Headlines – Week of August 29, 2010
September 5, 2010
Commercial Real Estate Yields Spur Investors
According to an article in Bloomberg, yields on U.S. commercial real estate are nearing a record high compared to Treasury bonds, a signal to many investors that now is the time to buy property.
Capitalization rates, a measure of real estate yields, averaged 7.22% in the second quarter, as calculated by the National Council of Real Estate Investment Fiduciaries. That was 4.29 percentage points higher than the yield on 10-year government bonds as of June 30 and 4.75 percentage points higher than Treasury yields as of Aug. 31.
The current spread is near the record 5.39 percentage points in the first quarter of 2009, when the U.S. was dealing with the worst economic downturn since the Great Depression. The spread shrank to less than 80 basis points when commercial real estate prices peaked in 2007.
The article points to the recent acquisition of the 33-story Wells Fargo Building in San Francisco by a group of South Korean pension fund investors as an example of how low cap rates have dropped for some high end buildings. According to Real Capital Analytics Inc., a property research firm the office tower sold at a cap rate of about 7%.
In another transaction in New York, RXR Realty LLC bought a stake in a 22-story office building, at a cap rate of 6%.
U.S. sales of office, retail, industrial, apartment and hotel properties totaled $20.7 billion in the second quarter, up 86% from $11.1 billion a year earlier.
However, the deals were still 85% below the peak of $135.7 billion in the second quarter of 2007.
Florida Population Grows Again
According to the latest preliminary population estimates from the University of Florida (UF), Florida’s population grew once again last year after declining for the first time since the end of World War II the year before.
The Bureau estimates that Florida added a modest 21,000 residents between 2009 and 2010, but that followed a population decline greater than 56,000 between 2008 and 2009.
Florida grew by more than 125,000 residents in every year from 1950 to 2008. In 2009 it is estimated that Florida added 21,285 residents with its total population increasing from 18,750,483 on April 1, 2009, to 18,771,768 on April 1, 2010.
Foreign immigration continues to be relatively strong, and the state also continues to have substantially more births than deaths – the drivers of Florida’s growth in the last year.
The largest population gains were in some of the biggest counties. Miami-Dade led by adding an estimated 8,253 residents, followed by Hillsborough, 6,353, and Broward, 5,834.
The county with the biggest percentage increase was Lafayette, which grew by 5.2%, but that change was largely attributed to the addition of state prison inmates. There was no pattern to which counties lost population, which were spread throughout the state and include both large urban counties and small rural counties.
The largest population decline was in Seminole County, which lost 3,659 residents, followed by Pinellas, 3,119, and Volusia, 2,055. In percentage terms, the county with the biggest decline was Glades, followed by Jackson and Holmes.
The Bureau expects Florida’s population to continue to grow slowly during the next year or two, however within the next 10 to 20 years, the state’s annual population growth could be as high as 250,000.
From 2003 to 2006, Florida’s population grew by more than 400,000 per year, and in the previous three decades increases averaged about 300,000 per year.
Between 2000 and 2010, the counties that grew the most in absolute numbers were Miami-Dade, Orange and Hillsborough. Flagler had the highest growth rate, 90.4%, followed by Sumter, 82.6%, Osceola, 59.8%, St. Johns, 50.6%, and Wakulla, 41.7%.
The population figures are interim estimates that will be replaced by numbers from the 2010 census when they become available early next year.
Commercial Conditions Favor Business Growth
According to Lawrence Yun, National Association of Realtors (NAR) chief economist, the fallout from the recession continues to impact commercial real estate.
Vacancy rates are beginning to level off in some sectors, but rent discounts and moderate levels of landlord concessions are widespread. As a result we are very much in a tenant’s market which is quite favorable for businesses that are considering expansion.
Looking at the overall market, vacancy rates will shift modestly in the coming year according to NAR’s latest COMMERCIAL REAL ESTATE OUTLOOK. The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail, and multifamily markets. Historic data were provided by CBRE Econometric Advisors.
Vacancy rates in the office sector, with high levels of available sublease space, are expected to increase from 16.7% in the second quarter of this year to 17.0% in the second quarter of 2011, and then ease later next year. The markets with the lowest office vacancy rates in the second quarter were New York City, Honolulu and Long Island, N.Y., with vacancies around the 9 to 11% range.
Annual office rent should fall 2.7% this year and decline another 2.1% in 2011. In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is projected to be a negative 13.6 million square feet this year and then a positive 22.6 million in 2011.
Industrial vacancy rates are likely to decline from 14.1% in the second quarter of 2010 to 13.7% in the second quarter of 2011, and then continue to ease modestly as the year progresses.
The areas with the lowest industrial vacancy rates in the second quarter were Los Angeles, San Francisco, and Kansas City, with vacancies ranging between 8 and 11%.
Annual industrial rent is estimated to drop 5.4% this year, and to decline another 4.7% in 2011. Net absorption of industrial space in 58 markets tracked is seen at a negative 31.7 million square feet this year and a positive 157.2 million in 2011.
Retail vacancy rates should hold steady at 13.1% in both the second quarter of this year and in the second quarter of 2011, with a level pattern for most of next year.
Markets with the lowest retail vacancy rates in the second quarter include San Francisco, Honolulu, and Miami, with vacancies of 7 to 8%. Average retail rent is expected to decline 2.6% in 2010 and then flatten out, slipping 0.1% next year. Net absorption of retail space in 53 tracked markets is forecast to be a negative 2.3 million square feet this year and then a positive 6.4 million in 2011.
The apartment rental market – multifamily housing – is benefiting from modestly higher demand. Multifamily vacancy rates are likely to decline from 6.0% in the second quarter of this year to 5.6% in the second quarter of 2011.
Areas with the lowest multifamily vacancy rates in the second quarter include San Jose, Calif.; Pittsburgh; and Philadelphia, with vacancies of less than 4%.
With additions from new construction, average rent should slip 0.6% in 2010, and then hold even in 2011. Multifamily net absorption is expected to be 105,200 units in 59 tracked metro areas this year, and another 138,000 in 2011.
Posted by Scott R. Lodde