Commercial Real Estate

Real Estate Investment Trusts Get Their Own Sector

By | Commercial Real Estate, Financial Markets

On September 1, 2016 the public real estate investment trusts (REIT) were given their own sector in the S&P sectors. Now there are 11 sectors. Previously REITs were combined with the financial services sector. It is anticipated that this will increase the attention that REITs receive. If you are looking for a way to compare your commercial property against a basket of other properties, this might be an option for you.

The Wall Street Journal reported, “The Global Industry Classification Standard, since its inception in 1999, has grouped companies into 10 industries, such as energy or health care, allowing investors to see and compare broad trends. Real estate will form group No. 11. The new classification from MSCI Inc. and S&P Dow Jones Indices LLC, which manage the indexes, is a recognition of the growth of the listed real-estate sector. With a market capitalization of $1.48 trillion, it now accounts for 3.5% of the global equities market, up from a 1.1% share in 2009, according to the European Public Real Estate Association, or EPRA. The new classification means “there is going to be more money looking at the sector,” said Matthew Norris, executive director for a real-estate fund at London-based property firm Grosvenor Group. “This is going to bring real estate into focus.”

For those of us in commercial real estate, we already know the yields are better than many bonds. The separation should generally help investors more clearly see the opportunity available to them in REITs. The additional investor attention should lead to increased capital being invested in these funds which should bode well for commercial properties, generally. Read the full article here (WSJ).

You can also check out the new index and get additional information on the new REIT index at the S&P Dow Jones site here.

Multifamily Housing Supply Unfavorable to Lower-Income Renters

By | Commercial mortgages, Commercial Real Estate, Multifamily housing, New Construction

Lower-income households that are looking for affordable multifamily rental housing are faced with significant challenges. With little new stock affordable to them, many lower-income households are renting apartments that are beyond their financial means, leaving them less money for food, healthcare, transportation to work, and other necessities.

If changes to the stock of multifamily housing in the U.S., broken down by tenure, affordability, and assisted rental housing status. The results show that lower-income renters have lost ground recently. The average monthly rent of a unit lost from stock was $600 while the average monthly rent of a unit added was $1,000. In addition, while the number of units lost has decreased, lower-income renters experienced a disproportionate amount of those lost units, and that units added were affordable to higher-income renters. Only one-quarter of the units added (approximately 38,000 annually) were affordable to Very Low Income renters, further highlighting renter affordability challenges.

The results of this analysis show that both units added to and units lost from the multifamily housing stock experienced a slowdown between 2005 and 2013. In both cases, lower-income renters lost ground. Most of the multifamily rental stock lost was affordable to lower-income renters, with a median monthly rent of $600 in 2011 for these lost units compared with a $750 median rent for units remaining in the stock. By contrast, little of the new stock added was affordable to lower-income renters, with a median rent of $1,000 in 2013 for these new units compared with a median rent of $780 for units remaining in the stock. These trends show the challenge facing lower-income households that are looking for affordable multifamily rental housing.

Read the full report here

Commercial mortgage loans less available as Bank mergers increase

By | Commercial mortgages, Commercial Real Estate, Lenders, Regulation

One in Six Banks Will Have to Merge: CBA Chief Hunt

Thanks to the Dodd Frank Act bank mergers and consolidation in the banking industry continues. The reasons cited below certainly are driving the trend at an accelerating rate. The impact to commercial property owners is that they will not have as many commercial mortgage loans choices among traditional banks. As a result, it could be harder for commercial property owners to obtain the financing that best meets their needs. The American Banker article summary below explains the probable cause for this trend.

In a recent interview, Consumer Bankers Association President and CEO Richard Hunt said consolidation will keep community banking viable in the face of such persistent threats as the economy, technology, and regulation. He expects mergers and acquisitions to pick up among banks with $10 billion to $100 billion in assets. “We have been saying for some time there are three great disruptors in the marketplace today — the economy, the evolution of technology, and the burdensome new regulatory environment,” he said. “Any one of those would have a dramatic effect on banking, but to have all three happen simultaneously creates the perfect storm. We expect more [mergers] to continue throughout 2016 and years beyond.” Hunt said there are more than 6,000 banks currently, and even if 1,000 to 1,500 were lost, the industry would still be competitive. However, he noted that “the definition of competition will become greatly different. You don’t have to have a branch in a hometown in order to be competitive because of the Internet.” Hunt said consolidations ultimately will benefit consumers because “by combining forces and achieving the economies of scale, the technological platforms will be better.”  From “One in Six Banks Will Have to Merge: CBA Chief Hunt” American Banker (02/12/16) Stewart, Jackie

We have many lender relationships outside of traditional banking that are actively funding commercial mortgage loans. We have established relationship with wholesale lenders, private equity firms, conduit lenders or life insurance companies that rely upon third parties to introduce borrowers to their commercial lending products. The bottom line is we have lender relationships that the typical commercial property owner does not have access to or possibly even knows that such lenders exist. If your local bank is not able to provide the commercial mortgage loan that you need, we would be happy to work with you and our lender network to find the commercial mortgage that fits you and your property.

Lenders Tighten Lending Standards for Some Loans

By | Commercial mortgages, Commercial Real Estate, Economy

Banks cited the recent uncertainty surrounding economic forecasts as driving their decision

Lenders tightened lending standards on commercial and industrial loans and commercial real-estate loans in the fourth quarter of 2015 and expect to tighten further in 2016, according to a Federal Reserve survey of senior loan officers.

Banks cited the recent uncertainty surrounding economic forecasts as driving their decision to tighten commercial lending standards. Some lenders also said they were worried about the performance of the oil and gas industries, which have been battered by falling prices.

Survey respondents also said they expect interest rates on many types of commercial loans to increase and “a significant fraction of domestic banks” said they expected delinquencies to rise.

The survey results suggest banks could be starting to worry that a boom in commercial real estate could be coming to an end now that the Federal Reserve has raised short-term interest rates off from the near-zero level where they hovered for seven years. Fed officials have indicated they plan to raise rates further in 2016, which could dampen the commercial real-estate market.

Still, lenders said they had seen “stronger demand” for commercial real-estate loans in the fourth quarter of last year.

Banks showed less concern about lending to households, however.

Some lenders said they had eased standards for home loans, including the larger “jumbo” loans. Banks also said they expected to ease mortgage standards further in 2016.

Home sales have been healthy as consumers have become more confident in the economic expansion. The National Association of Realtors said last month that existing home sales reached 5.26 million in 2015, the highest annual level since 2006. That has pushed prices up and reduced available inventories, the group said.

via (wsj)

Five Tips on Financing Commercial Real Estate

By | Commercial mortgages, Commercial Real Estate

You most likely have invested a lot of time and a fair amount of capital to search for that commercial real estate property with hidden potential. But ask yourself, how much time have I spent on researching how to finance the purchase? What commercial mortgage options are there? Do I understand those options? Who can help me arrange the commercial real estate financing? Don’t short change your investment by not fully understanding what types of commercial mortgage financing is available for your specific type of property. Here are a few tips to help get you started.

1) Interest only option. Interest only can give you additional cash flow by reducing near-term cash outflow. However, it will not help you build equity. Interest only is a great option if you have a sound strategy to improve the property in ways that will increase the cash flow the property can reasonably generate. This is one reason, an interest only commercial mortgage is common with bridge lenders. You have to be realistic if not conservative in the cash flow forecasts your strategy generates. The main idea would be to use the principal portion of an amortizing mortgage, and reinvest that principal into the property to increase its value, or attract higher paying tenants to produce higher cash flows from the property. Ask yourself, are you comfortable with the debt level on the property and that it will not be reduced. Finally, when thinking about interest only, think about your exit strategy for the property. What are your longer term goals for the property?

2) Amortization schedule. What amortization schedule will you be comfortable with? The longer the amortization the lower your monthly payment and less impact on net cash flow from the commercial real estate property. This is really the main point with commercial mortgages, because nearly all lenders will attach a balloon payment with a maturity between 5, 7, or 10 years from when you fund the property. Therefore, it really comes down to the property’s ability to generate enough cash flow to handle the proposed amortization schedule.

3) Variable rates.  Variable rate commercial mortgages are typically tied to an index and have a margin that is added to the index. They also have caps, a floor for the limit on how low the rate will be over the life of the mortgage, and a ceiling as a limit on maximum rate that can charged be over the mortgage. When considering these variable features you should conduct rate shock analysis on your cash flows. Focus on the maximum rate and see if the commercial real estate property can still generate a positive cash flow if the index rate the mortgage is linked to increased enough to adjust your rate to the maximum rate. And don’t count on interest rates staying at the floor. If they do consider it icing on the cake and take your wife on a tropical holiday with the savings.

4) Prepayment penalty schedule. Some types of mortgages require a prepayment. These are not easy to get around, so it is important to consider your longer term strategy for any commercial real estate property. You do not want to make a short term decision to sell the the property if you accept and take a commercial mortgage with a prepayment schedule. There are different types of prepayment penalties. Lenders require them because they do not want to invest the time and cost in originating, underwriting and processing a new mortgage only to have it pay off in a year or two. Lenders are also looking at the interest rate risk involved in a prepayment. The reason there is interest rate risk for the lender is that they have contractual obligations for the liabilities they have to support the funding of the commercial mortgage. When the mortgage pays off early, they may have shortage in interest income because typically they pay funding sources at a certain rate and will now have replace the paid off mortgage with another one most likely at a lower rate. A discussion on the various types of prepayment penalties out there deserves a dedicated blog entry, so stay tuned.

5) Balloon payment. Most all commercial mortgage lenders will require a balloon payment. Lenders have to reduce their interest rate risk over time. The best way to do that is to basically “reprice” their mortgages. And typically, these terms are matched with the lenders sources of funding so that they can maintain a positive net interest margin over the life of the commercial mortgage.

Because there are a lot of commercial mortgage options available it is important to first understand your objectives for the property and then to figure out what type of financing will be most suitable to the property and your objectives. Give us a call to discuss your property and commercial mortgage needs– there is no obligation.

Tougher Times for Mall Owners

By | Commercial Real Estate, Retail

Researcher pares forecast rent increases, occupancy rates for mall REITs, as more shoppers go online

As mall owners prepare to report fourth-quarter earnings results, investors already are bracing for a tougher road ahead.

Real-estate researcher Green Street Advisors is lowering its forecasts for the rent that large U.S. mall owners will be able to charge and the amount of space that will be occupied by tenants for years to come.

Rents will grow at a paltry 1.5% annually for existing nonanchor tenants through 2019, Green Street now predicts, down from the 2.5% growth it anticipated a year ago for the same four-year period.

Last January, the Newport Beach, Calif.-based researcher predicted that the occupancy rate for nonanchor tenants would rise above 96% in 2019. Now it expects that rate to drop to just over 94% by then. The occupancy rate in 2015 was nearly 95%.

Others are predicting a slog for landlords as well.

“I can’t find a clear catalyst that’s going to get people excited about the retail landscape,” said Steve Sakwa, an analyst at Evercore ISI. Evercore downgraded shares of three mall real-estate investment trusts in November, and currently doesn’t list any of the mall REITs it follows as a stock to buy.

The downgrades underscore the challenges facing the American shopping center as consumers alter their buying habits and retailers scramble to adjust.

The rapid growth of e-commerce sparked the revision to Green Street’s outlook, according to D.J. Busch, a senior analyst at the firm and lead author of a new report that features the lower forecasts. The forecasts apply to REITs, which own most U.S. malls.

The impact of lower rent growth and declining occupancy will fall hardest on weaker malls, which already may see less foot traffic or lower sales, Mr. Busch said in an interview. The most desirable malls will remain in demand even for retailers that close stores elsewhere, and those landlords will be able to command larger rent increases, he said.

“The ‘A’ properties are still going to do quite well,” Mr. Busch said. “If you’re the No. 2 or 3 [mall] in a small market, I’m not excited.”

Mall owners are jockeying to adapt to the shifting landscape. This month, Taubman Centers Inc. and Macerich Co., two of the nation’s largest mall landlords, agreed to spend $660 million to buy Country Club Plaza, a landmark property in Kansas City, Mo., that includes more than 800,000 square feet of retail space.

A week later, Taubman said it was abandoning plans to build an enclosed mall in Miami. Taubman says it will go ahead with plans to lease out street-level retail stores at the site.

Stock-market investors are treating some mall landlords as a relative haven amid concern about the global economy. Shares in Simon Property Group, which owns some of the nation’s most productive malls, rose 6.8% in 2015, when the S&P 500 was slightly down, and the firm’s stock is down less than the broader market so far in 2016.

Yet shares of U.S. mall REITs generally trade at a nearly 30% discount to the estimated value of their real estate, according to Mr. Busch.

The shift to online shopping is an important part of the challenge facing malls, according to Mr. Busch. In the third quarter of last year, the most recent period for which government figures are available, e-commerce grew 15% compared with a year prior, while total retail sales grew 1.6%.

Retailers are adjusting by integrating technology, said Tom McGee, chief executive of the International Council of Shopping Centers, a trade group. He cited a recent ICSC survey which found that about a third of holiday shoppers bought at least one item online that they picked up at a physical store. Of those consumers, 69% bought something else while they were at the store.

Internet retailers, meanwhile, are scrambling to figure out how to get goods to customers more efficiently—a job traditional stores excel at, he said. “People are investing in physical retail,” Mr. McGee said. “They have the last mile.”

Nonetheless, industry giant Macy’s Inc. recently detailed plans to close some stores, mostly at malls.

Retailers still benefit from having a physical store in a market, which underscores the advantages of brick-and-mortar, Mr. Busch said.

But, he said, retailers may pare back. Instead of having five stores in a market, he said, retailers may conclude “I only need three.”

via (wsj)

Housing Regulator Closes Loan Loophole Used by REITs

By | Commercial mortgages, Commercial Real Estate, Multifamily housing, Uncategorized

Move will bar membership in government-backed federal home loan banks for captive insurers

A top federal housing regulator on Tuesday shut the door on mortgage investors who had been using a loophole to access low-cost, government-backed financing.

The Federal Housing Finance Agency said so-called captive insurance companies, which insure the risks of the companies that own them, no longer will be eligible for membership in government-backed federal home loan banks.

Real-estate investment trusts that invest in mortgages are normally ineligible for home-loan-bank membership, but over the past few years have created captive insurers to gain indirect access to cheap federal funding.

After the announcement on Tuesday, shares of some mortgage REITs with captive insurers, such as Annaly Capital Management Inc., Two Harbors Investment Corp. and Redwood Trust Inc., fell between 0.9% and 5%.

Mortgage experts said the move is likely to make it even more difficult for some riskier borrowers who don’t fit the parameters of government-backed agencies to get loans.

“It will make some loans to lower-quality borrowers even slower to come back,” said Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute, a think tank.

Mortgage rates also could tick up, since the rules would effectively cut off some investment in mortgage bonds.

On the other hand, some had feared that allowing captive insurers to get access could put the FHLB system at risk, as other types of firms like hedge funds and investment banks considered using the workaround.

“Congress has had plenty of opportunities to give mortgage REITs access to the system, and they haven’t done so,” said Joseph Pigg, senior vice president for mortgage finance for the American Bankers Association, a banking industry trade group.

The 11 regional federal home loan banks advance low-cost loans to financial institutions such as credit unions and commercial banks to promote lower mortgage rates.

In shutting captive insurers out, FHFA Director Melvin Watt said the agency sought to abide by Congress’s intent when it passed the law governing the home loan bank system.

As of the end of September, 40 captive insurers had become home-loan bank members and as of mid-November, they had outstanding borrowings of more than $35 billion.

In a statement, John von Seggern, president of the Council of FHLBanks, said the FHFA’s decision “will mean fewer opportunities for private capital to expand homeownership opportunities for Americans.”

Mortgage Bankers Association President David Stevens said the rule “removes a vital component of the FHLBank membership which provides liquidity for the real estate finance market.”

On Tuesday, the FHFA did roll back separate provisions that would have required home-loan bank members to keep a certain percentage of their assets in mortgages. That move is expected to help liquidity.

The FHFA first proposed the changes in September 2014. A bipartisan group of congressmen in October last year introduced a bill that would require the FHFA to withdraw the proposal, though that legislation never left committee.

Mortgage REITs that have already used insurers to get home-loan bank access will get some relief. Those that entered the system before the September 2014 proposal can stay members for up to five years, while those that became members after will have one year.

Michael Widner, an analyst for Keefe, Bruyette & Woods, said that because of the uncertainty surrounding membership, mortgage REITs until now have hesitated to rely on the home-loan banks for a large portion of their funding. In part for that reason, he said he didn’t expect the FHFA’s decision to have a near-term impact on REIT earnings. Mr. Widner said 19 of 24 publicly traded mortgage REITs had captive insurers that were home-loan bank members.

Annaly CEO Kevin Keyes said mortgage REIT membership in the FHLB system “enhances both the stability of the residential financing market and is supportive of the federal government’s broader goal of returning private capital to the U.S. mortgage market.”

via (wsj)

How to Profit From Rising Rents: Build Apartments

By | Commercial Real Estate, Leasing, Multifamily housing

Average rents nationwide rose 4.6% in 2015, the biggest gain since before the recession

After six years of rising apartment rents in U.S. cities, investors from all corners of the real-estate industry are piling into new projects in a bet that the boom still has a long way to run.

Over the next three years, developers are expected to build almost one million apartments in the U.S., more than the nearly 900,000 constructed over the previous three, according to researcher Axiometrics Inc.

In 2014, multifamily rental construction reached 328,000 units, its highest in nearly 30 years, according to an analysis of U.S. Census data by Jed Kolko, a senior fellow at the Terner Center for Housing Innovation at the University of California, Berkeley.

The main lure for investors: rising rents. Average rents nationwide rose 4.6% in 2015, the biggest gain since before the recession, according to real-estate researcher Reis Inc. Rents have increased by more than 20% since the beginning of 2010. Most economists expect 2016 to be another strong year. The average monthly U.S. apartment rent now stands at nearly $1,180, up from about $1,125 a year ago, according to Reis.

“I sound to myself like a broken record because I’ve been saying the same thing for quite a few years now,” said Mark Obrinsky, chief economist at the National Multifamily Housing Council. “Demand remains high for apartments.”

Sales of U.S. multifamily apartment properties clocked in at a record $138.7 billion in 2015, up just over 30% from a year earlier, according to JLL, a commercial-real-estate-services firm. Last year, 4,915 multifamily projects were sold, up from 4,570 in 2014.

But some real-estate analysts worry that most of the new construction has been aimed at the top 20% of the market. In all, 82% of the units built from 2012 to 2014 in 54 major U.S. metropolitan areas are classified as luxury developments, according to CoStar Group Inc.

“What concerns me is not so much the volume of construction but that there’s an intense focus on building the same thing: luxury properties in urban locations,” said Jay Parsons, director of analytics for MPF Research, a division of RealPage Inc., who has been advising clients to look more at vibrant suburban markets.

The shift toward luxury is putting renters near the limit of what they can afford.

In downtown Los Angeles, new one-bedroom properties are commanding rents in the range of $3,000 a month. According to CoStar, a tenant would need a gross income of $128,000 to afford one of those units, four times the median household income in the area of just over $29,000 a year.

In Boston’s trendy Leather District, renters would need to make nearly $142,000 to afford average rents for newly built one-bedroom apartments of more than $3,500 a month, according to CoStar. The median income in the area is closer to $60,000.

Despite the affordability issues, apartments are drawing interest from a broad swath of real-estate companies, including home builders that haven’t traditionally built multifamily housing. Toll Brothers Inc., primarily a single-family home builder, has 7,400 apartment units planned or under development, and company executives say that could double over the next couple of years.

“All these trends supporting apartment demand are going to be with us for the foreseeable future,” said Charles Elliott, managing director of Toll Brothers Apartment Living.

Major office landlords, such as Mack-Cali Realty Corp. also are focusing more on apartments. The company, which was solely an office landlord before 2010, through acquisition and development has amassed 7,000 units and plans by 2019 to more than double that to 15,000 units.

“Most people forming households today are not buying,” said Michael DeMarco,president of Mack-Cali.

Urban markets are especially hot. The number of apartments completed in 30 major downtown city centers hit more than 54,000 for 2015, according to an estimate by Axiometrics, a 20-year high.

Toby Bozzuto, president and chief executive of the Bozzuto Group, a Washington-area builder, said he has seen an influx in the past few years of newcomers that once specialized only in office or retail but now are dabbling in apartments. He remains bullish on the apartment market, but has concerns that investors are piling on and driving up land prices beyond what rents can support.

Los Angeles-based Jamison, one of the city’s largest office landlords, is taking its first plunge into residential property. For two decades the company specialized in owning no-frills office buildings in the Koreatown neighborhood. Now its Jamison Properties LP unit is diving headlong into apartments, with 27 projects under development or in the planning stages.

About a third of the new units are conversions of the company’s existing buildings, while the rest are new construction, including Jamison’s most ambitious project, two 35-story towers in downtown Los Angeles with 648 luxury units.

Jaime Lee, CEO of Jamison Realty Inc., expects the market will start to slow in the next few years, so Jamison is breaking ground on some of its projects as quickly as possible.

“People are working against the clock right now,” she said. “We’re coming to market as quickly as we can.”

Some signs of strain are beginning to emerge. The vacancy rate for downtown apartment buildings in U.S. cities jumped to 6.1% in the third quarter of 2015 from 4.4% in the first quarter of 2013, according to Reis. During the same period, the suburban vacancy rate fell to 4.1% from 4.4%—suggesting some renters are leaving high-price inner-city areas and moving farther out.

New projects in the third quarter were 49% unleased upon completion, according to CoStar Group Inc., up from 29% in the third quarter of 2014.

“With all the new product being created skewed to luxury…we’re building lots of rental product but it doesn’t necessarily match up with what the demand really is,” said New York-based appraiser Jonathan Miller.

Then again, analysts several times in this cycle predicted a slowdown in the frenzied rental market, only to see the boom continue for years more.

Ms. Lee said she isn’t worried. Jamison aims to own properties for years and gets a large portion of its funding from friends and family, meaning it is able to ride out short-term fluctuations and rely on the long-term health of the market.

“We are willing to make the heavy bet, not only for the convenience and affordability but for the fact that the cultural renaissance around Koreatown is just going to continue to build the momentum here,” Ms. Lee said.

via (wsj)

U.S. Apartment Rents Leap at Fastest Pace Since Crisis

By | Commercial Real Estate, Leasing, Multifamily housing, Property Management

Average rose 4.6% to nearly $1,180, Reis reports

Apartment rents increased faster last year than at any time since 2007, a boon for landlords but one that has stoked concerns about housing affordability for renters.

Average effective rents nationwide rose 4.6% in 2015, the biggest gain since before the recession, according to a report by real-estate researcher Reis Inc. The average apartment rent now stands at nearly $1,180, up from about $1,125 a year ago.

Another report from Axiometrics Inc., a Dallas-based apartment research company, showed that rents increased 4.7% in the fourth quarter compared with the same quarter a year earlier, the strongest year-end performance since 2005.

The fourth quarter “wrapped up an incredible year for the apartment market, probably the strongest we’ve ever seen,” said Jay Denton, senior vice president of analytics at Axiometrics.

Rents have marched steadily higher for six consecutive years, in part because of tough lending standards for home buyers and in part because of a shortage of apartments for middle-income renters. The homeownership rate in the third quarter stood at 63.7%, near a 30-year low.

Unlike home prices, which crashed during the recession and have taken years to recover, rents scarcely dipped during the downturn. Since then annual increases have accelerated from 2.3% in 2010 to about 4% in each of the last two years. Over the last 15 years, rents have increased by an average of 2.7% annually, according to Reis.

In general, the higher rents go, the more difficult it will be for young people to save for down payments, making them likely to rent even longer. The percentage of first-time buyers among all home buyers is at its lowest level in three decades, according to the National Association of Realtors.

In some cases, meanwhile, professionals well into their 30s are choosing to rent rather than buy, preferring the financial flexibility and the proximity to restaurants and bars.

Alezandra Russell, a 34-year-old founder of a nonprofit, and her husband sold their five-bedroom house in suburban Maryland in 2014 in favor of an 800-square-foot apartment they rent in downtown Baltimore for about $2,500 a month.

Even though the rent has increased slightly every year, she said renting has given them much more financial freedom than when they had a mortgage that they were “stressed out about constantly.”

Analysts say the apartment market is showing some early signs of peaking. Vacancy rates rose slightly in the fourth quarter to 4.4% from 4.3% in the previous quarter.

The main factor: a flood of new supply, which is especially likely to weigh on rents in high-end buildings in downtown areas. In all, more than 188,000 apartment units were completed in 2015, the most since 1999, according to Reis.

Bob DeWitt, president and chief executive of GID, a Boston-based apartment owner and developer, is currently involved in developing 15 apartment projects across the country. But he said the increased competition is starting to limit how much more rent tenants are willing to pay.

“We certainly believe that over the next two or three years rent trends are going to slow and in some places they may actually back up,” he said.

Both reports showed that some of the hottest markets in the country are finally starting to cool, while smaller, less expensive ones are starting to heat up. That might reflect the fact that the affluent renters that dominate those markets are reaching the limit of how much they can afford and are moving to older buildings or neighborhoods farther from downtown.

Rents in the San Francisco area increased 7.6% year-over-year in the fourth quarter, compared with 11.8% in the third quarter, according to Axiometrics. Rents in San Jose increased 7.1%, compared with 9.9% in the third quarter.

Meanwhile, rents in Portland, Ore., traditionally a more affordable city, jumped by 12% in the fourth quarter from a year earlier, Axiometrics said.

Kimberly Minasian Sparks, a rental broker in Portland, said a few years ago she could easily find clients a one-bedroom apartment in the $900-a-month range. Today, she is lucky to snag one for less than $1,500.

“It’s not sleepy little Portland anymore,” she said.

Much of the new demand in Portland has been driven by people fleeing cities such as Seattle and San Francisco, where rents have shot up beyond what many people can afford.

Diana Comstock, a 42-year-old painter, moved to Portland from Santa Barbara last summer. She said the local moms’ group she belongs to on Facebook is full of people decrying huge rent increases driven by people coming from out-of-state.

“I tend not to tell people I’m from California,” she said. “You can’t blame people for coming here when it’s a good bargain.”

via (wsj)

Demand for Office Space Ramps Up

By | Commercial Real Estate, Office

Technology companies help spur additional leasing; fastest pace since 2007

U.S. employers are leasing office space at the fastest pace since the recession, showing a new appetite for expansion after years of sluggish growth.

Employers added 15.3 million square feet of office space in the fourth quarter, more than any other quarter since the third quarter of 2007, according to real-estate research service Reis Inc. That pushed the vacancy rate down to 16.3%, while rents sought by landlords hit $30.86 a square foot, up from $29.94 a year earlier, according to Reis.

For all of 2015, employers occupied an additional 42.4 million square feet. That is up from 31.4 million square feet in 2014, Reis said.

The increase shows newfound strength in a sector that experienced tepid growth for most of the recovery—hobbled by slow expansion in the financial industry and trends such as denser work spaces.

“Demand is really starting to ramp up,” said Ryan Severino, an economist at Reis, which surveyed 79 markets.

Driving much of the growth has been the technology sector, with startups and tech giants alike propelling fast-rising occupancy in markets like Silicon Valley, Seattle and Austin, Texas.

In Seattle, rents grew 8.1% during 2015 to an average of $27.67 a square foot, the most in the country, according to Reis. It was followed by San Francisco and the San Jose area, which includes Silicon Valley, where rents grew 6.1% and 6%, respectively.

Such growth extends beyond tech clusters on the West Coast.

Early last year, online lender Avant Inc.’s headquarters in Chicago was about 30,000 square feet. With its head count swelling, the company first signed a lease for 80,000 square feet for a new headquarters, and then in the fall it added another floor to bring its total to 120,000 square feet.

An Avant spokeswoman said the company plans to add 600 employees this year.

On the other end of the spectrum is the energy sector. Low oil prices are taking a toll on the Houston market. Companies there have dumped millions of square feet onto the sublease market while a rash of new construction is adding supply.

Houston’s vacancy rate rose to 15.6% from 14.5% a year earlier, according to Reis, and many real-estate experts expect it to get much higher.

“The next 12 to 24 months are going to be tough for landlords as tenants have the upper hand,” analysts at Evercore ISI said of the Houston market in a note to clients Monday.

via (wsj)