Investment Trends Quarterly

Transcription

Second Quarter 2008 Report
Vol. 4, No. 2
Investment Trends
Quarterly
Spotlight
on
Portland
Sponsored by:
InThisVolume
Now Available!
National Overview
Caught in the Storm
Economic Background & Investment Environment
A Focus on Real Estate Cap Rate & Yield Rate Expectations
Seeking Shelter from the Storm
Effect on Real Estate
National Market Analysis & Property Sector Highlights
“Sustainable Development Shapes Portland
Past and Future”
Contributors
Scope & Methodology
Regional and Metro-Level Analyses
Coming Soon!
East Region
Baltimore, Boston, Charlotte, Hartford, Norfolk, Northern
New Jersey, New York City, Pittsburgh, Philadelphia, Raleigh,
Richmond, Washington, D.C.
South Region
Atlanta, Austin, Dallas/Ft. Worth, Houston, Memphis, Miami,
Nashville, New Orleans/Baton Rouge, Oklahoma City, Orlando,
San Antonio, Tampa
Midwest Region
Chicago, Cincinnati, Cleveland, Columbus, Detroit,
Indianapolis, Kansas City, Milwaukee, Minneapolis, Omaha, St.
Louis, Toledo
West Region
Denver, Honolulu, Las Vegas, Los Angeles, Phoenix, Portland,
Sacramento, Salt Lake City, San Diego,
San Francisco, Seattle, Tucson
Investment Trends
Quarterly
Copyright© 2008 by Real Estate Research Corporation (RERC) and the CCIM Institute.
Foreword
April 2008
Dear Readers,
Property fundamentals for commercial real estate are beginning to reflect the new economic and capital market
storm we find ourselves in. Vacancies are up for all property types on a national level, and as noted in the second
quarter 2008 RERC/CCIM Investment Trends Quarterly, sales volume and pricing are starting to decline. What’s
more, the National Association of REALTORS® (NAR) forecasts that until confidence levels return, commercial real
estate investment will remain as much as 40 percent below transaction levels seen in 2007, when a record $427.2
billion of commercial real estate traded hands.
Despite this softening, commercial real estate is holding up reasonably well compared to other investments, and
CCIM designees and candidates who responded to RERC’s survey remain optimistic about this asset class. While
we see a great deal of turbulence in the commercial real estate debt market, according to anecdotal information
gathered at the mid-year CCIM Institute business meeting, most CCIM members are expecting only an approximate
10-percent adjustment for commercial real estate this year.
Given the turmoil in the markets, return expectations are of special interests—thus our special analysis on yield
rates, capitalization rates, and spreads. We hope you find this, and our other analysis of the capital markets, of
interest.
To make this research report even more valuable to CCIM members, we encourage you to share your completed
sales transactions. Here’s how:
•
At www.ccim.com, go to the Member Services category,
•
Click on the CCIM Transactions link (you’ll be prompted to enter your regular username & password),
•
Under the Professional Profile section, click the Manage Completed Transactions link, and
•
Enter the transaction.
Thank you to all who completed and returned our surveys, communicated your transaction information, or shared reports or other details about the various property sectors and markets. We appreciate your information and insights.
Sincerely,
Kenneth P. Riggs, Jr., CCIM, CRE, MAI
President & CEO
Real Estate Research Corporation (RERC)
Investment Trends
Quarterly
Timothy S. Hatlestad, CCIM
2008 CCIM Institute President
President, RE/MAX Commercial Investment
CaughtInTheStorm
Few, if any, could have anticipated how much the financial markets and the economy could change over the last 12 months.
The commercial real estate market had reached a new pinnacle in early 2007, with The Blackstone Group’s acquisition
of Equity Office Properties (EOP), plenty of cheap capital, and a belief that we were on the cusp of a new era of investing
with limited downside volatility. The storm clouds then began to roll in with the subprime mortgage meltdown, followed by
declining home values, sustained high oil prices, and a slowing economy. The winds began to shift, and we saw the credit
markets pause as the rating agencies finally started to sound a warning. Questions arose in the financial arenas about the
underlying risk of securitized pools of mortgages involving a string of investors and elements that were unknown to even the
most informed. By late 2007, there was a recognized credit crisis and we knew there were rough times ahead for the U.S.
economy. Once the broad debt markets seized up and the eventual buyout of Bear Stearns (fifth largest investment bank in
the world) occurred, the finger-pointing began in earnest, and even the past two Federal Reserve chairmen were pulled into
the fray to comment on the state of the financial markets.
These are the shifting conditions that are darkening the climate in which commercial real estate finds itself. The reach of the
storm is global, and there is no end in sight. Further, the ripple effect of this storm is immense, with those sitting on the front
lines either gone or forever changed in the way they conduct their business or approach the financial world. However, as we
have pointed out in the past, the impact on the various investments and the magnitude of the change in investment conditions
depend on your perspective and where you are sitting as this storm plays out for the balance of 2008.
Real Estate Research Corporation’s (RERC’s) view, from a commercial real estate equity standpoint, is that low-leveraged
commercial real estate is doing reasonably well relative to investment alternatives, and we see the market dynamics for this
style of low-leverage equity investment from a credit disruption perspective rather than a credit crisis. Although Wall Street
may challenge us on this optimistic approach to a world in crisis, RERC has remained focused on commercial real estate
investing from a low-leverage equity perspective, and how investors can best cope with the turbulent conditions surrounding
us all. This report will lay out our perspective for commercial real estate returns as we are tested and challenged to navigate
through a tempest that most of us have never seen before.
Economic Background &
Investment Environment
The year 2007 will be remembered for the many storm
clouds in our economy—the global financial markets, the
U.S. residential housing market, gasoline prices, and geopolitical risk, among others. While the storm clouds have
been hovering over the commercial real estate arena and
the turbulence has affected the debt markets, the commercial real estate low-leverage equity market has not
been as negatively affected as the residential market.
Although the global credit crisis ripped apart the most sophisticated leveraged structures from a financial perspective, we did not see a collapse of home prices. As can be
seen in Exhibit 1, even though home prices fell around 8
percent in 2007, they were still 70 percent higher than in
first quarter 2000. We recognize that then was then and
now is now, but it demonstrates that the undoing of the
housing market lies in the financial package and not in the
Investment Trends
Quarterly
Exhibit 1. Historical Housing Prices
Source: National Association of REALTORS® (NAR), 4q 2007.
Investors have a wait-and-see attitude, given the disarray and disappointment seen in the economy and financial markets, but who can blame them? However, despite
what one hears in the news, investors are not totally outof-sorts with commercial real estate. It is no surprise that
we continue to see the bid/ask spread widen, as sellers
The profound shift in the sell sentiment can be found in
the historical buy, sell, or hold recommendations shown
in Exhibit 2. The sell recommendation during first quarter
2003 through first quarter 2007 hovered around 8.0 on a
scale of 1 to 10, indicating that it was a good time to sell
(prices were viewed as strong relative to value). Today,
however, the sell recommendation is about half that level,
Exhibit 2. RERC Historical Buy, Sell, Hold Recommendations
9
9
Sell
Buy
Hold
4
4
3
3
08
20
1Q
06
20
20
20
1Q
1Q
1Q
20
1Q
20
20
20
1Q
1Q
1Q
20
19
1Q
Source: RERC.
07
5
05
5
04
6
03
6
02
7
01
7
00
8
99
8
1Q
The inability of investors to sort though the financial instruments that were created over the past decade has
caused them to become more risk averse, and has
brought established underwriting and investment criteria
back to appropriate standards that focus on the fundamental value of the asset. Getting back to basics is not
a bad thing, but one should not overreact to this situation. It is important to avoid the old pendulum paradigm of
swinging from a sentiment of greed to a sentiment of fear.
We see this happening on a limited basis, and it tends to
guide commercial real estate to spots where one needs
the pendulum to swing in the opposite direction, although
commercial real estate did not experience the broadbased overselling and overleveraging that we saw in the
residential sector. Investors are seeing a bifurcation relative to repricing issues in commercial real estate between
top-quality, low-leveraged assets, versus average-quality,
high-leveraged assets (75+ percent), although each set
of assets is facing some level of re-pricing.
are not willing to sell at a discount, and buyers are not
willing to buy at the ask price, given the uncertainty in the
economy and financial markets.
Rating
fundamental value of the asset. There is clear downward
home re-pricing taking place in parts of the U.S. that experienced the most speculation, and we still have some
tough realities to face before the market stabilizes. This is
important to keep in mind when we examine the financial
side of the commercial real estate market versus the asset side.
indicating that it fell quickly alongside the credit market
concerns and now is not a good time to sell (properties
are viewed as underpriced relative to what buyers will
pay). This reversal occurred right after the Blackstone/
EOP deal, which will go down in history as a major market coup and pricing velocity watermark. The message
the market is sending is that commercial real estate is a
good investment and the pricing is not viewed as being
too far ahead of the fundamentals, especially from a risk
perspective and compared to alternative investments.
We have noted during the last year that the market has
been going through a re-pricing phase and that investor
sentiment is shifting to reflect the changing nature of the
clouds that exist in today’s turbulent environment. This
is a clear signal that the commercial real estate capital
markets recognized the credit crisis and that commercial
mortgage-backed securities (CMBS) are temporarily on
the sidelines.
Given the big picture, commercial real estate is reacting
appropriately to the alarm. If it had continued with the
levels of first quarter 2007 CMBS underwriting that possessed aggressive pricing of high loan-to-value ratios and
high valuations, commercial real estate would have un-
Investment Trends
Quarterly
dergone a fate similar to that of the subprime market, and
we would all be suffering. Oddly, this current commercial
real estate market disruption (or crisis, for those on Wall
Street) is better for long-term investment prospects for
commercial real estate, and provides us with a more solid
investment foundation without having to suffer a broadbased market failure like the residential securitized market. However, we know that it is not over yet, and there
will be casualties along the way.
As shown in Exhibit 3, CCIM designees and candidates
rated commercial real estate at 6.7 on a scale of 1 to 10,
indicating it is a better investment relative to the alternatives of stocks, bonds, and cash. This does not come as
a surprise to commercial real estate investors, but they
have always been a group that was somewhat biased
Exhibit 3. CCIM Respondents Rate Investments
1Q 2008
4Q 2007
Commercial Real Estate
6.7
6.0
Stocks
4.3
3.9
Bonds
4.5
4.7
Cash
5.7
5.9
Source: RERC Institutional Investment Survey, 1Q 2008.
toward commercial real estate. Clearly, the respondents
see many clouds above, and while preparing for a storm,
are establishing strategies toward safer harbor.
Exhibit 4 tells what investors are facing in a world of
downside volatility. The only positive realized returns during first quarter 2008 are those reflected by the National
Council of Real Estate Investment Fiduciaries (NCREIF)
and the National Association of Real Estate Investment
Trusts (NAREIT). The 10-year treasury bonds reflect expected returns versus realized returns. NCREIF and NAREIT show almost no capital (appreciation) return, indicating that values flattened in first quarter 2008, and we
likely are entering a time of potential value adjustments or
re-pricing of the underlying assets. However, while commercial real estate is not performing at a level witnessed
a year ago, it is still delivering positive returns.
As we head into the second quarter 2008 and beyond, we
need to assess the economy and what it holds in store
for commercial real estate. If a recession takes hold and
unemployment increases, vacancy rates are likely to increase, rents will deteriorate, and values will be affected
by these strong undercurrents. With respect to the pricing of commercial real estate, the key thing is to assess
where prices have settled on a price per square foot/unit
basis, and what direction capitalization rates and yield
rates are heading.
Exhibit 4. What Do the Financial Markets Tell Us?
Compounded Annual Rates of Return as of 4/1/2008
Market Indices
1Q 2008
1-Year
3-Year
5-Year
10-Year
15-Year
Consumer Price Index
1.16%
3.98%
3.37%
3.00%
2.79%
2.68%
10-Year Treasury Bond*
3.66%
4.38%
4.52%
4.39%
4.81%
5.34%
Dow Jones Industrial Average
-3.06%
-0.74%
5.30%
8.94%
3.37%
8.85%
NASDAQ Composite
-6.75%
-6.11%
3.56%
10.83%
2.39%
8.27%
NYSE Composite
-3.60%
-5.02%
7.07%
13.21%
3.80%
8.36%
S&P 500
-4.05%
-6.91%
3.86%
9.29%
1.84%
7.43%
NCREIF Index
1.60%
13.56%
16.84%
15.17%
12.70%
11.29%
NAREIT Index**
1.40%
-17.37%
11.69%
18.34%
10.69%
11.66%
*Based on Average End of Month T-Bond Rates.
**Based on FTSE NAREIT US Real Estate Index Equity REITs, Total Return.
Sources: Economy.com, Federal Reserve Board, BLS, NYSE, NCREIF, NAREIT, compiled by RERC.
Investment Trends
Quarterly
A Focus on Real Estate Cap Rate
and Yield Rate Expectations
Exhibit 5. RERC Yield Rates vs. 10-Year Treasuries
Sources: RERC, Federal Reserve.
Investment Trends
Quarterly
Yield Rates
As a starting point in examining return expectations, it is
important to focus on the spreads of commercial real estate
yields (total returns) versus 10-year and 5-year treasuries
rather than reviewing these returns strictly on a nominal
basis. In our evaluation, we are using both 10- and 5-year
durations, because the holding periods for commercial real
estate have shortened from the traditional 10-year holding
periods, and because the durations of average leases that
create these cash flows are probably something between
that of 5-year and 10-year bonds. Regardless, we can see
that the spreads in 2003 in both cases were huge, which
meant that commercial real estate was a very attractive
risk-adjusted investment and that capital was bound to flow
into this arena. As one survey respondent stated, “It was a
no-brainer to invest in real estate.” Then the market started
to aggressively bid up real estate prices to bring this spread
down to its lowest level in 10 years in the first quarter 2007.
Since then, we have seen yield spreads for commercial real
estate reach around 450 basis points over 10-year treasuries (refer to Exhibit 5), and 550 basis points over 5-year
treasuries (refer to Exhibit 6). We recognize that spreads for
other financial instruments have widened much more and at
a more rapid pace during this credit crisis.
Since second quarter 2007, the market has been re-pricing
commercial real estate risk relative to treasuries. On historical terms and given the dynamics of commercial real estate
today, the spread is at least recognizing market risk vagaries. This shift in attitude is demonstrated in Exhibit 7, showing the significant upward percentage change in commercial real estate yield expectations during the second quarter
2007 from a 10-percent decline to a net upward shift of over
25 percent (-10 percent versus +15 percent).
Are we there yet? Probably not across the board, but for the
low-leverage, high-quality deals, we are getting close. From
our vantage point, the biggest question that the market is
wrestling with today is: How do you price risk for commercial real estate when there are fewer transactions to
measure investor behavior?
Cap Rates
The market tends to talk about pricing in terms of capitalization rates on a nominal basis. Cap rates are a simple performance measure and an easy metric to extract from actual
transactions; however, a cap rate does not give you the full
picture like a yield rate or internal rate of return (IRR) can
provide. During the last few years, RERC and others have
commented on this “era of cap rate compression,” as depicted in Exhibit 8. Since 2004, cap rates have declined by 200
basis points, much of which is attributable to spreads over
treasuries, as seen in Exhibit 9. Cap rate compression has
been reflecting the attractiveness of commercial real estate
from an overall investment appeal perspective, a world with
lower return expectations, and significantly improved transparency. Although required cap rates have increased only
around 25 basis points, the spreads over treasuries have
increased significantly and have incorporated more upward
re-pricing for the asset class than most market observers are
recognizing.
Exhibit 10 shows that yields (total returns, or IRRs/discount
rates) also have increased slightly more than cap rates since
second quarter 2007. The spread between yields and required cap rates (refer to Exhibit 11) showed a spike during
the latter part of 2007, which has settled down to a 160-basispoint spread in first quarter 2008. As with cap rate compression, we see a 200-basis-point decline in yield expectations
over the past 3 years until first quarter 2007, and an increase
in yield expectations from that point in time. This downward
trend in yield expectations is reflecting the attractiveness of
commercial real estate from an overall investment appeal
(improved transparency and attractive investment) and a
world with lower return expectations.
*RERC Required Cap Rates are used and reported onin the RERC Real Estate Report.
Exhibit 8. RERC Required Going-in Cap Rates
Exhibit 9. RERC Required Going-in Cap Rates
vs. 5-Year Treasuries
Source: RERC.
Exhibit 10. RERC Yield Rates
Source: RERC.
Investment Trends
Quarterly
Exhibit 11. RERC Yield Rates vs. Required Going-in
Cap Rates
Source: RERC.
Seeking Shelter
from the Storm
It is becoming harder and harder for the U.S economy
to find shelter, as conditions have changed dramatically
over the past 15 months and there is no near-term relief
in sight. The credit crisis continues, and the International
Monetary Fund (IMF) predicts that before it is over, an
overwhelming $945 billion of credit-related losses will
have occurred. Oil prices have topped $120 per barrel
and are still climbing, which continues to exact a heavy
toll on consumers and businesses. The labor markets are
succumbing to the pressure of rising costs and abating
demand, with approximately 260,000 jobs lost in the first
4 months of 2008 (although this is relatively good news in
the short term, when one compares this total to the 2001
recession when at times we lost 300,000 jobs per month).
The 1-year expected inflation readings are approaching
5.0 percent, up from the prior month’s level of around
4.5 percent, according to published reports. However
devastating, our financial system and the economy have
remained relatively resilient given the storms in our path,
but how long can we hold on?
Home prices continue to deteriorate, and a turnaround in
the housing market is not on the near-term horizon. The
S&P/Case-Shiller® Home Price Index that measures
home prices in 20 major metropolitan areas dropped 12.7
percent in February 2008 from year-ago prices, which is the
largest decline in the 20-year history of the Index. Tighter
lending terms for mortgages and broader weakness in the
economy, particularly in the labor market, are depressing
demand, and with a large inventory of unsold homes,
prices are likely to fall further.
The Federal Reserve has stepped up in a big way to make
sure that capital is available, although more expensive in
most cases. The Federal Reserve cut interest rates in late
April for the seventh time in 8 months, but signaled that one of
its most aggressive rate-cutting campaigns in a generation
may be nearing an end. The Federal Reserve also lowered
its target for the federal funds rate to 2.0 percent from 2.25
percent, bringing the cumulative reduction in interest rates
since September 2007 to 3.25 percentage points. That
exceeds even the aggressive rate posture set by former
Federal Reserve Chairman Alan Greenspan in the first 8
months of 2001, before the economy was shocked by the
terrorist attacks of September 11.
Investment Trends
Quarterly
The Federal Reserve indicated that while the economy
remains under stress, the “substantial” rate cuts and other
measures it has taken to provide liquidity to the financial
markets have tempered the risk of a severe recession.
On Wall Street, the turmoil that has devastated market
conditions for the stock and bond markets now shows signs
of improving. It is still too early to be certain, but there are
some believers that the worst of the credit crisis may be
past. Gold prices, which had surged to a record high of
more than $1,000 an ounce, have dropped below $900.
In addition, the global economy appears to be re-entering
an era when governments are harboring more protectionist
attitudes and are reasserting those views through their
policies and opinions related to world trade. Once again,
barriers are rising. “The era of easy globalization is certainly
over,” says Pulitzer Prize-winning author Daniel Yergin,
whose 1998 book, “Commanding Heights: The Battle for
the World Economy,” detailed the triumph of markets over
nations, starting with British deregulation under Margaret
Thatcher. “The power of the state is reasserting itself.”
Interestingly, it is U.S. consumers, although burdened with
high food and gasoline costs, who may be best equipped to
help stave off recession. By most accounts, approximately
$110 billion will be injected into the U.S. economy this
spring through the economic stimulus program. Some
pundits are suggesting that how Americans spend the
tax rebate checks they began receiving in early May is a
good predictor of whether consumers can continue to hold
Investment Trends
Quarterly
25%
Apartments
Retail
Market Equilibrium
Hotels
20%
Industrial
Office
25%
20%
5%
0%
0%
-5%
-5%
1Q
4Q
3Q
2Q
20
08
5%
20
07
10%
20
07
10%
20
07
15%
20
07
15%
1Q
The considerations and analyses of yield and cap rate
expectations included herein reflect much more of a
risky undercurrent than one would surmise by looking at
nominal returns—they reflect and incorporate the dynamic
changes that we have seen in the financial markets over
the past year. Although some pundits would argue there
Exhibit 12. Annualized Quarterly Investment Performance
20
06
First quarter 2008 commercial real estate fundamentals
remained relatively steady, although vacancy rates are
inching upward for office, industrial, apartment, and
retail properties. As pressures from the economy and
the financial markets increase, low investor confidence is
keeping the volume of sales down.
4Q
According to CCIM designees and candidates, commercial
real estate is the most preferred investment alternative,
with cash as the second-most preferred investment vehicle.
RERC maintains that as the economy, financial markets,
and capital markets continue to go through troubled times,
commercial real estate will remain a relatively strong
investment option, given the nature of the asset and
where it has been over the past year as compared to other
investment prospects.
As demonstrated in Exhibit 12, commercial real estate’s
investment performance on a realized basis has exceeded
investor expectations. However, we can clearly see that
performance has changed dramatically over the past year
and that it continues to deteriorate. RERC expects this trend
to continue until the write-down adjustments are taken in
the NCREIF Index. We are using the NCREIF Index as the
basis for the realized return in this performance analysis,
and we recognize the lag in data relative to the timing of
capital adjustments. The impact of the credit crisis has
not fully played itself out in this data. Commercial real
estate will be challenged by continued storm clouds in
the form of a tough economy, tighter credit standards,
tougher underwriting criteria, and an uncertain world. In
the end, “institutional” commercial real estate will weather
this storm battered but in relatively good shape, but we
are being pulled into market dynamics that few have ever
experienced, and adjustments to our expectations will
need to be made.
20
06
How accurate this projection is as an indication of things
to come is anyone’s guess. Nor do we know how long
this storm will go on. But we do know that we have often
doubted the strength of the U.S. consumer in years past—
during the 2000-2001 recession, after the terrorist attacks
of September 11, through corporate and accounting
scandals, with the war on terror, during the jobless recovery,
through rising gas prices, with the housing bubble and the
bursting of that bubble, the subprime lending crisis, and
most recently, through the weakness in the capital and
financial markets. So far, U.S. consumers have held on.
We will see if they will be able to continue to do so through
this current storm.
has not been enough upward adjustment on these return
expectations, given the global credit crisis and particularly
in the CMBS debt market, RERC believes that the market
is working toward figuring out the malaise but there is
not enough clarity to make a confident adjustment. The
message we offer from the equity commercial real estate
market is that of selectivity, caution, and the need to
keep a watchful eye on the rest of the financial markets.
Low-leverage, high-quality commercial real estate is in
a relatively positive position compared to investment
alternatives.
3Q
on during this economic storm. If consumers use most or
all of their tax rebate checks for discretionary purchases,
like flat-screen TVs, new furniture, or vacations, it is a sign
that the economy may make it through this storm without
much more damage. On the other hand, if consumers use
most or all of their tax rebate checks for non-discretionary
purchases like food or energy, or to pay down credit cards
or other bills, consumer strength may be more at risk than
anyone thought.
Sources: RERC, NCREIF.
TheEffectonRealEstate
wResidential real estate construction remained weak while
commercial real estate construction activity was mixed
during first quarter 2008, according to the April 16, 2008
Beige Book. Continued slowing of residential construction was expected as the economy slowed, and is needed
for the housing market to strike a better balance between
supply and demand.
wTotal construction for first quarter 2008 was $121.2 billion,
down 19 percent from a year ago according to McGraw-Hill
Construction. Total new construction starts were down 8
percent for March 2008. Non-residential building declined
by 23 percent in March, after increasing by 36 percent in
January and February. Residential building dropped by 1
percent in March.
wSales of commercial real estate have been slowing and
prices are seeing downward pressure in most districts, according to the April 16, 2008 Beige Book. Rental conditions
are weakening in the New York, Philadelphia, Richmond,
Atlanta, Chicago, St. Louis, Minneapolis, and San Francisco districts, while conditions are steady in the Boston,
Kansas City, and Dallas districts.
scale of 1 to 10, with 10 being high, for first quarter 2008,
indicating that investors believe the office sector is offering
a lower return relative to risk.
wCommercial real estate received a slightly higher value
versus price rating in first quarter 2008 than it received
during fourth quarter 2007. However, at 4.8 on a scale of 1
to 10, with 10 being high, investors still believe the value of
commercial properties is generally less than the price paid
for them.
wAt 5.3 on a scale of 1 to 10, with 10 being high, the hotel
sector received the highest value versus price rating during first quarter 2008. The apartment and industrial sectors
weren’t far behind, with ratings of 5.1 each. These ratings
indicate that respondents feel the value of the properties is
slightly higher than the price.
wIn first quarter 2008, both the office and retail sectors
earned a value versus price rating of less than 5.0 on a
scale of 1 to 10, with 10 being high, indicating that survey
respondents feel the value of the property is less than the
price paid. Except for the apartment sector, all property
types received a higher value versus price rating than they
received during fourth quarter 2007.
wCCIM designees and candidates rated commercial real estate as the top investment alternative compared to stocks,
bonds, and cash. With the volatility in the stock
market, stocks earned the lowest rating overall.
Historical Return/Risk and Value/Price Ratings
On a scale of 1 to 10, with 10 being high, survey
respondents gave commercial real estate a rat1Q 2008
4Q 2007
3Q 2007
2Q 2007
ing of 6.7, cash a rating of 5.7, bonds a rating of
Return vs. Risk
4.5, and stocks a rating of 4.3.
wSurvey respondents rated the return versus risk
for commercial real estate during first quarter
2008 at 6.2 on a scale of 1 to 10, with 10 being
high, nearly a full point higher than the rating for
fourth quarter 2007, indicating that respondents
expect a slightly higher return on commercial
real estate versus the amount of risk taken.
wThe apartment sector received a return versus
risk rating of 6.8 on a scale of 1 to 10, with 10
being high, for first quarter 2008. This was the
highest rating received by any of the property
types covered in this report. The industrial market received the second highest rating at 5.9.
wThe office sector was the only property type to
receive a return versus risk rating below 5.0 on a
Investment Trends
Quarterly
1Q 2007
Office
4.9
4.6
5.4
5.6
6.3
Indusrial
5.9
5.4
6.0
6.0
6.3
Retail
5.5
4.7
5.7
5.9
6.3
Apartment
6.8
7.0
6.3
6.2
6.7
Hotel
5.6
5.5
6.0
5.9
6.7
Overall
6.2
5.3
5.6
5.8
6.2
Office
4.6
4.3
4.8
5.0
5.0
Indusrial
5.1
4.6
5.4
5.5
5.7
Retail
4.8
4.4
4.6
4.8
5.0
Apartment
5.1
6.0
5.3
5.3
5.1
Hotel
5.3
5.1
5.2
5.3
5.2
Overall
4.8
4.5
5.0
4.8
5.3
Value vs. Price
*Ratings are based on a scale of 1 to 10, where 1 is poor and 10 is excellent.
Source: RERC.
10
TheEffectonRealEstate
wWith housing starts at historic lows, home foreclosures at
all-time highs, increasing residential vacancy rates, and
tighter restrictions on credit for those purchasing a home,
the majority of first quarter 2008 survey respondents said
that the apartment sector offers the greatest opportunity
for investment during 2008. Survey respondents also noted that the industrial sector offers good investment opportunity due to the stable income, growing demand, and low
vacancy rates associated with this property type.
In Summary
wMany first quarter 2008 survey respondents stated that the
retail sector offers the lowest investment potential as compared to the other property types. This is due in large part
to the impact of the slowing economy on the retail property
type. In addition to higher unemployment, increased energy costs, and inflation, the retail sector overall is overpriced and overbuilt.
wFor the most part, fundamentals for commercial real estate
remained relatively steady in first quarter 2008, although
vacancy rates are inching upward for office, industrial,
retail, and apartment properties. Investor confidence has
been declining as pressures from the economy and the
financial markets increase. However, the majority of survey respondents state that there is still ample credit and
interest for quality assets, but low confidence is keeping
the volume of sales down.
wIn first quarter 2008, CCIM designees and candidates noted that the commercial real estate market is mostly stable but it is beginning to soften. Many respondents were
seeing trends such as slightly rising vacancies among all
property types, flat rental rates, and a gradual increase in
capitalization rates. For now, most respondents are taking
a “wait and see” approach to commercial investment.
NAR U.S. Economic Outlook: April 2008
2007 Quarterly
2008 Quarterly
2009 Quarterly
Annual
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
2006
2007
2008
2009
Real GDP
3.8
4.9
0.6
-0.1
0.3
2.2
2.0
2.8
2.6
2.8
2.9
2.2
1.4
2.4
Nonfarm Payroll Employment
0.9
0.8
0.8
-1.2
0.3
0.6
0.9
1.1
1.3
1.4
1.8
1.1
0.2
1.1
Consumer Prices
4.6
2.8
5.0
4.2
2.8
1.0
1.4
2.7
2.5
2.7
3.2
2.9
3.4
2.2
Real Disposable Income
-0.8
4.0
0.1
0.6
0.6
2.1
2.3
4.1
3.2
3.1
3.1
3.1
1.2
3.0
Consumer Confidence
107
106
91
76
63
68
72
79
85
86
106
103
70
85
Unemployment
4.5
4.7
4.8
4.9
5.3
5.6
5.7
5.7
5.6
5.6
4.6
4.6
5.4
5.6
Fed Funds Rate
5.3
5.1
4.5
3.0
2.3
2.3
2.3
2.5
3.0
3.3
5.0
5.0
2.4
3.0
3-Month T-Bill Rate
4.7
4.3
3.4
2.5
2.1
2.1
2.2
2.6
3.0
3.2
4.7
4.4
2.2
3.0
Prime Rate
8.3
8.2
7.5
6.0
5.3
5.3
5.3
5.5
6.0
6.3
8.0
8.1
5.4
6.0
Corporate Aaa Bond Yield
5.6
5.8
5.5
5.0
4.9
4.9
5.0
5.1
5.3
5.4
5.6
5.6
5.0
5.3
10-Year Government Bond
4.8
4.7
4.3
3.6
3.6
3.7
3.8
3.9
4.1
4.2
4.8
4.6
3.7
4.1
30-Year Government Bond
5.0
4.9
4.6
4.0
4.0
4.1
4.2
4.3
4.4
4.6
4.9
4.8
4.1
4.5
Annual Growth Rate
Interest Rates, Percent
Source: Forecast produced using Macroeconomic Advisers quarterly model of the U.S. economy.
Quarterly figures are seasonally-adjusted annual rates.
Assumptions and simulations by NAR's Dr. Lawrence Yun.
Investment Trends
Quarterly
11
NAR Commercial Forecast (March 2008)
2007
II
III
2008
IV
I
II
III
IV
2006
2007
2008
OFFICE
12.4
12.5
12.5
12.7
13.0
13.2
13.3
12.6
12.5
13.3
Net Absorption (’000 sq. ft.)
21,202
14,766
15,414
9,179
8,690
9,468
11,193
81,183
57,265
38,530
Office Employment (thousands)
16,795
16,826
16,875
16,915
16,950
16,997
17,066
16,648
16,875
17,066
Completions (’000 sq. ft.)
14,732
16,476
17,380
17,380
23,442
17,338
16,252
51,606
61,102
74,412
Inventory (millions sq. ft.)
3,362
3,378
3,398
3,416
3,439
3,456
3,472
3,326
3,398
3,472
1.2
3.5
1.3
1.0
0.9
0.8
0.8
5.2
8.0
3.5
Vacancy Rate (%)
Rent Growth (%)
INDUSTRIAL
9.3
9.2
9.4
9.5
9.6
9.6
9.6
9.4
9.4
9.6
35,402
29,390
19,733
32,899
33,299
33,035
35,429
205,365
120,231
134,662
Industrial Employment (thousands)
10,236
10,238
10,238
10,244
10,252
10,255
10,261
10,235
10,238
10,261
35,695
28,033
40,330
52,874
46,020
36,627
38,520
173,979
126,765
174,041
12,330
12,358
12,399
12,451
12,497
12,534
12,573
12,233
12,399
12,573
1.2
0.8
0.7
0.6
0.8
0.9
0.9
1.4
3.6
3.3
Vacancy Rate (%)
Rent Growth (%)
RETAIL
Vacancy Rate (%)
9.0
8.8
9.2
9.1
9.1
8.9
8.8
8.0
9.2
8.8
-169
9,199
-621
6,756
6,368
6,000
5,636
10,526
11,081
24,760
8,002
7,454
5,807
6,269
6,300
3,094
4,659
28,455
29,733
20,322
1,566
1,574
1,580
1,586
1,592
1,595
1,600
1,550
1,580
1,600
0.8
0.8
0.8
0.4
0.3
0.3
0.3
3.9
3.2
1.4
5.7
5.7
5.1
5.4
5.3
5.1
4.8
5.9
5.4
5.1
Net Absorption (Units)
70,705
41,348
111,734
10,612
71,751
82,375
91,707
229,452
234,399
245,786
Completions (Units)
57,798
58,384
57,436
57,314
56,275
54,573
53,999
224,170
230,932
216,880
Inventory (Units in Millions)
13.8
13.9
14.0
14.0
14.1
14.1
14.2
13.8
14.0
14.2
Rent Growth (%)
0.7
0.7
0.8
0.9
1.0
1.3
1.4
4.1
3.1
5.3
Rent Growth (%)
MULTIFAMILY
Vacancy Rate (%)
Sources: NAR, CBRE/Torto Wheaton Research.
Investment Trends
Quarterly
12
Snapshot of Real Estate Space and Market Performance – 1 Q 2008
Vacancy Rates
Source: Torto Wheaton Research.
Source: Reis.
Performance Indicator
Recent Data
Impact on Commercial Real Estate
Rental Rates
(RERC’s surveyed rent
growth expectations)
Office - 3.0% to 3.2%
Industrial - 2.8% to 2.9%
Retail - 2.6%
Apartment - 3.1%
Hotel - 3.0%
Real Estate Returns
RERC’s Required Returns:
Office - 7.9% to 8.4%
Industrial - 8.1% to 8.5%
Retail - 7.8% to 8.5%
Apartment - 8.2%
Hotel - 9.2%
NCREIF Realized Returns:
Office - 14.6% - 21.9%
Industrial - 12.4% - 15.2%
Retail - 7.4% - 14.5%
Apartment - 9.6%
Hotel -15.6%
RERC’s required return expectations for office, retail, and apartment sectors increased during first quarter 2008. Expected returns for the hotel
sector decreased slightly, while those for the industrial sector remained
about the same as the previous quarter. NCREIF’s realized returns decreased across the board as compared to the previous quarter.
Capitalization Rates
RERC’s Realized Cap Rates:
Office - 5.6%
Industrial - 6.7%
Retail - 6.4%
Apartment - 5.8%
Hotel - 7.9%
NCREIF Implied Cap Rates:
Office - 4.9% - 5.6%
Industrial - 5.9% - 6.2%
Retail - 5.7% - 5.9%
Apartment - 4.6%
Hotel - 7.1%
RERC’s realized capitalization rates for first quarter 2008 remained
steady for all property types, except for hotels, which increased 20 basis
points. NCREIF’s implied capitalization rates decreased slightly for all
property sectors.
Investment Trends
Quarterly
Rental rate expectations for first quarter 2008 for all the property types
increased by 20 to 30 basis points, as compared to the previous quarter’s rates.
13
Source: Federal Reserve.
Source: Bureau of Economic Analysis.
Gross domestic product (GDP) increased at an annual rate of 0.6 percent during first quarter 2008. Although GDP was not negative, as is required in the traditional definition of a
recession, the National Bureau of Economic Research (NBER) determines a recession as
a “significant decline in economic activity spread across the economy, lasting more than a
few months, normally visible in real GDP, real income, employment, industrial production,
and wholesale-retail sales.”
Source: Bureau of Labor Statistics.
Source: Federal Reserve.
The unemployment rate has been climbing during the last year, settling at a seasonallyadjusted rate of 5.1 percent in March 2008. Nonfarm payroll contracted during first quarter
2008, falling by 80,000 during March, primarily in construction, manufacturing, and employment services. Continued increases in unemployment indicate that commercial real
estate vacancies may be on the rise.
The manufacturing utilization rate dropped for the fourth consecutive month. Although
the rate has been on an upward trend since the 2001 recession, it began declining in
July 2007, ending at 78.6 percent in March 2008. Industrial production slowed during
first quarter 2008, with the decline attributable to the decline in motor vehicles and parts
manufacturing.
Source: Census Bureau.
Source: Bureau of Labor Statistics.
Consumer Price Index (CPI) inflation increased by 0.3 percent in March 2008, while consumer prices for the first quarter increased at a seasonally-adjusted annual rate of 3.1
percent, as compared to the 4.1 percent for all of 2007, according to the Bureau of Labor
Statistics. The largest increases in consumer prices came from food and energy, which
are contributing greatly to lower consumer confidence overall.
Investment Trends
Quarterly
The Federal Open Market Committee (FOMC) lowered the federal funds rate and the
discount rate by 25 basis points, on April 30, 2008. Economic activity remains weak according to the FOMC, and inflation is still a concern. The last time the federal funds rate
was this low was in November 2004.
Consumer spending appears to be slowing. Retail sales increased 2.0 percent year-overyear in March 2008 as compared to an increase of 2.9 percent in February. The March
increase was the lowest year-to-year increase since October 2002. Retail sales peaked
in November 2007, and have been declining since then, due mostly to decreased sales
by furniture and home furnishing stores, building material and garden equipment/supplies
dealers, and motor vehicle and parts dealers.
14
Source: Census Bureau.
Source: The Conference Board.
Consumer confidence has dropped significantly since July 2007. The Consumer Confidence Index stood at 64.5 in March 2008, lower than it has been at any time during the last
5 years. The declining housing market, increasing energy costs, financial market instability, and job losses are taking their toll, with declining consumer confidence and slower
spending expected to eventually affect the the hotel and retail property sectors.
Source: NAR.
Source: S&P.
The Standard & Poor (S&P) 500 peaked in October 2007, and declined until starting to
increase again in March 2008.
Approximately 4.93 million existing homes were sold in March 2008, a decline of 19.8
percent on an annualized basis from year-ago sales. The peak for existing home sales
was 7.35 million units in June 2005. Now that the financial market has tightened the standards on home loans, it is harder to qualify for mortgages. In addition, buyers are wary of
purchasing homes that may continue to decrease in value.
Source: NAR.
Source: NAR.
The Commercial Leading Indicator (CLI) fell by 0.4 percent to 120.1 during fourth quarter
2007. This is the second consecutive decrease after the index reached its historical high
of 120.7, suggesting a slowdown for commercial real estate in the coming months. The
index factors in 13 variables affecting commercial real estate, such as unemployment,
retail sales, and the NAREIT Price Index.
Investment Trends
Quarterly
New residential construction was down sharply by 11.9 percent, or 947,000 units, in March
2008. The downward trend in construction started after peaking in January 2006. While
all of the regions also posted declines for March, the largest decline in new residential
construction ocurred in the Midwest region at 21.4 percent.
The median sales price of existing single-family homes increased slightly in March 2008
to $198,200. Despite the increase, single-family home prices are down approximately
8.3 percent from a year earlier. The West region was the only area in the U.S. to see a
price decrease in March, due largely to the increased number of foreclosures in that area,
which usually sell at a discounted price and tend to bring down the value of other “for sale”
homes in the area.
15
Commercial Real
Estate Index Eases in
Fourth Quarter
The latest reading of the Commercial Leading Indicator (CLI) for Brokerage Activity
suggests reduced business opportunities for commercial real estate practitioners
in the months ahead, reports Lawrence Yun, chief economist for the National Association of REALTORS® (NAR).
The CLI slipped 0.4 percent to an index of 120.1 in the fourth quarter from a reading
of 120.6 in the third quarter, but remains 0.1 above the fourth quarter of 2006 when
it stood at 119.9.
This is the second straight quarterly dip after reaching a record of 120.7 in the
second quarter of 2007. The index showed nine consecutive quarterly gains prior
to these declines; NAR’s track of the index dates back to 1990.
“The decline in the index implies that commercial activity, as measured by net absorption and the completion of new commercial buildings, is likely to contract moderately over the next six to nine months, which is consistent with an expectation for
slower overall economic expansion in upcoming quarters,” Yun said.
Rising unemployment insurance claims and falling durable goods shipments were
the key factors in lowering the CLI, but a weaker rate of return on investment as
measured by the National Association of Real Estate Investment Trust (NAREIT)
Price Index was also a factor. The only positive contributors to the index were
growth in wholesale and retail trade, and rising personal income.
“The latest data imply that investment in private nonresidential structures, which
rose a solid 13.2 percent in 2007 according to a preliminary GDP estimate, could
show only minimal growth or even decline in 2008,” Yun said. “REALTOR® members who specialize in office and industrial properties indicated in a separate survey
that they anticipate a measurably lower level of business activity in the upcoming
quarters.”
The commercial leading indicator is a tool to assess market behavior in the major
commercial real estate sectors. The index incorporates 13 variables that reflect
future commercial real estate activity, weighted appropriately to produce a single
indicator of future market performance, and is designed to provide early signals of
turning points between expansions and slowdowns in commercial real estate.
The 13 series in the index are industrial production, the NAREIT Price Index, the
National Council of Real Estate Investment Fiduciaries (NCREIF) total return,
personal income minus transfer payments, jobs in financial activities, jobs in
professional business service, jobs in temporary help, jobs in retail trade, jobs in
wholesale trade, initial claims for unemployment insurance, manufacturers’ durable
goods shipment, wholesale merchant sales, and retail sales and food service.
Nearly 140,000 NAR members offer commercial services, and 73,000 of those are
currently members of the REALTORS® Commercial Alliance, NAR’s commercial
division.
This information is reproduced in part from the March 2008 “Commercial Real Estate Outlook,” a newsletter published by the REALTORS® Commercial Alliance and with their permission.
NAR Commercial Forecast (March 2008)
Time
Period
Commercial
Leading
% Change from % Change from
Indicator
1 Quarter Ago
1 Year Ago
2007
4Q
120.1
-0.4
0.1
3Q
120.6
-0.1
0.7
2Q
120.7
0.5
1.1
1Q
120.3
0.2
0.8
4Q
120.1
0.1
1.7
3Q
120.0
0.3
2.8
2Q
119.5
0.2
2.6
1Q
119.2
1.0
3.1
4Q
118.1
1.1
1.9
3Q
116.7
0.2
2.2
2Q
116.5
0.7
2.6
1Q
115.7
-0.1
2.5
4Q
115.8
1.4
3.5
3Q
114.2
0.6
3.0
2Q
113.6
0.7
3.3
1Q
112.8
0.8
2.3
4Q
111.9
0.9
1.2
3Q
110.9
0.9
-0.6
2Q
109.9
-0.3
-1.7
1Q
110.3
-0.3
-1.0
4Q
110.6
-0.8
-0.6
3Q
111.5
-0.3
-1.1
2006
2005
2004
2003
2002
Source: NAR.
Commercial Leading Indicators
125
120
115
110
105
100
2002
2003
2004
2005
2006
2007
Source: NAR.
Investment Trends
Quarterly
16
NationalMarketAnalysis
National Transaction Breakdown (4/1/07 - 3/31/08)
Office
Industrial
Retail
Apartment
Hotel
$2,757
$4,386
$4,809
$2,483
$169
Size Weighted Avg. ($ per sf/unit)
$98
$56
$93
$56,231
$25,725
Price Weighted Avg. ($ per sf/unit)
$135
$88
$135
$77,450
$32,441
Median ($ per sf/unit)
$100
$63
$92
$60,667
$27,273
$5,384
$7,596
$8,452
$5,909
$1,489
$133
$64
$143
$67,450
$39,915
$200
$107
$251
$112,958
$52,156
$173
$85
$219
$92,582
$42,546
$157,273
$39,444
$46,654
$69,844
$57,580
$254
$79
$176
$106,620
$191,307
$407
$134
$303
$177,141
$501,945
$200
$91
$188
$100,766
$114,372
$165,414
$51,426
$59,915
$78,236
$59,238
$240
$74
$159
$99,431
$171,778
$396
$126
$282
$169,129
$489,300
$152
$75
$135
$83,333
$103,488
3.0 - 12.6
3.7 - 11.7
3.0 - 11.7
2.6 - 10.9
2.9 - 13.2
Weighted Avg. (%)
5.6
6.7
6.4
5.8
7.9
Median (%)
6.7
7.0
6.6
6.0
9.0
< $2 Million
Volume (Mil)
$2 - $5 Million
Volume (Mil)
> $5 Million
Volume (Mil)
All Transactions
Volume (Mil)
Capitalization Rates (All Transactions)
Range (%)
Source: RERC.
Investment Conditions Ratings* - 1Q 2008
1Q 2008
4Q 2007
3Q 2007
2Q 2007
1Q 2007
Office
5.1
5.6
6.1
6.0
6.5
Industrial
5.9
5.1
6.1
6.4
6.8
Retail
5.4
5.2
6.3
6.5
6.9
Apartment
7.0
7.1
6.9
6.8
7.1
Hotel
5.9
6.4
6.6
6.7
7.0
*Ratings are averages based on responses to surveys from CCIM designees and candidates for first quarter 2008.
Investment Trends
Quarterly
17
NationalOfficePropertySector
wCCIM designees and candidates who responded to
RERC’s survey rated investment conditions for the office
market at 5.1 on a scale of 1 to 10, with 10 being high, for
first quarter 2008. This is a decline from the previous quarter’s rating, and is the lowest rating this quarter among the
five property types covered in the survey.
wAccording to RERC’s recent sales transaction analysis,
average prices for office properties decreased slightly during first quarter 2008, while average and median capitalization rates remained stable.
wFor the second consecutive quarter, survey respondents
rated the office sector the lowest among the major property types for both “return versus risk” as well as “value
versus price,” indicating that the return on office property
investment generally is less than the amount of risk taken,
and that the value of office space is less than the price of
the property.
RERC Weighted Average Capitalization Rate
7.5%
East
South
Midwest
West
National
7.0%
6.5%
6.0%
5.5%
5.0%
1Q07
2Q07
3Q07
wAccording to Torto Wheaton Research, the overall vacancy rate for the office sector increased to 12.9 percent during first quarter 2008. In addition, overall net absorption
of office space in first quarter 2008 was the lowest posted
since 2003.
4Q07
1Q08
CCIM members who responded to RERC’s survey noted that
office vacancies are increasing in most areas and that “the
office market, particularly the suburban office market, is still
very soft.” However, opportunities are available in the future,
with one respondent advising investors to “hold cash and wait
for risk/reward and value/price corrections in all property types;
office will concede first.” Medical office space is in demand,
regardless of region, and in some of the southern metros (Dallas,
San Antonio, New Orleans/Baton Rouge, Memphis, etc.), office
space is in high demand with rent growth continuing.
RERC Size-Weighted Average PPSF
$350
West
Midwest
South
East
RERC Price-Weighted Average PPSF
$700
National
$600
$300
$500
$250
West
Midwest
National
South
East
$400
$200
$300
$150
$100
$200
1Q07
2Q07
Investment Trends
Quarterly
3Q07
4Q07
1Q08
$100
1Q07
2Q07
3Q07
4Q07
1Q08
18
NationalIndustrialPropertySector
wCCIM designees and candidates who responded to
RERC’s survey rated investment conditions for the industrial sector at 5.9 on a scale of 1 to 10, with 10 being high.
This was significantly higher than last quarter’s rating, and
indicates increased confidence in the investment potential
of industrial properties overall.
wRERC’s first quarter 2008 sales transaction analysis indicates that like the other major property types, the sales
volume of industrial property declined from the previous
quarter. However, average sale prices per square foot of
industrial space increased slightly, and average realized
capitalization rates remained stable.
wRespondents to RERC’s survey rated “return versus risk”
for industrial properties at 5.9, indicating that the return on
industrial property is slightly more than the amount of risk
involved in investment. Respondents rated “value versus
price” of industrial property at 5.1, indicating that the value
of the investment is about the same as the price.
8.0%
East
South
Midwest
West
National
wAccording to Torto Wheaton Research, the average availability rate for the industrial sector increased to 9.8 percent
during first quarter 2008 from 9.4 percent in fourth quarter 2007. Additionally, net absorption of industrial space
was -11 million square feet, the least amount of space absorbed in about 5 years.
7.5%
7.0%
6.5%
6.0%
1Q07
2Q07
3Q07
4Q07
1Q08
The industrial warehouse and flex sectors are favored by many
CCIM respondents, particularly in the port cities and in metros
with access to highways and rail. “There is a premium being
placed on industrial properties with great locations,” reported
one survey respondent. Another respondent noted that industrial
remains a preferred investment, as it is “traditionally overvalued,
but consistently underserved.”
$120
West
Midwest
South
East
$180
National
West
South
East
$140
$90
National
Midwest
$160
$120
$100
$60
$80
$60
$30
1Q07
2Q07
Investment Trends
Quarterly
3Q07
4Q07
1Q08
$40
1Q07
2Q07
3Q07
4Q07
1Q08
19
NationalRetailPropertySector
wCCIM Institute designees and candidates who responded
to RERC’s survey rated investment conditions for the retail
sector at 5.4 on a scale of 1 to 10, with 10 being high, for
first quarter 2008, slightly higher than the previous quarter’s rating.
wRERC’s weighted average capitalization rate and the
median capitalization rate for retail properties during first
quarter 2008 remained stable.
wAccording to RERC’s analysis of recent retail sales, national transaction volume decreased notably in first quarter 2008 from fourth quarter 2007 volume.
wThe availability rate for the retail sector increased to 9.2
percent, according to Torto Wheaton Research.
wAlthough the retail sector’s “return versus risk” and “price
versus value” ratings increased for first quarter 2008 over
the prior quarter’s rating, the “value vs. price” rating increased to only 4.8 on a scale of 1 to 10, with 10 being
high, indicating that the value of retail properties is generally still less than the price listed.
7.50%
East
South
Midwest
West
National
7.25%
7.00%
6.75%
6.50%
6.25%
6.00%
1Q07
2Q07
3Q07
4Q07
1Q08
Although retail space remains in demand in a few metros
mentioned in RERC’s survey, low consumer confidence and
spending, a fear of unemployment, and higher gasoline prices are
taking a toll on this property type in most regions. Interestingly,
although discount store retail sales seem to be increasing and
higher-end shopping is starting to slow in most areas, one Dallas/
Ft. Worth CCIM respondent reminded investors to “expect the
high-end shops to experience a good year because the people
making good money will shop and flaunt.”
$225
West
South
Midwest
East
National
$350
$200
West
Midwest
National
South
East
$300
$175
$250
$150
$200
$125
$100
$400
$150
1Q07
2Q07
Investment Trends
Quarterly
3Q07
4Q07
1Q08
$100
1Q07
2Q07
3Q07
4Q07
1Q08
20
NationalApartmentPropertySector
wCCIM designees and candidates rated investment conditions for the apartment sector at 7.0 on a scale of 1 to 10,
with 10 being high, for first quarter 2008. This rating was
similar to last quarter’s rating, and remained the highest
score when compared to the other major property sectors.
wThe first quarter 2008 weighted average capitalization rate
for the apartment sector showed no change over fourth
quarter 2008. However, during the past year, the average
capitalization rate for the apartment sector increased 60
basis points.
wTotal apartment transaction volume decreased notably during the past 2 quarters, although both the size- and priceweighted average prices per apartment unit declined only
slightly during first quarter 2008.
wAverage vacancy in the apartment sector increased to 5.9
percent in first quarter 2008, according to Reis, Inc. This
increase in vacancy can be attributed in part to seasonality
in the apartment cycles.
7.5%
East
South
Midwest
National
West
6.5%
5.5%
4.5%
3.5%
1Q07
2Q07
3Q07
4Q07
1Q08
RERC Size-Weighted Average PPU
$175,000
West
South
Midwest
East
wRespondents to the first quarter 2008 survey rated the
“return versus risk” for apartments higher than any of the
major property sectors tracked by RERC. The apartment
rating for “value versus price” decreased to 5.1, a significant decline from last quarter’s rating, and indicating a lower level of investor confidence in the value of apartments
when weighed against their price.
CCIM members who responded to RERC’s survey generally
expect apartments to be a good investment opportunity due to
tighter restrictions on credit for homebuyers and because “in good
economic times or bad, people still have to have somewhere to live.”
There have been some reports of overpricing of this property type
among speculators.
RERC Price-Weighted Average PPU
$250,000
National
West
Midwest
$150,000
South
East
National
$200,000
$125,000
$150,000
$100,000
$100,000
$75,000
$50,000
1Q07
2Q07
Investment Trends
Quarterly
3Q07
4Q07
1Q08
$50,000
1Q07
2Q07
3Q07
4Q07
1Q08
21
NationalHotelPropertySector
wOver the past year, the investment conditions ratings for
the hotel sector has been consistently declining. The first
quarter 2008 rating was 5.9 on a scale of 1 to 10, with 10
being high, and although this rating was slightly lower than
the previous quarter, it tied with the industrial sector for the
second highest rating given to any of the property sectors
tracked by RERC.
wWith consumer confidence down and gasoline prices up,
the first quarter 2008 average hotel occupancy rate declined to 64.7 percent, 3.7 percent lower than the year-ago
average rate, according to Smith Travel Research. Revenue per available room (RevPAR) was $70.89, essentially
unchanged from the same time one year ago.
wRERC’s first quarter 2008 average capitalization rate was
7.9 percent, 20 basis points higher than the previous quarter’s rate.
9.5%
East
South
Midwest
West
National
9.0%
8.5%
8.0%
7.5%
7.0%
1Q07
2Q07
3Q07
4Q07
1Q08
RERC Size-Weighted Average PPU
$300,000
$250,000
RERC Price-Weighted Average PPU
$850,000
South
$750,000
East
$650,000
$200,000
National
West
Midwest
South
East
$550,000
$450,000
$150,000
$350,000
$250,000
$100,000
$50,000
Low consumer spending and high gasoline prices, along with
reduced business travel due to budget cutbacks, are a double-blow
to this property type. One CCIM respondent to RERC’s survey
noted, “There are a lot of hospitality-related projects on the drawing
boards right now. Investors should do their homework, know where
everyone else is going, and do their math a few times determining
absorption.”
$950,000
National
West
Midwest
wSurvey respondents rated first quarter 2008 “return versus
risk” for hotel properties at 5.6 on a scale of 1 to 10, with
10 being high, indicating that the sector offers slightly more
return when compared to the amount of risk involved in
the investment. They also gave the sector a “value versus
price” rating of 5.3, indicating that the sector represents
slightly more value when compared to the price paid for
hotel assets.
$150,000
1Q07
2Q07
Investment Trends
Quarterly
3Q07
4Q07
1Q08
$50,000
1Q07
2Q07
3Q07
4Q07
1Q08
22
Sustainable Development
Shapes Portland’s Past and Future
By Edward M. Bury, APR
Long known as one of the nation’s
most progressive urban centers, metropolitan Portland--Oregon’s largest
city and the fourth largest city on the
West Coast--practiced sustainable
development, incorporated strict land
use guidelines, and promoted ecologically sound building practices de-
cades before it became fashionable.
Today, the market of 2.2 million remains at the vanguard of how to “go
green.”
Portland developers and planners
even export knowledge and expertise to other markets. Gerding-Edlen
Development Company, for example,
had tremendous success converting
a defunct five-block property into the
thriving Brewery Blocks mixed-use
development. Portland experts are
applying design and construction
principles to new properties in Los
Angeles and San Diego.
Clearly, city fathers and business
leaders have taken tremendous steps
forward to keep run-away growth in
check and preserve the scenic beauty of the Willamette Valley and surrounding region, with its nearby snowcapped mountain peaks, forests and
rivers. In the city limits, the outdoors
Investment Trends
Quarterly
and quality of life are exemplified by
the city’s 5,000-acre Forest Park, the
largest natural urban forest reserve in
the nation, and numerous other parks
and gardens. The Columbia River
Gorge and Mt. Hood, world-class outdoor wonders, are a short drive away.
And, Portland is the headquarters for
such outdoor-oriented companies like
Nike and Columbia sportswear.
But strong development laws and
green initiatives also have drawbacks.
Portland’s development controls and
dedication to preserving the natural environment have made it much
more challenging and expensive for
new properties to be constructed or
renovated, and for businesses wanting to grow. Also, controls have led to
a shortage of housing, and they may
be a factor in curbing job growth; job
growth in 2007 was 1.2 percent, a
drop from 2.4 percent the previous
year, and the unemployment rate
23
at year-end 2007 was 4.9 percent,
slightly above the national average.
Despite pressures to relax guidelines, Portland remains steadfast on
sustainability. Consider:
• In order to reduce urban sprawl,
Portland operates on an 84-yearold, single-use zoning practice
where land is zoned for a single
use. This policy, which greatly reduces development of mixed-use
properties, is under scrutiny; proponents of growth believe urban
boundaries should be expanded to
accommodate new development.
• All new commercial properties must
be built to meet the Leadership in
Energy and Environmental Design
(LEED) silver rating from the U.S.
Green Buildings Council. To meet
these standards, buildings must
reach specified criteria for sustainability, water and energy efficiency,
materials and resources selection,
indoor environment quality, and design innovation.
• This year, the City Council will debate a “feebate” system, which will
provide financial incentives for developments that exceed or match
high-level green building standards.
Even with these challenging regulations, a wide range of large-scale
development has taken place in Portland, and there are many properties
under development. One of the most
visible and successful redevelopment
projects is the Pearl District, a onetime undesirable concentration of
light manufacturing and warehouse
buildings converted during the late
1990s into Portland’s hippest district
for galleries, boutiques, restaurants,
and living. Green living is exemplified
by the 937 Condominiums, a luxury
16-story, 114-unit property that will be
LEED-gold certified once completed.
Featuring a 4,000-square-foot rooftop
Investment Trends
Quarterly
garden, condo prices will range from
$2.1 million to $328,000.
“Portland has been very successful in
developing buildings that are on the
leading edge of sustainability,” said
T.J. Newby, CCIM, vice president of
Integrated Corporate Property Services, LLC, of Portland. “One reason
is that developers and institutions
such as Portland State University engage directly with the community.” An
innovative cooperative program with
Portland State University has helped
Portland Transaction Breakdown (4/1/07 - 3/31/08)
Office
Industrial
Retail
Apartment
Hotel
< $5 Million
Volume (Mil)
$67
$89
$53
$170
$12
Size Weighted Avg.
$140
$83
$160
$63,736
$52,257
Price Weighted Avg.
$179
$102
$229
$71,101
$60,135
Median
$148
$84
$152
$65,878
$56,959
$1,102
$422
$314
$836
$242
Size Weighted Avg.
$233
$95
$134
$113,242
$105,934
Price Weighted Avg.
$303
$122
$156
$137,254
$114,018
Median
$175
$97
$148
$94,753
$92,026
$1,169
$510
$367
$1,007
$253
Size Weighted Avg.
$225
$93
$137
$100,089
$101,093
Price Weighted Avg.
$295
$119
$167
$126,062
$111,506
Median
$161
$87
$150
$74,974
$91,219
> $5 Million
Volume (Mil)
All Transactions
Volume (Mil)
Capitalization Rates (All Transactions)
Weighted Average
–
–
6.8
5.6
–
Median
–
–
6.4
6.0
–
Source: RERC.
24
keep new construction and redevelopment projects on track, she noted.
And, with good reason: Portland
State is the largest land owner downtown, with 4 million square feet of
space spread out over 44 city blocks,
and the University’s Center for Real
Estate has a 30-year history of educating future urban planners and developers.
Newby pointed out another “benefit”
of Portland’s urban growth boundary–
it helped insulate the market from office overbuilding during the dot-com
bust of the late 1990s and the recent economic slowdown caused by
the sub-prime fallout. Today, Newby
said, downtown Portland has “a lot of
cranes in the air” at office construction
sites. According to a market report
from Portland State University, the
downtown market can absorb from
400,000 to 500,000 square feet of
new office construction by 2009 with-
Investment Trends
Quarterly
out causing a spike in vacancy rates.
New Class A office rents would range
from $33 to $35 per square foot.
Given the housing shortage, investors
have targeted Portland for apartment
properties. Earlier this year, the 245unit Wyatt apartments sold for $111.5
million, or $455,000 per apartment,
and a tower at the Harrison complex
sold for $45 million, or $245,000 per
unit. Both properties were sold to
California-based companies.
Still, concern over how much land can
be developed to meet market needs
remains a concern. Most major markets plan for future development; the
general standard is to have a 20-year
supply of industrial land available
to promote economic development.
Economic theory suggests that for
every base employment or traded
sector job, another 2.8 jobs are created within that community.
“Portland effectively has less than a
5-year supply of industrial land available, and most of that is in small parcels,” Newby said. There is strong
demand for industrial properties, and
that is driving land prices and lease
rates up. Warehouse and flex industrial availability in the metropolitan
area is under 7.5 percent , with warehouse monthly lease rates at $45 per
square foot and rising. “Portland’s
‘uber’ growth boundary won’t be expanding anytime soon,” Newby says.
“Metro and regional planners are not
expected to publish recommendations for urban growth boundary expansion until sometime after 2010.”
In the meantime, industrial land prices start at $7.50 per square foot and
warehouses are transacting around
$100 per square foot.
25
RERC~CCIM Investment Trends Quarterly
Advisory Board Members
B.K. Allen, CCIM
B.K. Allen Real Estate
Potomac Falls, Virginia
Duncan Patterson, CCIM
Patterson-Woods Associates
Greenville, Delaware
Todd Clarke, CCIM
New Mexico Apartments
Albuquerque, New Mexico
Gary M. Ralston, CCIM, SIOR,
SRS, CPM, CRE
Florida Retail Development, LLC
Winter Park, Florida
Wayne D’Amico, CCIM
Property Politics
Essex, Connecticut
Paul Fetscher, CCIM
Great American Brokerage
Long Beach, New York
Stephen Furnary
ING Clarion Partners
New York, New York
Breck Hanson
LaSalle Bank, N.A.
Chicago, Illinois
Charles Lowrey
Prudential Investment Management Services
Parsippany, New Jersey
Dennis Martin
RREEF/DB Real Estate
New York, New York
Jeff Lyon, CCIM
GVA Kidder Mathews
Seattle, Washington
Buzz McCoy
Buzz McCoy Associates, Inc.
Los Angeles, California
Tom Nordstrom, CCIM
AEGON USA Realty Advisors, Inc.
Cedar Rapids, Iowa
Art Pasquerella
Berwind Property Group, Inc.
Philadelphia, Pennsylvania
Cynthia Shelton, CCIM
Colliers Arnold
Orlando, Florida
Frank Simpson, CCIM
The Simpson Company
Gainesville, Georgia
Richard Sokolov
Simon Property Group
Indianapolis, Indiana
John Stone, CCIM
John M. Stone Company
Dallas, Texas
Dewey Struble, CCIM
Sperry Van Ness
Reno, Nevada
Julien Studley
Julien Studley, Inc.
New York, New York
Allan Sweet
AMLI Residential Properties Trust
Chicago, Illinois
Garry Weiss, CCIM
First Industrial Realty Trust
Chicago, Illinois
Sam Zell
Equity Group Investments
Chicago, Illinois
Publisher
Kenneth P. Riggs, Jr.
CFA®, CRE, FRICS, MAI, CCIM
Editor-in-Chief
Barb Bush
Lead Analyst
Brian Velky
Research Analysts
Greg Philipp
Cliff Carlson
Morgan Even
Design Editor
Michelle Houlgrave
Data Management
Ben Neil
Daniel Warner
Production Committee
Terri Cotter
Scott Hamerlinck
Research Assistants
Alicia Brown
Charles Gohr
Jeffrey Harms
David Kelly
Herinomena Rakotoarivelo
Steven Schlange
Anthony Tholkes
CCIM Institute
President
Timothy S. Hatlestad, CCIM
President-Elect
Charles McClure, CCIM, CRE
First Vice President
Richard E. Juge, CCIM, SIOR
Chief Executive Officer
Jonathan Salk
Director of Public Relations
Edward M. Bury, APR
CCIM Member Services Committee
Steve Moriera, CCIM, Chairman
Brent Case, CCIM, Vice Chairman
Copyright Notice for RERC~CCIM Investment Trends Quarterly
Copyright© 2008 by Real Estate Research Corporation (RERC) and the CCIM Institute. All rights
reserved. No part of this publication may be reproduced, duplicated, or copied in any form, including electronic forwarding or copying, xerography, microfilm, or other methods, or incorporated into
any information retrieval system, without the written permission of RERC and the CCIM Institute.
Investment Trends
Quarterly
RERC Editorial Staff
Immediate Past Chairman
Nick Miner, CCIM
Liason
Frank Simpson, CCIM
26
Acknowledgements
The RERC/CCIM Investment Trends Quarterly is produced by
Real Estate Research Corporation (RERC) in association with
and for members of the CCIM Institute. The RERC/CCIM Investment Trends Quarterly is sponsored by the REALTORS® Commercial Alliance of the National Association of REALTORS®.
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Founded more than 75 years ago, Real Estate Research Corporation (RERC)
was the nation’s first independent real estate firm that specialized in both real
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Investment Trends
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28
Contributors
Gold
Thank you to all who
contributed to this report.
Trusted Advice. Proven Performance.
Bronze
Kenneth Delvillar
Cushman &
Wakefield
Orlando, FL
Daniel Huneke
Dancor Commercial
Properties
Louisville, KY
Lon Lundberg, CCIM
Discover Real Estate
Boise, ID
Skip Duemeland
Duemelands
Commerical
Omaha, NE
Nicholas Miner, CCIM
Eagle Commercial
Realty Services
Phoenix, AZ
Natalie Feldman
Eisner, Feldman &
Grant, Inc.
Tampa, FL
Bill Eshenbaugh
Eshenbaugh Land
Company
Tampa, FL
Columbus, OH
Matthew Curtis
First American
Commercial
San Antonio, TX
CBRE
Tucson, AZ
Grubb & Ellis
Company
San Antonio, TX
Barry Marotz
CenterPointe Real
Estate Group
Ernest L Brown, IV,
CCIM
Austin, TX
Pete Riehm
Chris Schreiber
Century 21 / Onpoint
Sandpoint, ID
Grubb & Ellis/Peebles
Mobile, AL
& Cameron
Bill Overman
GVA Advantis
Norfolk, VA
James W. Wright
Century 21 All Islands Honolulu, HI
Westlake, OH
Halo Realty &
Investments Corp.
Las Vegas, NV
Thomas D. Burke
Coldwell Banker
Commercial
James T Saint, CCIM
Dallas, TX
Hardy Commercial
Real Estate Services
Irvine, CA
Brady Collier
Coldwell Banker
Commercial
Stuart Hardy, Ph.D.
Glenn Thomas
Hart County Realty
Nashville, TN
Mike Habib
Coldwell Banker
Commercial
San Diego, CA
Robert Stone
Dallas, TX
Tom Tolrud
Coldwell Banker
Commercial NRT
Henry S. Miller
Commercial
Tampa, FL
Benjamin Pitts
Chattanooga, GA
Jecoah E. Byrnes
Coldwell Banker
Commercial NRT
Herman Walldorf &
Company, Inc.
Denver, CO
Bruce Holmes
HotelBrokerOne
Oklahoma City, OK
Daniel G. Mincher
Coldwell Banker
Commercial, The
Duncan Company
Sacramento, CA
John Schutzius
Industrial Commercial
Realty and
Chicago, IL
Investment Corp
John Seckerson
Colliers
Portland, OR
William Griffiths
Milwaukee, WI
Peter Kravaritis
Colliers Bennett &
Kahnweiler
Inter/Design
Investments inc.
Chicago, IL
Michael G. Loveland
Loveland Properties
Wichita, KS
Dan Colton
Colton Commercial
Phoenix, AZ
Kevin Casebier
Advanco
Atlanta, GA
Michael Johnston
Alain Pinel Realtors
San Francisco, CA
Jonathan Epstein
Berger-Epstein
Associates, inc.
Philadelphia, PA
Bill Chess
Bill Chess
Real Estate
Bastrop, TX
Nancy Miller
Bull Realty
Atlanta, GA
Latchezar Boyadjiev
California Realty
San Diego, CA
Brian Bell
Campana Resources
Dallas, TX
Gary Hunter
Capital Financial, LLC Seattle, WA
Tim Mehan
CBCNRT
Brandon Rodgers
Investment Trends
Quarterly
30
Contributors
Bronze
Paul Schapira
JADDA Capital
Management, LLC
Bloomfield, MI
Thomas E. Hankins,
CCIM SIOR
Realty Capital
Hankins Group
Orlando, FL
Jim Daniell
JD Properties
San Antonio, TX
Mark Fontaine
Realty Diversified
Services, INC.
Washington, DC
JM Padron
JM Partners Realty
Miami, FL
Ed Mendence, SIOR
San Francisco, CA
felix tang
Jobin Metro Realty, llc Washington, DC
REMAX Commercial
Silicon Valley
Kenneth Krawczyk
K.S.K. Services Inc.
Milwaukee, WI
Ferrell Blair
ReMax Results
LaGrange
LaGrange, GA
Wes Waltenspiel
Keller Realty
Reno, NV
Jason Tuomey
Rutledge Real Estate
Dallas, TX
Dionne Lang
Lang World Realty,
INC.
Chicago, IL
Bill Jeansonne
Sealy & Falgoust
Real Estate
New Orleans, LA
Jay Verro, CCIM
Larkin Commercial
Properties, Inc.
Albany, NY
Helen Selig
Selig Comm. R.E.
Memphis, TN
Gerald Katz
Shorewest Realtors
Milwaukee, WI
Blake Fletcher
Legacy Property
Development
Gainesville, FL
Pete Bine
Sperry Van Ness
Myrtle Beach, SC
Robert L. Smith, Jr.
Lockard Companies
Cedar Falls, IA
Heather Konopka
Sperry Van Ness
Dallas, TX
Charles Wiercinski
McLennan Comercial
Properties
Chicago, IL
Dewey Struble, CCIM Sperry Van Ness
Reno, NV
Joe Milkes
Milkes Realty
Valuation
Dallas, TX
Sabina Holtzman
Stephen Frank Associates, Inc.
St. Louis, MO
David
Miller
Phoenix, AZ
Steve Stephens
Chicago, IL
Danny Zelonker
Mizrach Realty
Associates
Stephens Commercial Real Estate
Miami, FL
Emilio
T & E Realty
Denver, CO
Todd Clarke CCIM
NM Apartment
Advisors Inc
Albuquerque, NM
David da Cunha
The ALCOR Group
New Orleans, LA
Steven C. Longley
Nortam Capital
Dallas, TX
K. F. Crimmins
The Blau & Bert
Company
Northern New Jersey,
NJ
JP Newman
PCF
Austin, TX
Lee Wheeler
Roz Peterson
Peterson
Minneapolis, MN
The LWIII Group at
Foxworth Real Estate Beaumont, TX
Company
Michael Cantwell
Platinum Property
Group, LLC
Miami, FL
Jair Morselli
The Manna Group
McLean, VA
N. L. Martin
ProVista Professional
Los Angeles, CA
Services
Allen Nivens
The Norton Agency
Atlanta, GA
Greg Ruthven
The Ruthvens
Lakeland, FL
Robert Strickland
Prudential CRES
Commercial RE
Tampa, FL
Omar Araim
Uptown Realty, Inc
Atlanta, GA
Emile Tujague
Prudential Gardner
Realtors
New Orleans, LA
Dan Weil
Weil Commercial
Los Angeles, CA
Tom Watson
RE/MAX of Spokane
Spokane, WA
Ricardo Rubiano
West Harlingen
Partners LP
Harlingen, TX
Tomasz Dubiski
Real Estate Agency
Poland
Investment Trends
Quarterly
31
Scope&Methodology
The analysis provided in the RERC/CCIM Investment Trends Quarterly is conducted by Real Estate Research Corporation (RERC). The
information is gathered in raw form from surveys sent to CCIM designees and candidates, and from sales transactions collected from various
sources, including CCIM members, various key commercial information exchange organizations (CIEs), the media, assessors’ offices, RERC
contacts in the marketplace, and other reliable public and private resources. All sales transactions are aggregated, analyzed, and reported on
by RERC. Additional data and forecasts are provided courtesy of the REALTORS® Commercial Alliance and Torto Wheaton Research.
Published quarterly, the RERC/CCIM Investment Trends Quarterly report provides timely insight into transaction volume, pricing, and capitalization rates for the
core income-producing properties.
RERC Definitions
Capitalization Rate: The capitalization rate is defined as the first year “stabilized” net operating income (NOI) (NOI is before capital expenditures – tenant
improvements, leasing commissions, reserves – and debt service) divided by the present value (or purchase price). Capitalization rates included are transaction-based medians and price-weighted averages.
RERC Capitalization Rate and Ranges: Capitalization rates and ranges listed throughout this report are based on RERC’s proprietary realized capitalization
rate model, which includes available transaction-based capitalization rates, survey responses, NCREIF Index Returns, and other market factors, but is heavily
weighted toward transaction-based capitalization rates for each property type within each market.
Price-Weighted Average: The price-weighted average is developed through weighting each asset based on the gross sales price. Therefore, larger dollar
properties are given more weight than the smaller dollar properties, with the weighted average reflecting more weight towards institutional real estate.
Size-Weighted Average: The size-weighted average is developed through weighting each asset based on its gross square footage – simply an aggregation of
all the gross sales prices divided by the aggregation of the gross square footage.
National/Regional Market Analysis: RERC ranks the investment potential of the metros and property types it covers based on various space market and
financial market criteria, including pricing, capitalization rates, vacancy rates, and other factors.
Investment Conditions Rating: A rating of 1 through 10 (with 10 being high) reflecting survey respondents’ collective views of the investment environment for a
particular property type in comparison with other property types. The rating may take into account supply and demand, economic conditions, pricing, rental rates,
or other factors.
NCREIF Definitions
NCREIF: The National Council of Real Estate Investment Fiduciaries (NCREIF) is an independent organization dedicated to the compilation, validation, and
distribution of performance data for the institutional real estate investment community.
Total Return: The total return includes appreciation (or depreciation), realized capital gain (or loss), and income. It is computed by adding the income and
capital appreciation return on a quarterly basis.
Implied Cap Rate (Income Return): The implied capitalization rate measures the portion of return attributable to each property’s NOI. It is computed by dividing the total NOI by the total quarterly investment.
Capital Appreciation Return: The capital appreciation return measures the change in market value adjusted for any capital improvements/expenditures and
partial sales divided by the average quarterly investment.
Annual and Annualized Returns: Annual returns are computed by chain-linking quarterly rates of return to produce time-weighted rates of return for the annual and annualized periods under study. For time periods beyond 1 year, the annualized returns are expressed as the annual compounded rate of return.
Allocation: The distribution, expressed as a percentage of the overall investment, in a particular geographic area by property type.
For a detailed description of the proceeding returns, as well as the calculations used by NCREIF to derive these figures, please visit http://www.ncreif.org/indices.
The combined returns are the weighted average of the returns for each property type according to the proportionate market value of properties surveyed relative
to the total market values surveyed during a time period.
RERC Defined Regions and MSAs
West: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, Wyoming
Midwest: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Wisconsin
South: Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Oklahoma, Tennessee, Texas
East: Connecticut, Delaware, Kentucky, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode
Island, South Carolina, Vermont, Virginia, Washington D.C., West Virginia
Metropolitan Statistical Area (MSA): A geographic unit comprised of one or more counties around a central city or urbanized area with 50,000 or more population. Contiguous counties are included if they have close social and economic links with the area’s population nucleus.
With a few exceptions, the MSAs within this report coincide with the U.S. Office of Management and Budget’s December 2005 definitions for each MSA. For
example, St. Paul, Minn., and Bloomington, Minn., as well as many other suburbs, are included within the Minneapolis MSA.
Note of Caution: It is imperative to exercise caution when comparing the data contained herein to previous reports published by RERC. The data herein is not
“fixed,” and will be updated and changed as additional transaction information is gathered and analyzed.
Disclaimer: This publication is designed to provide accurate information in regard to the subject matter covered. It is sold with the understanding that the
publisher is not engaged in rendering legal or accounting service. The publisher advises that no statement in this issue is to be construed as a recommendation
to make any real estate investment or to buy or sell a security or as investment advice. The examples contained in the publication are intended for use as background on the real estate industry as a whole, not as support for any particular real estate investment or security. Although the RERC/CCIM Investment Trends
Quarterly uses only sources that it deems reliable and accurate, Real Estate Research Corporation (RERC) does not warrant the accuracy of the information
contained herein.
Investment Trends
Quarterly
32

Investment Trends Quarterly

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