East Bay Office Vacancies Decrease In First Quarter 2014

The East Bay market ended the first quarter of 2014 with an office vacancy rate of 10.6%, according to the CoStar Group.  San Francisco, which usually leads the nation in lowest vacancy rate, came in at 9.2%.  This continues a trend we have seen over the last several quarters but certainly not at the pace that led to vacancy rates in the 8’s in the late 90’s.

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To give you an idea of how this compares, the national vacancy rate was 11.5%.  LinkedIn just inked a lease for 450,000 sq ft in San Francisco and is indicative of the confidence factor we’re seeing with many Bay Area companies.  As companies are growing and expanding that means they feel profitable enough to hire more people.  That is certainly good news for the local office markets.

New CRE Loans Hitting All Time Highs

The U.S. commercial real estate market continued to recover steadily in the 1st Quarter, according to most analysts. Both the office and retail vacancies declined by about 10 basis points, but what we wanted to report on here is increase in commercial and multifamily mortgage originations as reported by Mark Heschmeyer on costar.com.

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Loan Performance Improving, but Loan Maturities Coming Down the Pike

During the fourth quarter of 2013, commercial and multifamily mortgage originations were strong, boosting mortgage debt outstanding to a new all-time high.

In fact, the fourth quarter marked the highest volume of commercial and multifamily mortgage originations since 2007, with all investor groups increasing their activity, according to the Mortgage Bankers Association’s just-released 2013 Data Book.

The level of commercial/multifamily mortgage debt outstanding reached $41.2 billion, or 1.7%, over the previous quarter.

Originations for commercial bank portfolios increased by 54% from last year’s fourth quarter. There was a 40% increase for life insurance companies, a 15% increase for CMBS and a 43% decrease in dollar volume of loans originated for the two big Government Sponsored Enterprises (Fannie Mae and Freddie Mac) loans.

Multifamily mortgage debt outstanding separate from CRE lending also rose to $895 billion, an increase of $11.5 billion, or 1.3%, from the third quarter and $36.6 billion, or 4.3%, from the fourth quarter of 2012. Rising property incomes and values continue to boost the performance of commercial and multifamily mortgage loans, the MBA noted.

Commercial and multifamily mortgages performed relatively well during the downturn, and for most investor groups, delinquency rates are now back in the lower end of their historical range.

Loan Maturities Hit Nadir, but Expected to Increase Dramatically

Although 2014 will mark the fourth straight year of declining commercial/multifamily mortgage maturities, volumes are expected to spike – by 72% in 2015 and an additional 34% in 2016, as 10-year loans made in 2005, 2006 and 2007 begin to come due.

The loan maturities vary significantly by investor group. Just 3% ($12.7 billion) of the outstanding balance of multifamily and health care mortgages held or guaranteed by Fannie Mae, Freddie Mac, FHA and Ginnie Mae will mature in 2014.

Life insurance companies will see 5% ($18 billion) of their outstanding mortgage balances mature in 2014. Among loans held in CMBS, 7% ($41.8 billion) will come due in 2014. About 15% ($19.2 billion) of commercial mortgages held by credit companies and other investors will mature in 2014.

Top Lenders

Wells Fargo was the top commercial/multifamily mortgage originator in 2013, according to MBA. Other top originators include J.P. Morgan Chase, Bank of America Merrill Lynch, Eastdil Secured, KeyBank, PNC Real Estate, HFF LP, Meridian Capital Group, CBRE Capital Markets and Prudential Mortgage Capital Co.

Shopping Malls To Become Extinct?

CNBC Online has a recent article, 7 Bold Commercial Real Estate Predictions, that we find pretty interesting and a great read.  Over the next 25 years commercial real estate will be buffeted by changes in demographics, technology, globalization, economic and environmental realities and a host of other trends.  So what will the Commercial Real Estate landscape look at by 2039?  While we could debate each prediction endlessly, let’s take a look at just the first one and see what you think…

Most Shopping Malls will be extinct.

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“The world of the American shopping mall, said Kenneth Riggs, president and CEO of Real Estate Research Corp., “has been a Darwinian environment since the 1990s with the advent of big-box retail and the ‘Wal-Marting’ of the world—and it will stay that way.” In other words, expect malls to continue their decline due to the rise in e-commerce, with only those consistently producing very strong revenues still doing business in 25 years.

“As the J.C. Penney’s and Sears continue to lose market share to online retailing, you’re going to see more dead malls where the anchors go dark and ultimately are worth only the land they’re built on,” said Tom Bohjalian, executive vice president at Cohen & Steers, which was the first investment company to specialize in listed real estate.

Teardowns may not be the only way to capture value in defunct malls, though, said Rick Fedrizzi, president, CEO and co-founder of the U.S. Green Building Council. He predicts that with repurposing, they’ll be a useful resource when our way of life swings back to revolving around more compact communities. “Established places like shopping malls will become like town centers, where people can come together, where their doctors and day care will be, where they can gather after major devastations.””

We agree that e-commerce is likely to grow over the next 25 years, and that some of that will be at the cost of traditional retail. Yet as we have seen over the last several holiday shopping seasons, brick and mortar vs. e-commerce is not a winner take all battle.  The American consumer will ultimately decide which form of shopping they prefer, and we’re betting on a basic American human instinct.

The American consumer likes to put their hands on products, to pile in the car and make a day of it – to have a physical experience when they shop that we feel isn’t likely to change radically in the next 25 years.  And while we may have practiced another basic American human instinct, overbuilding our retail space, that seems like more of a correction than a fundamental change in how we like to shop.

As retailers get more savvy in finding a way to combat the issue of window shopping at brick and mortar stores then getting a better price online, we’ll see better sales in the brick and mortar world.  Some things it’s okay to buy sight unseen, but for most items it is that physical need to spend time with hands on the product why we don’t feel most shopping malls will be extinct by 2039.

 

Investing In Commercial Real Estate

Industrial and commercial properties constantly come to market, but don’t get the highlighted attention or preferential treatment that residential homes do. You have to successfully find them by hunting, and working with JMA Commercial Services can assist you in doing so.

buildingLocation is the most important factor in choosing a commercial property to buy. Pay attention to the property’s surrounding area. The neighborhood’s demographics, including socioeconomic status and age of residents, influence the success of your investment. Look at the growth in similar areas. This research will help you figure out how the neighborhood you’re considering buying commercial property in is likely to grow and change over the next several years. If you aren’t comfortable with the potential growth rate or the atmosphere of the neighborhood, purchase property elsewhere.

Buying commercial property takes more time, and the process is far more labyrinthine, than buying a house. The added time and effort are crucial, however, to getting the return that you want on your investment.

You may find that you spend a large amount of time at first on your investment. It will take time to find an opportunity that is profitable, and afterwards, you may have to wait for repairs and remodeling before you can start monetizing your investment. Don’t abandon your investments because they are eating into your personal time. It will pay off in the long run.

Strive to keep your commercial properties occupied at all times if you choose to rent them to tenants. If no one is paying you rent, you’ll be the one footing the bills. If several of your properties are vacant, reexamine your management style and look for ways to fix issues that are keeping tenants away.

If you are negotiating a commercial lease, make sure nothing can be considered as events of default. Your tenant will be less likely to default on the lease if you do this. This is something that you don’t want to happen under any circumstance.

Take tours of any properties that you’re considering. As you tour each property, you should bring along an experienced contractor who can offer helpful input. Begin negotiating and the process of offers and counter offers. Before you choose, make sure you look over your offers a few times.

Before making a real estate purchase, sit down and talk with your tax adviser. A tax adviser can let you know how much money the buildings will cost you, and the amount of your income that will be taxable. Consult your adviser for areas where taxes are lower.

Properties, like people, have finite life spans. It’s important to be aware of this. Don’t make the mistake of overlooking the fact that you will need to put a substantial amount of money into the property to keep it well-maintained. It may need a more updated electrical system, or a new roof. Every piece of commercial property needs maintenance sometimes; however, some buildings require more extensive or frequent repairs than others. Be prepared for when these necessities come up.

Finding the appropriate commercial real estate property for your needs is one half of the battle. The other is actually obtaining it. Just a little information can go a long way.  Trust in the professionals at JMA Commercial Services to guide you through the entire process – Our Clients always come first!