are well-positioned to acquire properties at a discounted rate," Mano Leventakis, managing director of the company's Inland Empire operation, said in a statement.

There are worries that a wave of foreclosures is coming in this sector in 2010, but Grubb & Ellis predicts this concern is probably "an exaggeration." The dollar value of outstanding commercial mortgages adds up just a fraction of the residential mortgages that led to the subprime meltdown.

Leventakis said that the gap in what investors are willing to pay for distressed properties and what the lenders holding the mortgages will sell for will narrow in the second half of the year. This will stave off many potential foreclosures.

Mary Sullivan, the former research director in Grubb & Ellis' Inland office and now a consultant, said there won't be a quick bounce for commercial real estate in the first half of this year.

"I don't think things will be substantially better by mid-year," Sullivan said. "But by the end of the year and into 2011 it will level out a little more."

Sullivan agrees that, nationally, the fears of a wave of foreclosures could be overstated, but it's a bigger concern for the Inland area because many tenants are not as well established as they are elsewhere. That could worry investors.

Another issue is the willingness of banks to back future investment.

"I think the financing issue is still going to be a major unknown for 2010," Sullivan said. "It affects the business side, but it also affects a tenant's ability to expand."

How Commercial Real Estate Could Trigger a Double-Dip

Written by: CHARLES HUGH SMITH

Reports that commercial real estate (CRE) is suffering from a double whammy of soaring vacancies and declining valuations have been making news recently with sobering regularity. DailyFinance addressed the risks that CRE meltdowns pose to banks in early December. And in a stunning confirmation, just weeks later Morgan Stanley announced it was "walking away" from five San Francisco office towers, giving them back to the lenders. These accounts address the impacts on real estate investors, banks and hard-hit locales such as Southern California. But a bigger, often-overlooked, risk is the potential for CRE to remain a drag on the U.S. economy for years to come, or its potential to trigger a slide back into recession -- the so-called double dip that many fear.

Four primary factors are behind the tumble in CRE prices -- and they're eerily similar to those that powered the residential housing boom and bust:

Overbuilding in marginal locales that lacked adequate jobs and services to support massive new commercial construction (malls, hotels, business parks, resorts, etc.)

Excessive valuations fueled by low interest rates and easy credit

Highly leveraged bets on future appreciation

A banking sector that's extremely vulnerable to write-downs and losses from foreclosures

How much have prices tumbled? According to Moody's/REAL Commercial Property Price Index, CRE prices have plummeted 41% from the peak in 2007. Or in many cases, even more. For example, a hotel in Hawaii that sold for $250 million with a $230 million mortgage a few years ago is now only worth about half that amount.

It Starts With the Banks

In a recent research report, Deutsche Bank analysts expect 75% of current CRE loans won't qualify for refinancing. With more than $2 trillion in CRE debt maturing from now until 2013, that suggests $1.5 trillion cannot be "rolled over" into new loans. Part of this crunch stems from the fact that commercial property loans are typically shorter-term than residential mortgages; most common are terms of five to seven years.

Of course, speculators aren't the only ones who are losing big. The banks that provided the mortgages are in trouble, too -- and that's where the problems in CRE can start weighing down the entire U.S. economy.

Over the next few years, the Deutsche Bank analysts estimate CRE losses to lenders of $200 billion to $300 billion. With banks already reeling from losses stemming from U.S. residential real estate's 30% decline from its 2006 peak of $20 trillion (a value set by Federal Reserve data), the analysts believe that "hundreds of banks, mainly smaller community and regional banks, are likely fail." These losses will hit vulnerable regional banks especially hard because they loaded up on commercial loans in recent years.

Don't Bet on Another Bailout

Will the banking sector once again require taxpayer bailouts as these huge losses start draining regional banks' reserves, pushing them toward insolvency? It's unlikely the public will support another TARP-type rescue. It's perhaps even more unlikely that politicians will risk their careers in an election year by supporting yet another massive bailout of lenders that knew -- or should have known -- the risks inherent in highly leveraged CRE loans.

What will happen as banks absorb billions of dollars in new losses, thanks to the meltdown of CRE? They'll have much less money to lend to other borrowers. And that contraction of credit in a fragile economy could trigger a double-dip recession. Anyone believing that banks are "on the road to recovery" hasn't factored in the hundreds of billions of dollars in CRE losses forecast by industry analysts.

Property values are another problem. In that area, CRE faces significant structural headwinds to a recovery. Perhaps the single most important one is the contraction of the consumer economy that supported seemingly endless expansion of malls and other retail space. Consumers' net worth has fallen by about $12 trillion, their incomes are either flat or declining, taxes are rising across the board (income, sales, property, etc.) and baby boomers face the generational task of saving far more for their retirement than seemed necessary at the top of the housing bubble.

That boils down to less money available to spend on discretionary goods and services, and hence less demand for retail space and for resorts and hotels.

Cyberspace Means Less Commercial Space

The steady growth of Internet shopping also saps the demand for bricks-and-mortar retail space. Web-based shopping has already reordered the bookselling industry and is well on the way to permanently reducing demand for other retail outlets.

Beyond retailing, the Net is also transforming demand for office space, as increasing numbers of knowledge workers telecommute from home, cafés or other decentralized locations. That means less need for office cubicles -- and for conference rooms, considering that teleconferencing and other Web-based communications are eroding the old model of business travel and meetings. This also means less demand for business-related hospitality services, such as hotels and restaurants.

Add these structural headwinds to the unavoidable heavy losses and write-downs facing CRE lenders, and you get a recipe for a major drag on lending, banking profits, property taxes, employment, construction and all the other sectors of the economy.

Whether these forces will tip the U.S. into a double-dip recession depends on many other factors, but they certainly have the potential to add to the contraction of credit that's bedeviling wide swaths of the economy. And we all know what happens when credit disappears.

A new year a new beginning

As we enter this first week of the new year, we sit with anticipation and excitement for what the coming year will bring for us. A new year is always welcomed with a sort of rejuvenation and new beginnings. With the creation of Mogul Launcher, we feel no different. We are very excited for our impending launch of our new real estate business in hopes that it will bring a rejuvenation to the real estate industry. We are in the process of incorporating our company, tidying up our business plan and seeking proper funding to move forward. We have made a number of contacts with a variety of professionals to further benefit and serve you. We are very excited about the design company that we have hired to paint our thoughts and ideas to the web and assist us in our marketing materials. We have worked tirelessly these past 6 months with you, our customers, in mind in order to assist and guide you in your property investments. Mogul Launcher's staff is a combination of real estate and marketing professionals that have one goal in mind, "How do we best serve our clients?" With that question in mind, we will always strive to be one step ahead of your needs and help you attain your goals. We will post our progress as we inch closer to our launch and will continue to post articles keeping you up to date in the real estate world.

Posted by: Mogul Launcher

How to win in 2010

December 30th, 2009 by John Combs

This time of year we can choose to either look back or look ahead. Based on some of the Year in Reviews I’ve read already, I advise looking ahead. While the overall economy does seem to be rebounding, the best advice is to take matters into your own hands. Choose the best path for your business in 2010. Choose to win.

I’ve compiled a few strategies to consider if you’re looking to gain more value from your real estate and better position your properties for 2010. To be honest, some of these recommendations for winning in 2010 are actions you should have considered in 2009. Don’t put off the resolutions that could help your bottom line. While they won’t help your waistline (depending what your personal New Year’s resolutions may be), they are worthwhile if you want to win in 2010.

Stay close to your tenants. According to Kingsley Associates, an industry research firm that conducts tenant surveys, almost 20 percent of tenants never interact with their property managers. Connecting with your tenant can bring about higher levels of tenant satisfaction, which also promotes better retention. Conversely you can also better observe how their underlying business is doing. Don’t let a tenant get too far behind. Look for signs of decline. The earlier you can identify a potential problem, the faster you can correct the problem and safeguard your revenue. What are signs that a tenant may be in trouble? More empty offices or cubicles. Empty parking spaces. Unreturned phone calls. Bounced checks and repeat late rent payments. If you can, blend and extend terms if you believe the tenant’s business is viable.

Rebid and re-negotiate contract services for properties paying particular attention to the scope of services. To preserve revenue, many owners and managers are cutting back on 24/7 guard service or modifying cleaning specifications to reduce operating costs. Try to adjust the scope of work without compromising service quality. Some of the ideas noted by Patricia M. Areno, CAE, Senior Vice President, BOMA International on the BOMA website include: adjusting the frequency for window washing or for sweeping and mopping stairwells, taking advantage of economies of scale by using the same vendor for multiple properties, and evaluating service levels to be sure you are getting all the services in your contract agreement.

Keep the vacancies in move in condition. If you are in a building that is 15 years or older, make sure the entry, common area and suites show well. This is not the time to let it be. If you have empty space, be proactive. Your buildings need to look great and you need to work more with the brokerage community. Schedule open houses or, if you can, offer incentives. Think about what you can do for potential tenants. Provide free rent periods and other incentives.

Review tax bills and appeal valuations The valuations show how much a property is worth based on calculations by the Assessor’s Office. While notices should reflect current market data, property valuation can be a complicated and lengthy process that, despite an ever-changing market, has to refer to a fixed period. The valuation appeals process can be simple and beneficial to a property owner if there is evidence of a different lower value for the property.

Continue your commitment to reduce utility costs. According to California’s Flex Your Power program, energy represents as much as 30 percent of a building’s operating costs. Undertaking energy efficiency measures can reduce energy consumption – and thus, utility bills – by 30 percent or more. These savings directly benefit the bottom line. A 30 percent reduction in energy consumption can lower operating costs by $25,000 per year for every 50,000 square feet of office space. The best part is that these improvements to energy efficiency are often attained through no-cost or low-cost projects that also enhance the indoor environment of commercial office buildings. Consider these ideas: Turn off copiers and other office equipment at night to save energy and money. Conduct periodic night tours to identify equipment that’s left running in your buildings and tenant suites. Keep the commitment to “green” your buildings. Implementing energy saving and sustainable practices has been shown to increase tenant satisfaction and property values.

Thank you for your interest and commitment to this blog. 2010 is bound to be another challenging year and I look forward to commenting on it for the real estate community.

The State of California Real Estate

Southern California has had its great share of real estate struggles since 2007, and the economic recession of 2008 only made it worse. However, over the past few months, a stabilizing real estate market has offered optimistic views of the future of the Southern California real estate market. Home sales are beginning to rise and the drop in median prices have slowed, giving real estate experts the impression that the real estate market has hit bottom and is poised for a rebound. However, many still feel that the economic stability of the state of California and the concern for job security still pose as major obstacles to the successful recovery of the Southern California real estate market.

According to DQNews.com, many cities, including Santa Barbara, are beginning to post increases in home sales and slower declines in the median price of home sales. In fact, October experienced the smallest decline in median home prices since 2007, primarily due to a smaller inventory of foreclosed and distressed properties on the market. The median price for a home in Southern California was $280,000, up 1.8 percent from the previous month but down 6.7 percent from the previous year. Some regions near Santa Barbara are even beginning to experience year over year gains in the overall median home price. In October of 2009, about 22,000 new and resale houses and condos were sold in Southern California, which was a 2.8 percent increase from the previous month and also a 2.8 percent increase form the previous year. October also marked the 16th consecutive month ending in a year over year gain in home sales. Experts also believe that the federal tax credit for first time home buyers has also been a major factor in the increase in home sales, as well as affordable mortgage rates and home prices.

The Pacific Coast Business Times also reports that real estate experts forecast that the Santa Barbara real estate market will rebound in the coming months as signs show that the market has already hit bottom. Declining foreclosure rates will play a major role in the improvement of median home prices. However, experts still believe that the commercial real estate market has a longer way to come, given that the market is still struggling with a 13.3 percent vacancy rate and virtually nonexistent construction activity.

Taxes, Taxes and more Taxes!!!!!

URGENT! CONTACT YOUR CONGRESSMAN TO AVOID COMMERCIAL REAL ESTATE TAX HIKES

December 9, 2009 on 10:50 am

Action to Oppose More Than Doubling of Taxes on Real Estate Carried Interests

Edited by Jodi Summers

In early December, Congressman Charles Rangel Ways, chairman of the Ways and Means Committee of the House of Representatives, introduced the “Tax Extenders Act of 2009″ (H.R. 4213). Wrapped in this legislation package is a proposal that would more than double the taxes on carried interest received by general partners in real estate partnerships. Under this legislation, carried interest would no longer be taxed as capital gains at 15 percent, but as ordinary income at rates as high as almost 35 percent…making everyone’s investment real estate holdings a lot less sexy.

Kick us while we’re down. Those investing in commercial real estate are already feeling economic distress because of the decline of property values and the lack of loans available. The proposed legislation would more than double the taxes imposed on many real estate entrepreneurs.

If H.R. 4123 enacted into law, this proposal could be the largest modification to the taxation of real estate since the Tax Reform Act of 1986.

This bill was past stealthfully, proposed on December 7th, it bypassed the customary legislative process, bypassing the House Ways and Means Committee, and going directly to the House floor for a vote on December 9, reducing meaningful opportunities to amend the bill.

Safeguard your real estate assets; communicate with your Congressional Representatives and Senators! Let them know that this tax increase on carried interest will further damage the commercial real estate industry and undermine efforts in their own communities to spur job growth and economic recovery.

http://www.capwiz.com/naiop/issues/alert/?alertid=14439831&type=CO has letters ready to go to your congressmen.

Save your assets and contact them!

Key Professional to Make Use of When Buying Real Estate

01.12.2009 | Author: Chris Channing

A small ring of professionals is necessary when buying your first home. Such professionals all work together to make your buying process to be a smooth, fast, and safe one. If you are buying your home for the first time, it’s important to take advantage of each professional to avoid hardship.

The first professional that comes to mind is the real estate broker- who is going to help you find the actual real estate you wish to buy. Although some argue that brokers aren’t completely necessary, for the average first time home buyer working a full time job, it would be too much work otherwise. Real estate brokers also have key contacts in the industry to aid you in other aspects of home buying.

Getting approved for a mortgage loan is the logical next step. A lender will take the time to comb over your financial history and ability to pay a mortgage loan. If approved, the lender will proceed to set a payment plan that corresponds to your budget. Sometimes getting approved is tricky- and it might take months to fix a credit rating.

An appraisal is in order for a home you aren’t sure is priced right or not. The appraiser can be of great help in formulating a good offer for the real estate in question. A good real estate broker should be able to give a ball park estimate of what the home is worth according to current market conditions. Real estate brokers can also sometimes act as an inspection agent for the home.

Saving money after buying the home because priority in order to keep bills paid. Applying and qualifying for a tax credit can lessen the burden of bills for up to $8,000 for qualified home buyers. There are several tax credits to take advantage of, so if you can’t qualify for one, talk to an accountant for more ideas on saving money via tax credits.

Lastly, obtain insurance on the property once it is received in your name. Lenders will automatically demand that you do this in order to protect their investment, but it doesn’t hurt to look around before the purchase so you know which insurance agency has the best deal. Become educated on what the policy does or doesn’t cover, and do consider getting a more expensive policy to cover your home from acts of nature such as a tornado or hurricane.

Your team of professionals that you choose will cost a pretty penny- but it’s a sum well spent. Buying real estate is much easier with the help of others on your side to find the deals, close them, finance and then insure them so that your future with your home will be long lasting.