2010 q2 commercial real estate market survey

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NATIONAL

ASSOCIATION ofREALTORS ®

RESEARCH



SEPTEMBER 2010

Download this report from:

http://www.realtor.org/research/research/cre_market_survey

Commercial Real EstateQUARTERLY MARKET SURVEY

Copyright © 2010 NATIONAL ASSOCIATION OF REALTORS ®. Reproduction, reprinting or retransmissionin any form is prohibited without written permission. For questions regarding this matter please [email protected].

THE NATIONAL ASSOCIATION OF REALTORS ®, “The Voice for Real Estate,” is America’s largest tradeassociation, representing 1.1 million members involved in all aspects of the residential and commercial realestate industries..

Although the information presented in this survey has been obtained from reliable sources, NAR does notguarantee its accuracy, and such information may be incomplete. This report is for information purposesonly.

The REALTORS® Commercial Real Estate Market Survey measures quarterly activity inthe commercial real estate markets. The survey collects data from commercial Realtors®.The survey is designed to provide member Realtors® with an overview of their markets’performance, sales and rental transactions, along with current economic challenges andfuture expectations. The questions are designed to capture the effects of the existingeconomic conditions on the commercial real estate business. Each quarter, participantsrespond to questions regarding the current demand for commercial properties, price, cap

rates, rental concessions and other economic factors.

2

NATIONAL


RESEARCH



SEPTEMBER 2010


2010.Q2 Survey Highlights

• Sales volume declined 16 percent in the second quarter compared with a year ago. • Sales prices declined 18 percent in the second quarter on a year -over-year basis.• Leasing activity declined 6 percent from the previous quarter. • Rental rates declined 10 percent compared with the previous quarter. • Concession levels moved up 9 percent on a quarterly basis. • Financing continues to top the list of most pressing current challenges, followed by thenational economy.

• The estimated average transaction value was $1.1 million, lower than previous quarter.

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EALTORS® Commercial Activity – 2010.Q2

les Volume Compared with Previous Quarter Down 10%

les Volume Compared with Previous Year Down 16%

les Prices Compared with Previous Quarter Down 11%

les Prices Compared with Previous Year Down 18%

pected Inventory Availability for the Next 12 Months Up 13%

pected Cap Rate Movement for the Next 12 Months Up 12 bps

ntal Volume Compared with Previous Quarter Down 6%

ntal Rates Compared with Previous Quarter Down 10%

vel of Rent Concessions Compared with Previous Quarter Up 9%

rection of Business Opportunities Compared with Previous Quarter Down 4%

lume of New Construction Compared with Previous Quarter Down 16%

NATIONAL


RESEARCH



SEPTEMBER 2010


4

2010.Q2 Cap RatesOffice 8.6%Industrial 8.9%Retail 8.8%Multifamily 8.5%Hotel 9.5%Development 11.7%

2010.Q2 Vacancy RatesOffice 21.2%Industrial 18.7%Retail 20.6%Multifamily 12.5%Hotel 26.7%Development 44.8%

57%

43%

Did you complete a commercial sales transaction?

Yes

No

1%

2%

8%

13%

22%

54%

Over $10 M

Between $5 M and $10 M

$2 M and $5 M

Between $1 M and $2 M

Between $500K and $1 M

Under $500K

Dollar amount of last transaction

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

0.Q2

0.Q1

9.Q4

Average Rental Space Demanded During Last Transaction

> 100,000 sq ft

50,000 to 99,999 sq ft

10,000 to 49,999 sq ft

< 10,000 sq ft

NATIONAL


RESEARCH



SEPTEMBER 2010


• “Banks are neither financing, nor are they dumping their bad properties, creating a log jam. Nothing'smoving.”

• “Gulf of Mexico Drilling MORATORIUM.”

• “Lack of buyer and/or tenant demand.”

• “Local Economy is part of anemic National Economy...”

• “Regardless of what the banks are telling everyone the money has dried up. Unless you have triple A creditand a large down payment your not going to get a loan.”

• “Too much and increasing inventory, buyers and tenants expect "free" and sellers/landlords are laggingbehind in their expectations.”

• “Uncertain healthcare requirements.” • “Unrealistic expectations by all and uncertainty.”

• “We don't even have a hospital built in this parish, and in order for businesses to want to come here we needa hospital which will bring more people to live here and then generate business leads.”

• “We have no buyers or tenants inquiring.”

5

%

%%

%

%

%

%

%

%

%

%

2010.Q2 2010.Q1

REALTORS ®

Most Pressing ChallengesOther

Pricing Gap between Buyers andSellers

National Economy

Local Economy

Financing

Distress

NATIONAL


RESEARCH



SEPTEMBER 2010


6

-13%

-7%

-8%

-70%

13%

-3%-17%

13%

-3%

80%

-25%

-20%

50%

4%

-8%

-5%

-15%

-20%

-8%

-12%

-18%

-50%

-24%

-14%

-34%

-4%

-30%

-21%

-15%

-15%

-10%

-14%

-11%

-13%

-15%-7%

-37%

-3%

-3%

-40%

-38%

-5%

0 250 500 750 1,000125Miles4

Legend-70% - -30%-29% - -15%-14% - 0%1% - 15%16% - 80%

Sales Volume Compared with Previous Quarter (Based on the overall level of commercial transactions for the second quarter of 2010)(Based on the overall level of commercial transactions for the second quarter of 2010)

NA

-3%

NA

NA

NA

NA

DC: NA

NA

NANA

NATIONAL


RESEARCH

State-level data may register large fluctuations from one period to the next due to small sample sizes in some states.



SEPTEMBER 2010


7

-18%

8%

7%

-19%

1%

-90%

-22%

-15%

19%

-35%

-30%

-12%

20%

1%

2%

-12%

-22%

-25%

3%

-21%

-19%

-23%

-23%

-33%

2%

-38%

-29%

-23%

-29%

-60%

-34%

-7%

-11%

-17%

-15%-34%

3% -2% 10%

-26%

-3%

-26%-30%

-25%

-52%

0 250 500 750 1,000125Miles4

Legend-90% - -40%-39% - -15%-14% - 0%1% - 15%16% - 20%

Sales Volume Compared with Previous Year (Based on the overall level of commercial transactions for the second quarter of 2010)(Based on the overall level of commercial transactions for the second quarter of 2010)

NA

-6%

NA

NA

NA

NA

NA

DC: NA

NATIONAL


RESEARCH




SEPTEMBER 2010


9

-15%

-16%

-65%

-22%-28%

-12%

-12%

-8%

-23%

-8%

-15%

-33%

-30%

-10%

-19%

-18%

-10%

-6%

-23%

-19%

-11%

-21%

-30%

-16%

-15%

-20%

-17%

-19%

-45%

-16%

-8%

-16%

-20%

-17%

-16%

-20%

-10%

-24%

-16%

-14%

-8%

-20%

-18%-19%

-15%

-27%

0 250 500 750 1,000125Miles4

Legend-65% - -35%-34% - -20%-19% - -15%-14% - -10%-9% - -5%

Sales Prices Compared with Previous Year (Based on the overall level of commercial transactions for the second quarter of 2010)(Based on the overall level of commercial transactions for the second quarter of 2010)

-24%

-8%

NA

NA NA

DC: -15%

NA

NATIONAL


RESEARCH




SEPTEMBER 2010


The REALTORS® Commercial Real Estate Quarterly Market Survey asks participants tocomment on current challenges and difficulties in their markets. Below are a few of thecomments about the 1 ST quarter 2010 environment and members’ most pressing concerns.

• "A property owner who owns a property free and clear cannot place a mortgage on his property and take out more than$25,000. If he had a mortgage he can not take out any money. So much for new purchases. We are being killed by newbanking regs .” • " Although this should be a great time to land bank fear and expensive over regulation are holding the market back. No onetrusts the supply of money for smaller business. “ • " Anchorage economy is off only 1%, so very stable. “ • " As a commercial appraiser (State Certified General) dealing specifically with bank work, 1 of 10 (approx.) is new money.The rest are REO, pre-foreclosure, foreclosure, workout, watch-list or monitoring appraisals; it's bad out there. Covering PalmBeach, Broward & Miami-Dade County Florida market area .” • " Banks are hard to deal with as they withhold financing so as to leave commercial buyers to all cash transactions thereforeno need for banks .” • " Banks are only lending to those that really don't need credit. Credit is not available to those who need it to grow eventhough they have a very good credit history .” • " Banks will not let up go of their money and when the do, under very restricted underwriting standards, ie. 35% to 40%down and a high percentage of security .” • " Bid-ask variance is starting to close in leasing transactions. Occupancy cost as a percentage of projected sales is drivingface rates in retail deals, no longer what landlords "say" the market is ....” • " Business is picking up. Need more encouraging PR. Too many sensational media downers Not enough about the goodthings that are happening .”

• " Businesses continue to be very concerned about the economy. No one is willing to take a risk to start a new business orexpand operations .” • " City is in recovery mode from 08 floods. Downtown businesses slowly coming back. Most new construction is federally orstate funded. Banks not loaning. SBA slow to help .” • " Clients are cautious and only buying properties at a 30 to 60% discount. Only buyers with cash are making moves in thiseconomy, banks are killing deals, and clients are wanting to buy rather than lease, but they cannot get loans ...” • " Clients can't close loans. The banks are not lending, the government is lying that money is available. Companies arespending on equipment, rather than employees. Why take on the insurance and benefits risk as opposed to a machine that

just needs maintenance? Why hire when companies have no idea how much the penalty for hiring really will be ?“ • " Commercial lending remains a pitfall for recovery with more bad debt bleeding to follow. We are mid crisis ... the recoverywill begin 2nd to 3rd Q of 11 and follow thru into 2012. By the end of 2012 we will hopefully return to business levels similar tothe early 2000's .“ • " Current market has buyers but they cannot get their financing. I understand banks are being held up by the government soit all goes back to our government and their inability to jump start this economy and allow banks to lend to business and notmake it so tough on all of us .” • " Currently we are see a surge because of pent up demand that needs to be satisfied. This indicates to me that people arefeeling somewhat better about the economy and they need to make a move .” • " Distressed Properties like the residential market Foreclosures and Short Sales pulling down arms length transactions.

Availability of financing form the banks that got a bailout and are not bailing out borrowers and buyers and sellers .“ • " Employment is down and staying there. Affected by national economy. Absorption is flat or still slightly negative. Landlordscontinue, when they can, to increase incentives and lower rents to compete for the scarce number of tenants in the market.Investment sales are virtually non- existent.” • " Fear strangling the market, starting in Washington, and ending with Mom and Pop being afraid to spend any money. Worstin the over 35 years I have been brokering and investing in CRE .”

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NATIONAL


RESEARCH



SEPTEMBER 2010


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

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• " Flagstaff's growth has a normal trend line of 3 -4% increase per year. The growth has been flat for two years, with noindustry moving into the area and no jobs created.” • " Georgia has been especially hard hit with unemployment at 10.4% and expected to rise. Many banks have little or nodemand for loans. Businesses I talk to are scared and worried about new taxes, government regulations, healthcare costsand the overall economy.” • " Given current rent levels, there is a gap between what Landlords are willing to invest in tenant improvements and whattenants are willing to spend. Many potential transactions are stalling out because neither party wants to pony up the cost ofthe T.I.“ • " I also appraise hotels and this is not a market conducive to to normal market activity, not a typical market does not meetmarket value definition more liquidation value.” • " I feel that there are plenty of available opportunities for listings. This is forcing Cap rates higher because of the com petitioof supply. Also due to difficulties in finance, available cash is also forcing pricing to reflect cash based offers. I have personallyseen a rise in creative finance.” • " I work for a retail user and am finding that I have more opportunities available in today's market as compared with themarket two years ago when there was a feeding frenzy for retail real estate. We are seeing much lower rents, especially withour high credit, and have recently seen some downward motion for land sales and ground leases. Although our office is inMemphis, TN I showed a NJ zip code for home office since that is the area where I do my real estate transactions.” • " I work in a bedroom community just 12 miles south of Salem. Most of my clients are now looking for opportunity and citygovernment that will work with them. With revenue down in city government, finding fewer concessions given. Frustrating.” • " If the government would KNOCK IT OFF with the taxes so business could think about growing again, people would havemore confidence to turn loose of $$$$. AND STOP WITH THE SPENDING ALREADY!” • " I'm seeing an increase in retail leasing as tenants are able to secure financing to open their stores. Landlords are redu cin

rent rates and offering some TI to help get deals done. “ • " IN the current status of the Health care, Economy, new taxes, and joblessness (by the current administration) has created tough times for tenants and landlords on making deals, land is not selling and new construction is almost nothing going on.The housing market with defaults on the rise and short sales taking months to get the bank to respond is also hurting theeconomy."• " It is absolutely the worst that I have encountered in more than 50 years in the business. and I believe it is all Obama's administration fault for this mess."• " It'll get substantially worse. Also, about 20 years ago I had a philosophical ""argument"" or discussion with a higher up manager affiliated with Wells Fargo. They had changed their commercial property loan terms from 20 yr amortization to 20 yramortization with a 5 yr. balloon or re-write provision. I suggested that was impractical to expect people (borrowers and thebanks) to be able to make long-term decisions and plans with short-term financing terms. He said that they did this becausethe bank got burned when the rates/inflation came up some years prior on their then existing loans. I suggested they wouldget burned worse if approximately 20% of their commercial loan portfolio came up for renewal every year (assuming evendistribution on the 5 year re-write terms) as in what are they going to do if folks cannot qualify and they start getting tons of

property back un a fairly short period? That at least with a fixed rate for 20 years, everyone knows where they stand and can plan in good years for the bad ones instead of saying ""If I get a bad year or 2 or 3, I am toast."" He didn't agree and I stillthink I was and am right. I got out of any business interest that I had where I needed to be borrowing on commercial property."• " It's going to be a tough commercial market for the next 36 -48 months. There are properties in Toledo, OH market areoffering free rent for a year just to keep the buildings filled.” • " Job growth is essential. There will be no relief in either residential or commercial real estate until there is job grow th. Theadministration must hear this message.” • " Lack of available financing is creating a market wherein we seek cash buyers. This eliminates competition for a property,which creates an environment for low offers from buyers. “

NATIONAL


RESEARCH



SEPTEMBER 2010



19

• " Loans are near impossible for a client with years of being in business, excellent credit, my client went to his bank of 25years, they finally gave the loan on another real property,2 yr. old building ,a going business the client had leased the bld . for2 yrs. and many other concessions. The loan was for 12 months only."• " Medical, and especially medical office shows to have the best potential for leasing in my market. Industrial is next in line,with office, then multifamily, and hospitality in last place.” • " My current market is in Cheboygan County Michigan which was rated 11th of 3400 counties nationwide as the mosteconomically stressed. We are located in Northern Michigan. We expect Rick Synder to be our next governor along with moreoptimism in local, state and national commercial markets after November.” • " My market is Rhode Island and we have the second highest unemployment in the Nation -only behind Michigan and not bymuch. We have the highest energy costs, pay unemployment to EVERYONE no matter what the offense, tax business high,we are in the top 15 States with the most State budget problems-we have no manufacturing and our biggest employer is retailsales and tourism...need I say more. There is no economic plan here 1 in 4 properties is bank owned-so there is no real realestate market here--just distressed sales. Could go on and on but I am sure other Rhode Island Brokers will also respond tothe survey--but it is not a pretty picture here in the Ocean State...."• " NNN best opportunities for buyers. Apartments still attractive but not condo. Financing very difficult for most any type. "• " No one wants to make a commitment because they are afraid of what Washington might do next. Once they must act,financing is a major problem.” • " Our local economy is in horrible condition. Our largest employer (Sea Island Company) recently filed for bankruptcy andleft many of my clients in danger or going out of business.” • " Our market is over developed for current demand. There are few buyers with money, and the few that do have cash arelooking to pay pennies on the dollar. Many distressed properties are untouched. I have many sellers but few buyers, andmany sellers are upside down on their mortgages, so their properties generate little serious buyer interest.”

• " Our market is relatively healthy, however buyers are wanting greater deals and higher CAP rates than what is available.They are not considering the low mortgage rates and high spread.” • " Property is selling below its mortgage. There is lots of cash on the sidelines but it is very cautious." • " Recent uptick in the level of interest and the number of transactions this quarter.” • " Second generation space will always lease faster to a tenant then a gray shell. Tenants seem to negotiate price on the

phone, even before they see the space. Clients are asking for rent concessions and tenant improvements with no personalguarantee or credit history. I believe the market is heading for a double dip recession. If the commercial market fails and m ore

jobs are lost, we’re talking another 36 months before we see any economic recovery. “ • " Sellers can't sell because the value of their property is 30% below what they paid for it. They are essentially making ju stenough income to pay their expenses and debt service.” • " Sellers want their price and buyers want a deal. Everyone is trying to hang on to every dollar they have. No one is

purchasing office space; however, people are leasing and there is optimism among some retailers that I just leased space to:niche businesses that are established local operators. Investors are looking for a real deal or they walk away, confident thatsomething else will turn up. No one is purchasing office space in our market, which is an outlying secondary market to a largemetro area (SW PA).” • " Sept 2009 through Feb 2010 was the toughest part of this down cycle. As of May 2010, we're seeing more and moreowners and landlords adjusting prices to move inventory. The phrase I hear the most is "Priced Right". If your property is

priced right and shows well, its moving. We're seeing more and more established business taking advantage of the lower prices and opening new locations.” • " Some activity in sales and leasing. Sales have lack of inventory at reasonable pricing. Leasing market has adequateinventory, but less tenant activity. Landlords have to be flexible and aggressive to make deals.” • " The Albuquerque market is moving in a positive direction, job loss is less than the national average, prices have fallen 1015% but, are holding steady .”

NATIONAL


RESEARCH



SEPTEMBER 2010



20

• " The availability of commercial money at a reasonable rate and consumer confidence are our biggest concerns in thismarketplace.” • " The banks are the main problem at this time. They are sitting on the money and they have gone way over to the right after being way over to the left. Unless the government pressures them to make more loans with the money they have been given ,nothing will change for some time.” • " The current market is being bogged down by negative media again, just like 18 months ago. The media needs to lay offthe negative and look at the bright side. Banks need to start lending money again, they seem to be more any moredemanding offering less and less $ and practicing less and less common sense.” • " The federal Government actions are destroying the commercial real estate industry, also the housing and bankingindustries are being negatively impacted by the democrats spending, tax policies and regulations. It has to stop in Novemberare we are economically doomed.” • " The government’s moratorium on oil Drilling in the Gulf of Mexico can potentially destroy the LA economy.” • " The greatest factors impacting commercial real estate relate to the rules of the game. What will the tax rates be, what w ilthe impacts of Health Care, cap and trade, EPA rulings, and on and on. Too much risk very hard to quantify, so no jobs, noexpansion, and great fear. NAR must insist that our congressmen support the free market and sound business principles."• " The market appears to be driven by buyers looking for "deals" and sellers holding on to remaining value the gap betweenbuyers and sellers appears to be large with the exception of owner occupied properties for the few business's that have anoptimistic outlook going forward.” • " The market has many interested parties, but most are searching for below market deals, and focusing on the economics ofthe deal, versus the future spacial needs of their company.” • " The market is quiet to the point of eerie. Almost the only phone calls are people returning my calls. We are getting new listings, but it is doubtful we'll find financing. When we work on distressed properties there is a lot of action, but those sales

are hard to put together. Everyone is waiting to see if the taxes will go up, if jobs will crash due to health care, extreme debt,unionization, and ""Green"" issues like taxing people for energy use. People are waiting to see what happens in Novemberand in January to see if the President will veto attempts to stop the taxes from going up. Some people are frozen in fear overwhether the country will go bankrupt with the enormous debt. My best clients right now are liberals who are a shrinkingminority of people who think everything is hunky dory. I don't discourage their optimism, I want to put sales together. […] "• " The market is so overwhelmed with negative news about the current economic condition, clients are afraid to make a moveeven after they finish telling you they had a great first half of the year.” • " The second challenge is the seller's acceptance of the fact that they can not sell their properties at the CAP rates they

purchased them and there is no equity left in their property as the CAP rates have been rising.” • " The Self Storage Market has held its own during economic crisis. However financing is a critical factor for any buyer. Th einventory is out in the market place but the existing cap rates have discouraged many sellers from marketing their properties• " The service based businesses are the backbone of this market's economy. Service based businesses have been crushedby the national economic policy's and direction. The majority of business owners recognize that they must preserve capitol ifthey hope to stay solvent.” • " The small office (1000 - 2000 SF) leasing market is up substantially from a quarter ago. The lease prices continue todecline. To make a deal requires concessions or rent reductions or both.” • " There is no financing. Loans are being called, or not being renewed, and there is no source of re -financing. We are beingasked to cover reducing L/V resulting from bank in-house re-vals, with no way to raise cash to cover the margin. Financing isthe world's biggest problem at the moment.” • " Things seem to be picking up but the proportion of "tire kickers"/lookers vs. "action takers"/doers seems to be much greathan in previous times. It seems that people/companies want to do business but are more hesitant than ever because of theeconomy-local, national, and global-and the lack of good financing alternatives as well as a lack of certainty that things havehit bottom and we are "out of the woods ".”

NATIONAL


RESEARCH



SEPTEMBER 2010


NATIONAL ASSOCIATION OF REALTORS ® RESEARCH DIVISION

The Research Division of the NATIONAL ASSOCIATIONof REALTORS ® produces the Commercial Real Estate

Outlook, a quarterly report forecasting commercial marketfundamentals. Additionally, NAR Research examines howchanges in the economy affect the commercial real estatebusiness, and evaluates regulatory and legislative policyproposals for their impact on REALTORS ®, their clientsand America’s property owners.

If you have questions or comments regarding this reportor any other commercial real estate research, please

contact George Ratiu, NAR Economist, [email protected].

To find out about other products from NAR’s ResearchDivision, visit www.REALTOR.org/research.

NATIONAL ASSOCIATION OF REALTORS ®

Research Division500 New Jersey Avenue, NWWashington, DC 20001

NATIONAL

2010 q2 commercial real estate market survey

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