Commercial Real Estate Market Survey 2014-05-06

MAY 2014

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THE NATIONAL ASSOCIATION OF REALTORS®, “The Voice for Real Estate,” is America’s largest trade

association, representing 1.0 million members involved in all aspects of the residential and commercial real

estate industries.

Although the information presented in this survey has been obtained from reliable sources, NAR does not

guarantee its accuracy, and such information may be incomplete. This report is for information purposes

only.

Copyright © 2014 NATIONAL ASSOCIATION OF REALTORS®. Reproduction, reprinting or retransmission

in any form is prohibited without written permission. For questions regarding this matter please e-mail

[email protected].

2 NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.realtors.org/research-and-statistics

MAY 2014

The REALTORS® Commercial Real Estate Market Survey measures

quarterly activity in the commercial real estate markets. The survey

collects data from REALTORS® engaged in commercial real estate

transactions The survey is designed to provide an overview of market

performance, sales and rental transactions, along with information on

current economic challenges and future expectations.

Despite disappointing economic performance and severe winter

weather in parts of the country, commercial REALTORS® reported

broad-based market improvements in the first quarter 2014. In keeping

with the upward momentum in the markets, REALTORS® rated the

direction of commercial business opportunities 6.0 percent higher in the

first quarter 2014, an improvement over the 5.0 percent rise from the

fourth quarter 2013.

On a year-over-year basis, sales increased 11 percent in the first

quarter, as prices rose 4 percent. Cap rates continued compressing

with a 50 basis point decline, from an average of 8.7 percent in the

fourth quarter 2013 to 8.2 percent in the first of this year. Multifamily

properties recorded the lowest average cap rates, at 7.7 percent,

followed by hotels, at 7.6 percent. Office and retail spaces posted

identical cap rates of 8.0 percent, while industrial properties recorded

capitalization rates of 8.1 percent.

3

GEORGE RATIU

Director, Quantitative &

Commercial Research

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Sales Volume Sales Prices

Source: National Association of Realtors®

NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.realtors.org/research-and-statistics

MAY 2014

The average transaction price moved from

$1.2 million in the fourth quarter 2013 to

$1.4 million in the first quarter 2014. In a

noticeable change, commercial

REALTORS® reported that the most

significant concern during the first quarter

was a shortage of available inventory. The

second major concern was the pricing gap

between buyers and sellers. After several

years of topping the list of concerns,

financing dropped to a distant third place,

signaling a marked shift in market

conditions over the past six months.

Commercial fundamentals continued to

strengthen in REALTOR® markets, as

demand for space accelerated during the

first quarter. Commercial leasing rose 5.0

percent over the fourth quarter 2013,

following a moderate 0.4 percent rise the

prior quarter. On the supply side, new

construction showed a similar acceleration,

gaining 4.0 percent in the first quarter

2014, on the heels of a 2.0 percent

increase last quarter.

Vacancies declined for all property types,

except multifamily buildings. Office

vacancies declined 90 basis points, to 16.7

percent, while industrial availability

declined 150 basis points, to 13.1 percent.

4

2014.Q1 Cap Rates

Office 8.0%

Industrial 8.1%

Retail 8.0%

Multifamily 7.7%

Hotel 7.6%

Development 9.9%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

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REALTORS® Commercial Capitalization Rates

Office Industrial Retail

Multifamily Hotel Development


2014.Q1 Vacancy Rates

Office 16.7%

Industrial 13.1%

Retail 14.2%

Multifamily 7.4%

Hotel 18.6%

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New Construction Leasing Volume



MAY 2014

Multifamily vacancy reached 7.4 percent,

an 80 basis point advance. Retail

availability declined 190 basis points to

14.2 percent. REALTORS® expect

inventory availability to remain flat over the

next 12 months.

With decreasing vacancies, landlords were

in a stronger position, and provided fewer

rent concessions. Rent concessions

declined 4.0 percent on a quarterly basis.

The national average tenant improvement

allowance was $4,878 per lease in the first

quarter 2014.

Average rental rates rose 2.0 percent

during the first quarter, following a 0.3 gain

percent during the fourth quarter 2013. In

terms of space requirements, tenant

demand in the 5,000 square feet and

below accounted for 75.0 percent of

leased properties. At a more granular

level, demand for space under 2,500 feet

comprised 42.0 percent of lease

agreements. Lease terms remained

steady, with 36-month and 60-month

leases capturing 62.0 percent of the

market.

5

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

REALTORS® Commercial Vacancy Rates

Office Industrial Retail Multifamily Hotel


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REALTOR® Commercial Leasing Trends

Rental Volume Rental Rates Rent Concessions


NOTES:

1. Vacancy rate data in this report come from a national survey of REALTORS® who identify themselves as

commercial practitioners. The data do not match the historical data which underlie NAR’s Commercial Real

Estate Outlook (CREO). The CREO vacancy data are sourced from Reis, Inc.

2. In April 2014, NAR invited a random sample of 47,000 REALTORS® with an interest in commercial real estate

to fill an on-line survey. A total of 388 responses were received, for an overall response rate of 0.8 percent.


6

MAY 2014

2014.Q1 Survey Highlights

• 66% of commercial REALTORS® closed a sale.

• Sales volume rose 11% from a year ago.

• Sales prices increased 4% year-over-year.

• Cap rates averaged 8.2% during Q1.14

• Leasing activity advanced 5% from previous quarter.

• Rental rates increased 2% over previous quarter.

• Concession levels declined 4% on a quarterly basis.

• Inventory shortage topped the list of current

challenges, followed by pricing gap.

• The estimated average transaction rose from $1.2

million in Q4.13 to $1.4 million in Q1.14

0 20 40 60

0 - 12 months

12 months

24 months

36 months

48 months

60 + months

60 months

Average lease term during last transaction (%)


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Average Leased Space by Size, Quarterly*

Under 2,500 sf

2,500 - 4,999 sf

5,000 - 7,499 sf

7,500 - 9,999 sf

10,000 - 49,999 sf

50,000 - 100,000 sf

Over 100,000 sf

Source: National Association of Realtors® *Prior to 2010.Q4 "Under 5,000 sf was the lowest category available.

The REALTORS® Commercial Real Estate Quarterly Market Survey asks participants to comment on

current conditions in their markets. Below are a few of the comments about the latest quarter environment.

All government bodies really are making too many regulations and codes for investors.. The property tax in our area is capped at 3% , but if you now take that 3% tax that is a 99% payback for the next 30 years.. Even if you have paid off your mortgage on your investment you now have a 30 yr mortgage called property tax. Rents cannot keep up with the rate of change in the assessed value and the amount of increase in the property tax. Major companies are landing tax abatement reductions and the amount of taxes they don't pay are being allocated to the investment community to pay for this loss of income, which reduces the profit on our investments. Available inventory is down for businesses looking to lease space. New construction has started, but I do not think it will keep up with current demand. Inventory will drop until new construction catches up with demand. Available inventory of industrial is low. Lease rate prices should continue to rise. Office demand is low for B class space. Construction prices are getting higher. Biggest problem is no lender financing for investment properties. Buyers are still extremely tentative and price-sensitive; sellers still wish for yesterday’s prices, terms and conditions. But there IS money moving again after a 5 year hiatus. Certain submarkets are outperforming others in office. Suburban still a little soft, urban getting a little too hot. Retail weakening overall but vacancy still low in my market area. Commercial Financing is still a huge obstacle. The rates are acceptable but the terms and conditions are deal killers.

7

MAY 2014


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2013.Q4 2013.Q3

REALTORS® Most Pressing Challenges

Other

Pricing Gap: Buyers vsSellers

National Economy

Local Economy

Financing

Distress

Inventory

Continued job growth. Slow office absorption. Strong warehouse market. Retail improving. Multi- family strong. Rents slowly increasing in all sectors except Class C & distress which are trading at significant discounts to write off. Evergreen, Colorado is a unique market for retail and office. Very close to Denver and a booming Lakewood/Golden market. Denver is a growing market largely due to the legalization of marijuana. That has also made industrial space at a huge demand. Our largest gains have been in the ALC development area. Good local industrial market. Growth in the area focused on airline/aircraft and oil and gas manufacturing. Good market, strong concern. Very odd. I foresee investment in distressed real estate improving. I have two bars on the market for about a year we cannot get anyone financed for these business

The REALTORS® Commercial Real Estate Quarterly Market Survey Comments—continued.

8

I primarily list and sell land and this market has not recovered in my area. The supply exceeds the demand Good: pent up demand, new home building up, interest rates still low, Bad: remodeling does not buy back depreciation, government policy, loss of jobs and fear of job loss, rental hedge funds drove the price of existing homes down with low cash offer, created a home shortage under $150,000. Still copious inventory of residential lots in REO's, over supply of residential rentals is beginning to turn rent lower, These condition has caused a spike in new construction. but the price between existing average home and new homes is very large. A new home in a subdivision may sale for $94.00, but the same plan 3 years old may sale for $78- 80 per sq.ft. and the new home same lot same design and appeal new will sale for $94-96 per sq.ft. Appraisal wise this anomaly assumes the same as driving a new car of the lot, with no adjustment. My opinion the existing homes will remain low for a while longer, and many subdivision will not recovery to the price of a new home, but sink to the level of existing values. So economic indicators are not working in some cases as lower sale prices with a lower supply from large quantities of the purchase of resident rentals. I think the law of supply and demand will push hundreds of these homes back on the market and create another real estate bubble as the rents become stagnant. Commercial REOs especially vacant land or not likely to recovery for many years. Equity position required by lenders are on average 20- 50% down on vacant land with no income stream. It appears the larger banks are taking most of the inventory and with the effective use of the internet clients can place their own loans leaving the smaller banks and brokers with the much more difficult deals to place. I've seen more new business in the past 4 months than I have in the last 4 years.

MAY 2014


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REALTORS® Commercial Transaction Closing Rate


It's still a mess, no matter what the optimists write. The numbers hardly work, and lending is not friendly. I lost buildings because I couldn't refinance due to appraisals 50% below the purchase price, and they took my buildings back and I did not miss a payment. You explain that and while you try, read the Bill of Rights' ILLEGAL SEARCH AND SEIZURE CLAUSE. Job growth is still very slow, the market is a shuffle of properties and investors without a supportable stimulus. lack of inventory and buyers who want price and terms concessions that might have been available 2 years ago but not now. Lenders are still very conservative but they are willing to consider small business opportunities. Less SBA more local lenders absorbing the risk. Los Angeles has made it harder to do business. more costs, taxes, and fees. On top of the nonsense our president has cost business owners with more expenses...I have noticed lots of hesitation moving forward signing off on the deal.


9

Market has stabilized and is moving upward. Most investors are positive. Market seems to be moving upward for retail demand and overall rental is up. We continue to struggle to attract national known tenants due to lack of management based people in our immediate area. Overall economy has also effected the growth. Market slow but stable. Industrial in very short supply for sale or lease. Metro New Orleans is still reeling from the Katrina effect 8 years later. market has been good, lots of adaptive reuse projects but funded with new market tax credits and other incentives that would have otherwise not launched the projects due to the financing climate. Multi-family very active, office space being absorbed very quickly. My office is located on 4th Ave. in Tucson. We are located in a historic district close to downtown and right along the new modern street car route. We are 1/2 mile to University of Arizona. Our numbers are completely different than other areas. We are seeing rapid growth and appreciation in our area. New development areas and infill are in demand. Not many good leased investment opportunities in Las Vegas, new homes are selling very well, not enough resale homes on the market, commercial always follows residential. I think until the residential market is healthier and stable commercial will continue to experience less than stellar numbers. Industrial is probably one of the more stable real estate disciplines with office being the least stable. Retail vacancy depends on the area but seems to be gaining momentum. Our market is very strong across all sectors and should continue at least for near and medium term.

MAY 2014


Our small warehouses are starting to fill up. Whether the little businesses pay their rent on time remains to be seen. They are paying first last and security deposits so it has an upside so far. Looks promising. Our tertiary market has been bouncing along the bottom level without large losses but not seeing much in new opportunities. Regulation overreach is daunting. 40 years in the business and the shelf life of my knowledge is about 30 minutes. Retail, Office and Industrial vacancy rate is high and lenders do not want to lend on less than 90% occupancy. Secondary market small business opportunities are limited. Shopping center, retail space are moving due to interest rate is still low; lots of 1031 exchanges. Small business and economy are in the tank. On line retail and national economy on the rise. State (if not local) markets are differentiating. Some areas are on-the-move...some are not. Some will not move in my lifetime! Tenants are asking for better rates. If not where they want them they move in another direction. The local economy has been stagnant for the past 3 years and that trend continues. Wrestling owners (and hopefully sellers) into the new reality of value (35% of value was lost 2009/10 and has not recovered) is a difficult task. Local lenders are still very shy about lending in the commercial sector. Industrial is our one strong market. The Oil fracking business in Northern Colorado is pushing demand for Industrial/Comm Properties, Entry level housing, and Land.


10

There are fewer start up companies due to the still unstable economy. The last quarter of 2013 and the first quarter of 2014 sales/rentals were dampened significantly due to the US Government's healthcare enforcement. There is a lot of money sitting on the side lines. investors still looking but not sure what economy is going to do. Commercial Bank loans are the biggest problem. You cannot hardly get one, and if you do they want 45% plus down. There is positive movement in the marketplace. The fundamentals are returning to historical expectations. This is a slow, declining market with upward potential dependent upon the how social and economic difficulties are handled by local governmental officials. Too much federal debt and federal regs. Pres. Obama policies are hurting the economy. We also complete numerous REO listing transactions for banks and special servicers. Prices have increased and more financing is available. We are experiencing a high level of anxiety among the retail entrepreneurs who typically make up our rental pool. They are very concerned about the uncertain economy and rising labor costs mandated by government at all levels, including increased minimum wages and mandated health care costs. We are in a great housing boom, and that is bringing retail big boxes to Augusta, Ga. We are on the Mexican border and there appears to be renewed interest in the Maquila/Twin plant . Expansions and new lookers. We are suffering from lack of inventory. Clients are ready to offer very attractive terms and prices but there are no takers.

MAY 2014


We have a poor job market. Unemployment is still high and underemployment is very high. We see an uptick in leads and activity for small business leasing.

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Direction of Business Opportunity


NATIONAL ASSOCIATION OF REALTORS®

RESEARCH DIVISION

The Research Division of the National Association of REALTORS® monitors and analyzes

monthly and quarterly economic indicators, including retail sales, industrial production,

producer price index, gross domestic product and employment data which impact

commercial markets over time. In addition, the Research Division provides several

products covering commercial real estate:

• Commercial Real Estate Outlook

• Commercial Real Estate Lending Survey

• Commercial Member Profile

• CCIM Quarterly Market Trends

• Expectations & Market Realities in Real Estate 2014 (Deloitte, RERC, NAR)

If you have questions or comments regarding this report or any other commercial real

estate research, contact George Ratiu, Director, Quantitative & Commercial Research, at

[email protected].

To find out about other CRE research products:

11

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MAY 2014

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Documents

Commercial Real Estate Market Survey 2014-05-06