New PREI Report Backs CoC Projection: Economy Improving, CRE Fundamentals Trending Positive

As I have written in previous posts, and as other prognosticators have indicated as well, things appear to be improving for the commercial/investment real estate market.

And that is good news for investors, tenants, and owner/users alike. Now its not just practioners on the gound saying this. Our sister oranization, Prudential Real Estate Investors, has issued its latest quarterly report on the state of the U.S. real estate market, and it concurs: fundamentals are, indeed, improving.

Here are key points from the Executive Summary:

• With the economy growing at a healthy pace, commercial real estate fundamentals are finally moving in a positive direction in all sectors. Fears of a double-dip recession have mostly abated, although turmoil in the Middle East and the disaster in Japan are reminders that exogenous events are always lurking. Questions remain as to how strong the recovery will be and how long it will take the space markets to fully recover from the recession.

• The momentum should continue in the apartment and hotel segments, which bottomed a year ago, due to increased demand for rental units and rising travel. Fundamentals are just shifting to positive in the office, retail and warehouse sectors. Gains in those property types are bound to be inconsistent based on the market and segment.

• Capital continues to flow to commercial real estate, particularly “prime” assets in “gateway” cities. Acquisition yields in a handful of core markets have been reduced to historically low levels. Transaction activity is up about 50% from a year ago and should reach 2004 levels.

I wrote some weeks ago on these pages about e in the eventsMiddle East and Japan continuing to be a concern, but despite nagging worries about inflation (something that still concerns me greatly as a nation that continues to print money 24 hours and day and buys its own debt cannot escape severe inflation if such activities continue), the ship appears to be back on track -- for now. Better properties, properly priced, are finally coming to market. For Tenants, there still is prime space available, and many choices. Owners can rest assured that should they need to sell, the downslide in value appears to have bottomed out. Further, apart from multi-unit housing, other sectors should be seeing their slide in per square foot lease rates bottoming out as well. Bottom line? Everything is up for negotiation.

Click on the highlighted link in the body of my text above to access a copy of the full report. All in all, it backs up what we are seeing out here at the front lines.

Again, that is good news!

1099 Rule Killed; Value Depressing Leasing Rule Delayed

Big news just in the past few weeks that affect CRE owners and new investors.

Number 1 -- Congress has delayed an accounting rule change that negatively impacts property owners, both corporations and private individuals. The proposal called for referencing options to purchase or options to lease as liabilities on the balance sheet. Specifically, if you were in the middle of a lease term, and in your contract you have two 5-year renewal options (meaning you have the option to continue another five years, to start), the proposed accounting rules would have required that it be shown as a 10-year liability. For publicly traded corporations, this would negatively impact balance sheets and impact share pricing in the future. For private individuals, it would similarly impact the balance sheet, perhaps lowering credit scores and potentially interfering with an individual's ability to get a loan.

Number 2 -- The Small Business Administration has announced it is expanding its commercial refinancing program, which is a win for struggling business owners.

Number 3 -- Congress has KILLED (okay, we can also say "repealed") a controversial new provision in the controversial health care bill that required anyone spending more than $600 with any one vendor in a calendar year to issue an IR Form 1099 to that person or entity. So if a company or individual buys a new computer for $600 or more, they would be required to issue a 1099 to Egghead, or Amazon, or from whatever or whomever they purchased it. As a colleague asked this afternoon, can you imagine Staples, or Best Buy being covered in a blizzard of paper every week to comply? In our business, it would have been burdensome for owners and their agents, alike. It was government intrusion at its worst, sold as a means to fund the new healthcare program and, allegedly, to battle tax fraus. Congress, thankfully, has killed it.

Things are looking up.

Synergy

syn·er·gy  [sin-er-jee]
noun, plural -gies.
1. combined action or functioning; synergism.
2. the cooperative action of two or more muscles, nerves, or the like.
3. the cooperative action of two or more stimuli or drugs.

The word "synergy," oft used in business circles, comes from the Greek "synerg" or "synergos," which means "working together. The American engineer, inventor and futurist, Buckminster Fuller, coined the word synergy, and defined it as "synthesis plus energy." More simply put, it translates to how the result is greater (usually FAR greater) than the sum of the parts. In agriculture, it is referred to as "heterosis," where a handful of good qualities of two plants, or two animals, are crossed. The result is incredibly superior offspring. My engineer nephew insists that 2+2=5 (for heavy values of 2). In business environments, the same concept expresses how projects or people work together to create an outcome that is of exponentially greater value. Specifically, sphere overlap leads to force multiplication. The more overlap, the greater the factor of multiplication. Hence, 2 x 2 = 20

With that said ......

In 2006, I joined the Prudential Commercial office in Columbus, leaving behind a small local brokerage (high profile in the Ohio State campus area) for one that has one the world's best known brand, and whose reach and influence is international in scope. Not sure if I was making the right decision, still, I have never looked back. The principal broker of the office was Robert White Sr., an accomplished, likeable gentleman who knew the commercial business like the back of his hand.

Bob preached "synergy" all the time. He was convinced -- and he was right -- that the best results come from personnel working in concert with each other, teaming whenever possible, leveraging off each other's skillsets, exploiting individual strengths for a larger goal. Because the team we had assembled and were continuing to grow was a living entity with capabilities no one even knew. For when you put sharp people together, you don't just get a good outcome. The result is great; head and shoulders extending far beyond the individual inputs.

Bob is gone now. I have written about him in past posts, but his enthusiasm for synergy lives on. David Mussari, our company owner and managing broker, was so moved by Bob's focus on "Synergy" that he created an annual award to be presented in his memory to an agent as recognition for accomplishments, teamwork, focus, initiative, blah blah blah.... I say "blah blah" because I don't want to toot the horn too loud.



Because, of all the incredible talent in our company, and the knowledge my fellow agents possess, and throughout our firm, which spans Ohio and Kentucky, I was presented with the Synergy award for 2010 today during our annual Blue Rock Midwest network meeting. A surprise at the end of a very long, very busy, and educational day.

To receive an award created in memory of, and to honor the drive of Mr. Bob White, I am extremely honored. To have been chosen to receive this recognition from among (and in front of) my many accomplished peers, well, it is humbling. But I am a product of that synergy in our office. For as others leverage off of me, I leverage off of them.

Because success in this business, in this economy, is almost always a team effort.

Blue Rock Midwest Network Meeting

In Dayton today at our annual Blue Rock Midwest regional network meeting. Approximately 40 PCRE agents from Ohio and Kentucky, covering all our offices, convening to share best practices and hear presentations from a number of outside leveraged resources.

Presentations today on life settlements to acquire commercial properties (my personal favorite),  green building standards and certification, managing the receivership process, acquiring investment property using self-directed IRAs, new lending programs including SBA requirements, and more.

We also played an unusual game of "Family Feud" on the Wii console, consisting of "Team Rock," "Team Reinvigorate," "Team Retool," and "Team Rethink." No, there was no "Team Resusitate....."

Here is a photo from the morning session.

A more detailed rundown coming soon. Particularly on "Green," "Life Settlements," and "Self-Directed IRAs." Heading back into session.....

Humbled, Honored To Be Asked To Participate In Ohio Military Hall of Fame Induction

Someone asked me for a favor a couple of weeks ago. And as unusual as this sounds, I am incredibly humbled to have been asked.

In the late 1990s, a group of people got together to recognize Ohio military veterans who have distinguished themselves and been recognized for valor. Specifically, a local recognition. Something lasting. The Ohio Military Hall of Fame was born and its first class of honorees was inducted in 2000.

This year, Friday May 6, will mark the 12th class of inductees into the Hall. I know several members of the Board of Directors of the organization though various relationships, and have been an avid supporter and attendee for a number of years. Plus, my dad was a WW2 medic who served in the Pacific Theatre and saw action on Leyte Gulf and Okinawa. Additionally, I have three nephews who are active duty Army. This organization is important. What it recognizes is important. It means something.....

So by now you are asking, What does that have to do with "the phone call?"

Simply put, I have been asked to emcee this year's ceremony.

If you are in Central Ohio on the 6th around midday, stop by the Ohio Statehouse in downtown Columbus at the Ohio Veterans Plaza (the east lawn/Third Street side in front of the Senate office building). We will be outside, weather permitting. If the weather gets bad, the event will move indoors to the Atrium connecting the Statehouse to the Senate building. Beginning promptly at 11:30 am, and concluding at 12:30 pm,  the 2011 class of Honorees will be inducted into the Ohio Military Hall of Fame. When you read the citations, which will be posted to the OMHF website after the ceremony, you will realize it isn't Hollywood. Its real. What they faced was real. This ceremony is a way for them to be recognized by their home state for their actions.

It means something....

To those who thought of me to emcee the 2011 ceremony for the public, thank you. It will be my honor to guide this ceremony for an mere hour in recognition of those who gave so very, very, very much over a period of days, months, years, and even a lifetime.

And to those honorees whom I am yet to meet, thank you for your sacrifice. I am glad Ohio will soon honor your actions and service.

Do You Own Good Debt or Bad Debt?

Colleague Jon Hanson asked this very question in a book he wrote several years ago entitled (what else) "Good Debt, Bad Debt."

It was a play on titles from the popular investing book "Rich Dad, Poor Dad," penned by entrepreneur Robert Kiyosaki. But it looked at the differences between good debt and bad debt, gave examples of each. Jon wrote a very readable, informative book that taught the concept of how debt can work for you -- and against you.

Blogger The Blonde Trader has created a wonderful visual that demonstrates many of the same ideas. The blog post is titled "Do You Own Good Debt or Bad Debt?" Missing are the anecdotes that give real-life examples to each principal taught, but the concept is the same and well presented.

What is the difference? Good debt is any debt that creates value and/or cash flow. Specifically, the debt that often paid back by others (and not you). An example? An income property. Bad debt? Well that's anything charged on credit that YOU have to pay back. Credit card debt, debts that provide no return, or debts for items that will decrease in value.

I have written on this in the past but I share Kiyosaki's philosophy that your home is not your largest "investment," for if you children are not paying rent for their rooms then it is not an investment. But your home should not a bad debt either. Someone's home is their shelter, their repite from the workaday world.

This graphic representation also spells out just how much debt Americans have under a section titled "Americans Love Their Debt."

Anyway, enjoy and learn. Then pass it on .....

'Failure To Execute' May Be Biggest Reason Why Investors Miss Opportunities

We are starting to see more opportunities here in Ohio, particularly as investment opportunities come and go rather quickly as buyers choose to pull the trigger when opportunity strikes rather than wait.

As I noted in some earlier posts, better properties -- properly priced -- are now coming to market and are being scooped up. We are seeing listings come to market and go into contract either on the same day or that same week. That is good news. Which leaves those investors who want to sit and analyze for weeks and weeks unable to get into the game. But then that's their choice.

They might say "I lost out on an opportunity." I would suggest that, no, you can't lose something you never had. Good analysis is fine, but "analysis paralysis" will get you nowhere. So will waiting for "the next even better deal" to come along.

Thankfully, it's not just here that improvement is occurring. In southwest Florida, particularly in the Naples-Bonita Springs-Fort Myers corridor, fundamentals are improving also. Good friend and trusted colleague Garren Grup of John R. Wood Realtors notes in conversations we have had the past few weeks that parts of the market there seem to have bottomed out. In case you didnt' know, there is a strong connection between the Midwest USA and SW Florida, as the "snowbird" population in Lee and Collier Counties is heavy with investors from Ohio, Indiana, Michigan, Illinois and Wisconsin.

Garren recently wrote me the following, and it is so worth pondering: "The market here seems to be on a good roll now that season is rolling to an end and many have lost the best deal for failure to execute."

Truer words were never spoken. I am not advocating blindly jumping into the fray. But with wise counsel from a qualified commercial/investment agent, and a solid knowledge of market conditions, when opportunities arise buyers must strike quickly (and smartly) or they will never get in. Particularly now.

Thoughts on a stormy, rainy Ohio day...

More Good News?

Colleague Garren Grup in Naples, Fla. clued me into a news story in USA Today that I missed, which notes that the recovery in commercial/investment real estate appears to be exceeding projections. We can only hope.

From the news story: "Lenders were still saddled with $181 billion in distressed loans in February, according to Real Capital Analytics. But that's down from $188 billion in September. Mortgage defaults for office, retail, and industrial building loans dipped for the first time since 2005 in the fourth quarter, to 4.28 percent from 4.36 percent. They should fall further this year says RCA Economist Sam Chandan. "Worst-case scenarios have been avoided," he says."

Further, investors are clamoring to scoop up well-leased office buildings in large markets like New York City and Washington DC. The reason? Virtually no new development in the past few years, creating a dearth of high-quality inventory.

The full USA Today story may be read by clicking here.

The hope is that rising prices will temper additional foreclosures on the $1.4 trillion in commercial mortgage that some financial houses say are maturing by 2013.

Springtime In Central Ohio (And Then and Now...)

Spring . . . When a young man's fancy turns to thoughts of love, or something like that, so the saying goes. The only this this young man knows is that allergy season is already in high gear. A snowy, wet winter, and a wet, moderate spring with few late freezes are guaranteeing a colorful Spring and early Summer. And with it . . . a disaster for we Spring allergy sufferers. Plus, yours truly downing a lot of allergy meds. A really rough time a little over a week ago, with lots of over-the-counter allergy solutions being tried in an attempt just to make it through eachday. Maybe too many. The jury is out on that one... Anyway, for a break from business I thought I would post some photos I shot in the past week. But I lead-off with off with one I shot on the evening of February 1, as a few colleagues and I worked late painting trim and walls at our new office prior to the move. A raging ice storm as we left that evening. Around a 3/4 inch coating on roads, ground and trees overnight, and someone of the strangest sounds as trees dropped limbs onto rooftops through the night hours. The same shot from two days ago is immediately below it. Wow, what a difference a little over two months makes....

Pssssttt!!! Wanna Buy The Empire State Building?

Have we got a deal for you! Want to own the Empire State Building? Or part of it....? Details are uncomfirmed at this time, but word on the street in The Big Apple is that the owners of the iconic tower may launch an initial public offering of their holdings, according to the New York Times. The Malkin family did not comment on the story, but they have spent millions on upgrades to the Empire State Building. Other buildings may be involved in the offering, including 1 Grand Central, and six buildings in Westchester County and Connecticut. The full NYT story is here.

International Investors Invade U.S.

They're coming! They're coming! Okay, let me back up for a minute. I receive emails every now and then, or even phone calls from CoC readers who will say, "Hey Brent, you're out there saying things are rosy, jump in. Of course you would say that, you're an agent." First, yes indeed I am a licensed real estate agent in the State of Ohio, USA. Now, with that said, I haven't said things are rosy. I have said that things appear to be improving. And if you look back at a lot of my earlier posts, I said I was not nearly as optimistic as many of my colleagues in the industry. In fact I was downright pessimistic. Then I became (gasp) cautiously optimistic. I am still in that category but continue to see improvements not just in fundamental indicators, but real life activity in my market here in Central Ohio, and in some other markets I follow closely. But then remember, the health of all real estate -- whether commercial/investment or residential -- is driven, in part, by location, location LOCATION. Central Ohio fared better than many markets because it is more diversified economically, and is not a resort area that saw a steep run-up of unsustainable increases in prices over a decade or less. So with that said, WHO is coming? International investors, that's who. So don't take my word for it that things are improving. Take a look at new stats from various organizations that track that sort of thing. Here are just a few nuggets: 1) Foreign investors purchased approximately $41 billion worth of residential property in 2010, according to the National Association of Realtors. That represents about 4 percent of the market. The NAR also reports that sales to international investors were reported in 39 states. And about 28 percent of Realtors told the NAR that they have at least one international client (for disclosure purposes, I several myself). 2) Investors from China, the United Kingdom and France are taking an increased interest in U.S real estate. Canadians continue to be active. 3) And the one I love is this: European pension funds are expected to double their investment in American real estate this year to $1 billion. Why? Because the U.S. is still viewed as a safe place to park your money. Here are few other reasons why our shores are being invaded by foreign capital: -- The continued weakening of the U.S. dollar -- Residential real estate continues to be flat, and commercial/investment is only barely starting to improve. -- Unrest in the Middle East and Northern Africa. -- The European debt crisis. -- Even nuclear concerns in Japan ... And here are some reasons why U.S. investors are finally waking up. There has been a dearth of decent properties on the market for some time. And those few out there were (and in some cases still are) way overpriced. And as it is only a matter of time before higher inflation makes its way into official U.S. figures, commercial/investment real estate -- as always -- will once again provide a decent hedge against inflation. Plus, those "decent" properties are either properly priced (finally) or are in distress and can be picked up at a significant discount, creating strong upside opportunities once they are stabilized and the economy gets back on track. According to National Real Estate Investor magazine, contributing columnist Victor Calanog writes that (as I have written on this blog in months past) food prices are spiking and the price of oil was inching upward even before the latest unrest in the Middle East sparked shortage fears. Even Wal-Mart CEO Bill Simon is warning that "inflation is going to be serious." But market watchers, which include myself, are thinking that 2011 will be a robust year. I am in that cautiously optimistic category, but then keep in mind that CRE volume was off some 90 percent in 2010 when compared to 2009. A 90 percent drop in volume! Assets returning 10 or 11 percent clearly represent a good hedge against inflation. The trick to all of this will be to find quality assets -- the kind that offer significant income and solid rates of return. All things that your handy real estate investment counselor can help with. If you need help finding one, please drop me a line and I would be happy to introduce you to reputable commercial/investment specialists in most parts of the U.S. Your next logical question SHOULD be, "But Brent, could there be trouble ahead?" Sure there could. Clearly another hiccup in the economy could stall what appears to be movement toward a commercial/investment real estate recovery. If there is a double-dip problem with housing, CRE may be affected. But right now they are going in two different directions, as housing prices and sales totals still are falling while CRE values and volume is ticking upward. The real problem will be if banks sit on housing inventory, it may take years to clear -- just as it did following the Great Depression of the early-mid 20th century. There are some estimates that approximately two million more homes are slated for default in the next two years. So prices, or better said, "values," will most likely continue to fall. Thankfully, there are differences that have allowed the fates of residential and commercial real estate to diverge, causing them to travel in different paths. Specifically households suffer psychological scars from the residential bust, and there is limited access to capital. Commercial, on the other hand, has suffered from lack of access to capital and some increases in vacancies as the economy tanked. But capital is roaring back now, at least via private investors, REITs, and pension funds -- even as traditional lenders such as banks have not yet woken up. The CRE correction, according to Kevin White, a real estate strategist with CoStar Group has largely run its course because it was less inhibited. Translation from your author tonight: Government intruded less harshly on the commercial/investment real estate market than it did on the housing market. What's more, in many parts of the U.S. commercial real estate did not suffer the amount of "overbuilding" that took place in the residential sector. Therefore, while there are vacancies and things have been slow, there is less product available to fill when compared with housing that never got filled, that which has been foreclosed on and is sitting vacant, and those homeowners in serious financial straits who are watching the clock and their mailboxes, waiting for the other shoe to drop. All of which creates incredible buying opportunities. So again as I stated at the top of this post -- don't take my word for it that real estate, whether commercial or residential, is a value right now. Overseas buyers are flooding our shores with cash, looking for bargains because this is probably the safest place on the planet to park their money. American investors are waking up to this slowly but surely. Clearly, most Americans invested in 401(k)s, pensions and and other institutional investment vehicles probably don't even realize that part of the portfolio they may well be in is in real estate. And the percentage of those portfolios in such investment vehicles is growing. But Europeans, Chinese and others don't need to see what U.S. pension funds are doing to help them make up their minds. They are looking strictly at investment opportunities and are not jaded by gloom and doom news reports each night on American newscasts. My two cents .... (long-winded though it was).

Apologies But Blogger Giving Users Fits

As you may have noticed, recently my blog posts have no breaks between paragraphs. Most Blogger/Blogspot users (the platform I use for the CoC blog) are reporting similar problems, particularly if blogs are viewed in Internet Explorer. Blogger still has not resolved the issue. I apologize for any difficulty you may be having in reading the material here. For what it's worth, it's no picnic for me either and I am hopeful the problem will be resolved soon . . . BUT it has been going on since late last month.

How Safe Is Your Roth IRA?

Self-directed IRAs are a tremendous vehicle through which to invest in commercial/investment real estate. Roth IRAs differ from traditional IRAs in that your contribution to the account has already been taxed. But however much it grows over time, what you take out you can enjoy tax free. At least for now. Because . . . a writer for the Los Angeles Times questions why Roth IRAs are not being examined as a source of revenue for a cash-starved government beast (okay, those are my words). Actually, our government treaury is not cash starved; its just that politicians from both sides of the aisle routinely spend more than the government takes in. And it can't continue. I am in favor of cutting spending, AND cutting taxes, for the latter stimulates money flow into the treasury. Kennedy knew it. Reagan knew it. But I digress . . . Be aware that with the current administration in Washington, EVERYTHING is being reviewed to see if more money can be squeezed from it to fund the federal government. Or in the case of the Roth IRA, whether the rules might be changed some day down the road. Mr. Scorcese, the Times writer, posits the following: "Roths drive up the federal deficit and cause other pain. They're great for holders but grim for America. Its time to retire them." He calls Roths "fiscal Frankensteins," because Wow. I'm not sure what economics class this individual has attended, if any. I respectfully disagree with his position . No, strike that. I overwhelmingly disagree, particularly since Roth IRAs do NOTHING to drive up the deficit. Spendthrift lawmakers drive up the deficit. Again, money coming into a Roth has already been taxed. I will give this to members of Congress in 1997 -- the government did one good thing when it created the Roth IRA. It created a system that actually -- for the first time in decades -- prompted Americans to save. Because they don't. And when they run through savings they buy on credit. Which can, for some, cause increased reliance on entitlements at retirement time. Megan McArdle, writing at The Atlantic magazine, and I are of the same mind. This blatant suggestion to "take" something from those who have worked and scrimped and saved and carefully selected the appropriate investment vehicle for their needs somehow "offends" those who would rather spend what they have now and worry later about how they will live. For Congress, it is far "easier" to penalize (increase taxes) on those who saved for their future, rather than penalize (cut benefits) to those who did not plan for their future. Three guesses which one they will attempt first. Keep an eye on this issue. I am convinced it may become a big discussion point in the time before the next presidential election, though the trend in the U.S. House of Representatives right now is about cutting spending. Even "working people" (I am one of those, for I work 60+ hour weeks) have IRAs and 401(k)s, and I believe it could turn into an ugly issue if the matter is pressed very hard. Nevertheless, the Roth IRA is STILL an outstanding vehicle through which to purchase investment grade real estate. The bottom line: Don't stop saving -- or investing.

More Good News For CRE?

National Association of Realtors Economist George Ratiu is chiming in with news and a forecast that dovetails nicely with what I wrote on several days ago -- fundamentals are improving for commercial/investment real estate. As I noted, good properties are being brought to market with increasing frequency, properly priced and they are going into contract almost immediately. That is GREAT NEWS! While I tend to look at what is happening in the market and discount rosy outlook presentations by NAR, Raitiu is talking fundamentals and a reflection of market realities. There is a higher demand for office space and vacancy rates are coming down, he notes. But I agree that it will take a while for rents to come back to previous levels. Job growth is key. Here is a link to the full story and video interview with Mr. Raitiu. Even the industrial sector is heaing up. Good news all around.....