PCG Northeast Ohio Newsletter - February/March 2010
Content
P C G|no rth e aN O R T H E Ai oO H I O st oh S T
n e w s l e tte r
P R IVATE CLIEN T GRO U P
february/MarCh 2010
M ON TH Ly N Ew SLETTER
c a p i t a l m a r k e t s | p r i v a t e c l i e n t G r o u pRUA Ry 2010 FEb
www.cbre.com/pcgnortheastohio What Should We expect From commercial real eState debt marketS in 2010? Now that the commercial real estate debt markets have begun what appears to be a long, extended process of de-leveraging, CbRE Economic Advisors recently turned their attention toward thinking about some broad industry trends and how debt markets may evolve. Here are their thoughts on six key trends that are likely to play an important role in shaping transaction activity over the next several months.
key rateS
2/19/10 Tax-Exempt AAA Rated
(10 year GbA rate)
Month Ago 3.28% 3.25% 2.45% 3.70% 0.25%
year Ago 3.25% 1.80% 2.76% 1.25%
3.12% 3.25% 2.45% 3.78% 0.25%
Prime 5-yr US Treas. 10-yr US Treas. LIbOR 3-Mo.
MORE DISTRESS - while this trend may appear quite obvious to market participants, expect some subtleties as to how distressed Source: bloomberg and wall Street Journal assets come to market, and what types of assets comprise the distressed pipeline in 2010. with banks reluctant to take losses 2009: A Terrible to be the primary on performing assets, extensions will continue Year for the Record Books cap rate corner US Search maturing loan roperty for resolution of lenders’Results 21, 2010 in the avenue Trade Capital Trends - January portfolios short term. Expect some opportunistic investors to remain frustrated national trenDs on PriCinG over the | Cleveland which All Typesrelatively slow pace |atUS distressed assets migrate into Transactions c For those who thought 2008 was a transactions, especially on higher quality assets. terrible year in the annals
of US commercial property investing – and who didn’t think so? - 3 (MARKETS) Continued on page2009’s results put a surprising glow on such bleak memories. With $51.9 billion in investment sales showing a 64% retreat from 2008’s $146 billion - and a 90% plunge from 2007’s $522 billion - 2009 eveloper Survey sight. cbre 2010 mob i nveStor/ d limped ingloriously out of
provideS poSitive outlook The 2010 CB Richard Ellis Medical Office Investor/Developerfooting than clear that the New Year is beginning on better Survey was sent to 596 of the most For every property type, theinvestors, did the old one. influential medical office final quarter of 2009 estate an upturn, trusts vibrant one. country, developers and realmarked investment if not a(REITs) in theBut the direction clearly is more positive with 120 taking the time to respond. than one year ago, when the bottom
was nowhere in sight. Except that, with the year just past coming into full view, it is
Total Volume (in mil.) to simultaneously find both the stomach and the capital to $159.7 $424.5
This year’s survey contained eighteen key questions about the state of the medical Even the most glaring no-show in 2009, the entity-level deal, office investor/developer market. Some of the more showed signs of life toward the outlook for medical interesting findings in the survey includedyear-end, when Simon Property Group announced a pending expect, values for core office capitalization rates. As most would $2.2 billion acquisition. And portfolio “A” medical office buildings (MOBs), still product, namely class transactions were a factor in really just one sector – retail – where Cleveland almost a third of total remain at cyclical highs withthey made uprespondents reporting volume; 87% of the that overall, there were fewer than $10 billion in portfolio deals. cap rates are below 8.50% and 37% of Reported the respondents reporting Past 12 months For the most part, 2009 was the year of the one-off, when Newly Offered that cap rates for core product are Closed/Contract even those investors below 8.00%. with larger horizons were rarely able
US Total
Reported Closed/Contract Total Volume (in mil.) # of Properties Total sf Price/ sf Range (in mil.) Avg. Property $ (in mil.) Wghtd. Cap Rate $61,511.4 3,754 1,082,465,562 $68.7 $0.5-$590.3 $16.4 7.61% 7.78%
In contrast, there continues to be in wide spread 16 cap rates between 31 in take down assets a quantity. # of Properties care medical product and class “b” facilities, with over 82% of the Total respondents reporting that cap rates are1,943,541 sf 3,971,913 As the year dragged on andabove 9.00% and 36% of the waning tide of investment Price/the respondents reporting that cap rates are over 9.50% for class in just sf $88.9 $137.6 sales volume began its slow turn, cap rates continued “b” off campusone direction: up. Only apartment caps climbed fewer than product.
$3.7-$34.0 $5.1-$50.0
Range (in mil.)
100 basis points year-over-year, but then, only apartment Avg. Property $ (in on page 4 (SURVEy) $10.0 $13.7 Continued mil.)investors had government-sponsored enterprises Fannie and Freddie pitching in on financing. Wghtd. Cap Rate 8.59% 8.09%
Mean Cap Rate See hiGhliGhtS
7.86% Mean Cap Rate From the 2010 mortGaGe bankerS 8.42% In sales volume for all property types, there was an eerie uniformity in Real rate of Analytics vs. 2008 sales levels, as the Capital descent Source: aSSociation conFerence on paGe by more than 60%. CBD office, usually the king of subtypes, fell the hardest for any 4. subtype after subtype plunged
Page 1
sector with meaningful volume, down 78%, while humble strip centers turned out to be the jack of all trades: strips were down a relatively bearable 36% as the only subtype to endure a year-over-year decline of less than 50%.
P C G|no rth e a st oh i o
n e w sle tte r
www.cbre.com/pcgnortheastohio
february/MarCh 2010
market SnapShot
oFFice
Market Downtown Cleveland East Lorain County Medina County Northeast South Southeast Southwest Summit County west Totals Existing Inventory # buildings 368 352 488 375 446 322 150 456 1,535 431 4,923 Total RbA 42,658,451 13,762,585 5,451,126 2,978,241 6,994,420 9,903,202 3,033,104 7,790,742 27,452,786 9,099,020 129,123,677 Direct SF 5,232,400 1,416,614 514,170 267,837 962,027 1,237,812 300,475 683,880 2,213,466 1,154,366 13,983,047 Vacancy Total SF 5,374,738 1,459,808 514,170 269,798 970,992 1,290,877 318,208 686,450 2,430,560 1,156,368 14,471,969 Vacancy % 12.6% 10.6% 9.4% 9.1% 13.9% 13.0% 10.5% 8.8% 8.9% 12.7% 10.95% yTD Net Absorption (149,662) (93,412) (30,150) 80,224 (54,839) (27,909) (54,617) 28,094 (148,694) (90,313) (541,278) yTD Deliveries 0 155,583 0 50,200 1,300 0 0 0 162,471 26,000 395,554 Under Construction SF 525,000 0 0 82,240 0 0 0 0 32,600 0 639,840 Quoted Rates $17.32 $18.37 $16.03 $16.36 $15.42 $18.76 $18.99 $16.97 $15.89 $15.90 $18.70
induStrial
Market Akron Ind Downtown Ind East Ind Medina County Ind Northeast Ind Outlying Lorain Ind South Ind Southeast Ind Southwest Ind west Ind Totals
Existing Inventory # buildings 1,528 805 174 505 1,625 156 823 1,755 1,070 1,051 9,492 Total RbA 61,809,261 29,076,213 9,435,450 17,614,791 66,166,273 6,321,288 35,268,954 89,962,367 54,298,456 41,526,867 411,479,920 Direct SF 4,710,454 2,610,682 733,206 1,640,794 5,405,065 2,709,304 2,043,847 7,013,056 3,580,847 2,355,899 32,803,154
Vacancy Total SF 4,899,610 2,610,682 772,416 1,640,794 5,413,830 2,709,304 2,085,401 7,144,606 3,580,847 2,359,499 33,216,989 Vacancy % 7.9% 9.0% 8.2% 9.3% 8.2% 42.9% 5.9% 7.9% 6.6% 5.7% 11.16%
yTD Net Absorption (494,754) (125,184) (79,288) (448,554) (449,798) (70,131) (227,725) (480,572) (666,517) (528,208) (3,570,731)
yTD Deliveries 0 0 0 0 5,280 0 0 0 28,500 0 33,780
Under Construction SF 0 0 0 7,919 0 0 14,000 0 0 0 21,919
Quoted Rates $3.37 $4.10 $6.87 $4.22 $3.17 $2.36 $4.86 $4.28 $4.46 $3.46 $4.12
retail
Market Downtown Cleveland East Lorain County Medina County Northeast South Southeast Southwest Summit County west Totals
Existing Inventory # buildings 308 584 1201 802 1196 526 187 1152 3020 771 9,747 Total RbA 7,381,232 12,296,161 15,729,604 9,970,745 22,927,735 11,581,047 3,873,263 22,489,260 37,090,595 15,311,571 158,651,213 Direct SF 321,917 806,280 1,379,095 683,196 2,456,164 1,169,528 579,752 1,624,287 2,697,872 886,181 12,604,272
Vacancy Total SF 326,152 806,280 1,422,575 696,996 2,593,992 1,244,848 673,267 1,667,352 2,925,232 964,348 13,321,042 Vacancy % 4.4% 6.6% 9.0% 7.0% 11.3% 10.7% 17.4% 7.4% 7.9% 6.3% 8.8%
yTD Net Absorption 40,766 86,094 8,743 (87,185) (261,573) (484,558) (44,806) 98,793 (553,935) (19,985) (1,217,646)
yTD Deliveries 71,280 0 201,296 0 111,400 0 0 397,512 49,351 0 830,839
Under Construction SF 78,083 0 52,705 0 0 10,000 0 24,800 20,000 0 185,588
Quoted Rates $14.32 $12.98 $9.55 $12.10 $9.99 $8.31 $14.08 $11.37 $9.75 $12.70 $11.52
Page 2
Source: CbRE, CoStar Group, Inc.
P C G| no rth e a st oh i o
n e w sl e tte r
www.cbre.com/pcgnortheastohio Continued from page 1 (MARKETS) Over the past year, distressed assets increased markedly, reaching some $172 billion at the end of 2009-a fourfold increase from year-earlier levels, according to Real Capital Analytics. Undoubtedly, the pipeline of distressed loans will see rapid growth, particularly in the development and hotel sectors, with income and occupancy shortfalls causing some bank lenders to finally throw in the towel, accept losses, and move to restore the health of their balance sheets. Distressed hotel deals will also continue to rise sharply as the industry struggles to right itself after an historical decline in revenue over the past year. A gradual recovery in hotel fundamentals by late-2010 will help to stem the tide of distress in the sector. Also, expect plenty of small-loan bank deals, busted developments and nonstandard property types that will require difficult valuation and resolution processes. “MIDDLE OF THE FAIRwAy” DEALS - The return of life companies, private funds, mortgage REITS and CMbS issuers will help support lending to high-quality sponsors on high-quality assets with stable leasing profiles. Growing competition for larger deals with high-quality sponsors could result in a number of larger, syndicated deals among bank and life companies. Deals with significant sponsor or leasing issues will continue to lack lending opportunities and will face significant restructuring challenges. A TwO-TIERED DEbT MARKET - At the same time, expect growing bifurcation of the real estate capital market, consisting of: (i) low-leverage capital becoming more plentiful from the above sources, which will compete for business with the best sponsors and (ii) distressed deals in which opportunistic funds take advantage of deeply discounted note sales or restructuring situations on troubled assets. It is likely that loan pricing will continue its trend of gradual improvement for the top tier assets as more capital flows into the sector; meanwhile, pricing expectations for distressed assets will remain highly discounted and uncertain. MULTIFAMILy LIQUIDITy - Tracking the decline in sales transaction and refinances, agency multifamily originations were off by more than 30% for the year ended in the third quarter of 2009, according to the MbA loan origination survey. However, this decline was not as dramatic as the more than 50% decline registered for all commercial and multifamily lenders over this time period. Expect the multifamily sector to continue to benefit from GSE lending. There is the risk, however, that lending volume may suffer under the weight of higher defaults and worsening credit issues, as well as eventual Page 3
february/MarCh 2010
regulatory moves to reduce the overall size of the agencies’ investment portfolios. CONSERVATIVE UNDERwRITING - Conservative underwriting is here to stay for the time being-a reflection of the relative lack of capital and the prospect that many property leases will rollover into markets where rents and occupancies have declined significantly. However, as lenders see that markets are beginning to bottom out and the prospect of recovery in the real estate market takes hold, look for average loan-to-value ratios to eventually increase to a 70% LTV standard. First mortgage loans will require 25- to 30-year amortization terms, significant rollover escrows, and cash management features. MORE CMbS DEALS - In late 2009, three single-borrower CMBS deals came to market, the first new issue deals since early 2008. Look for several more small-sized, low-leverage, single-borrower CMbS deals to come to market in 2010. As warehousing and hedging risks are gradually resolved, expect issuers to dip into the securitization market with larger multi-borrower deals. CMbS loans will remain conservatively sized at 50-60% LTV, leaving little room for rating agency interpretation over sizing AAA-rated bond proceeds. For the market to expand to higher levels of leverage, investors are likely to require higher levels of confidence regarding the rating agency model, the alignment of interest among various parties to the securitization, and a consensus that real estate fundamentals are on the mend. In particular, investors will need to have more confidence that loan originators have significant funds at risk, or “skin in the game”. with improving levels of price discovery for low-leverage deals, expect financing under the Term Asset-Backed Securities Loan Facility (“TALF”) to become less relevant for successful deal execution. The TALF program for new issue CMbS, which is scheduled to expire at the end of June, provides low-cost financing to buyers of AAA-rated CMBS. After successfully re-starting the new issue market, the number of future TALF trades may be rather slim over the next few months. However, the program will continue to provide benefits through effectively providing insurance or a “backstop” against adverse changes in pricing and widening loan spreads. For more insights from CbRE Economic Advisors, visit them at www.cbre-ea.com.
2-5 years (30%), followed by 5-7 years (20%). Of those that selected over 10-years for their hold period, 51%
february/MarCh ofce were P C G|no rth e a st oh i o health care REITs and 27% were medical2010
n e w sle tte r
www.cbre.com/pcgnortheastohio * Continued from page 1 (SURVEy) Pricing should hold steady as demand is expected to outweigh supply in 2010 with 52% of the survey respondents reporting that available medical office product for purchase (supply) will be the same as it was in 2009, while 55% of the survey respondents reporting that the amount of When survey respondents were asked howhigher were investors looking to purchase (demand) will be they than 2009. nancing medical ofce buildings, bank debt ranked
developers.
What is the average hold time frame for your medical ofce investments? What is the average hold time frame for your medical
office investments?
33%
30% 20% 15%
% of Respondents
RETURN REQUIREMENTS
2%
It’s not surprising that the results for a “market”
as number one, followed byparticipating life companies, debt from in a webinar For more information on
review of followed bythe survey, are using all cash from the funds rms that please contact Steve Latkovic at [email protected] or 216-363-6418. Some of the questions are answered below: on their balance sheet.
capitalization rate for medical ofce in 2010 varied
widely10-years 7-10 yearson product type. The majority o Over depending 5-7 years 2-5 years Under 2 years
survey respondents (87%) indicated that a “market”
What types of nancing sources are you utilizing?
6% Bank Debt 9%
What
types of funding sources are you utilizing?
capitalization rate for team “A” on-campus produc cbre’S debt and equity Class provideS inSiGhtS From the 2010 mortGaGe bankerS aSSociation would be conFerence below 8.50% and 37% of the survey
3% 2% Survey respondents also indicated a wide spread in their Life Companies 32% target all-cash internal rate of return (IRR) requirements All Cash
Credit Tenant Lease Financing % on-campus product, 42% of the survey respondents Revolving Line of Credit
for 2010 depending on product type. For Class “A” indicated that their target all-cash IRR for 2010 is
Other 16% survey respondents indicated that their target all-cash 22% IRR for Class “B” off-campus product Synthetic Lease Financing for 2010 is above
Bond Financing between 10.00% and 12.49%. In contrast, 39% of the
17.50%
What is your target internatl rate What is your target Internal Rate of of return (all-cash) Return (All-Cash) requirement for 2010? requirement for 2010?
14% time for 8% respondents’ medical24% ce investments, the of 90% 13% 70% 60% 10% Above 20.00%
6%
10%
10% 12% 80% over 10-years ranked number one (33%), followed by 15% 12% 20% 2-5 years (30%), followed by 5-7 years (20%). Of those 17.50% - 20.00% 15.00% - 17.49% 10.00% - 12.49% 7.50% - 9.99% 12% 2% frame for Class B OffCampus Below 7.50%
that selected over 10-years for their hold period, 51% 31% 50%
29% 42% were health care REITs and 27% were medical ofce 40% 12.50% - 14.99% 30% developers. 20% 10% 21% 27% 8% 23% 22% 24%
6% 0% What is the average hold time Class A OnClass ofce investments?A Off- Class B OnCampus Campus Campus
your medical
Page 4
33%
30%
% of Respondents
While there was a wide variation for the average hold100%
• The Debt Capital Markets are back, Las Vegas is not rate would be below 8.00% for the same • Liquidity has returned with Life Cos increasing allocationsproduct Demand should outweigh market; material increase that and Securitized lenders of those surveyed indicated in of a In contrast, 82% back in supply in 2010 with 52% effective capacity the survey respondents reporting that available medical “market” capitalization rate for Class “B” off-campus • Lenders have overcome their fear of commercial real estate, ofce product for purchase (supply) will be of same as still careful but working above 9.00% and 15%the the survey product would be to compete • Annuity $in 2009, while 55% of the survey respondents liquidity accounts it was are flooding lendersthat a “market” capitalization respondents indicated • 60-65% Leverage is the new 50-55% LTV reporting that above 10.00%of the same select • Up to 75% LTV bepossible on at least forinvestorsin looking to rate would is the amount some assets product. markets; as well as recapitalization, mezzanine, equity, hope purchase (demand) will be higher than 2009. notes, basis plays, etc • 6% Loan Coupon is the new 8% Wherewillyou is increasingly available, across the for medical What do be see investment supply/demand for • Positive leverage a “market” capitalization rate asset range inofce in 2010 compared to 2009? medical 2010? ofce • Competition for multi-family loans heats up as Life Co pricing narrows gap with agency terms 55% 100% 0% 52% 3% 3% 5% • The valuation cycle is at or past bottom, at least for better 6% 6% 4% 15% 90% quality assets; but there is a divide between high & low 39% 38% 6% 14% 17% quality 80% Above 10% 21% Higher • The residential market bottomed last year and is now 70% 9.50% - 9.99% favorably priced based on relationship to median income Same 50% 60% 10% • The cycle has moved past Fear, to38% Capital and6% then 9.00% - 9.49% 45% Lower 50% Fundamentals, should have a longer than typical run 8.50% - 8.99% (10 years or more) 46% 40% 8.00% Supply Demand • banks are beginning to break the extension pattern, forcing - 8.49% 30% borrowers to mark assets with sale or refinance on today’s - 7.99% 7.50% 20% reality 35% 34% 30% Below • This remains an orderly process, with abundant acquisition 7.50% 16% 10% capital succeeding accommodating lenders as a limit on 2% 2% 2% 2% 1% 1% 0% 0% 0% Over two thirds of survey respondents (70%) project price weakness Class A this Class B event Class B Off• The tone Class A optimism atOff- year’s Onand Oncould not medical ofce lease rates for 2010 to increase between Campus Campus Campus Campus possibly have improved more than it did compared to last zero year and two percent, while 10% of survey respondents
SUPPLY VS. DEMAND
respondents indicated that a “market” capitalization
MARKET FUNDAMENTALS
believe that medical ofce lease rates will experience
P C G| no rth e a st oh i o
n e w s l e tte r
www.cbre.com/pcgnortheastohio
february/MarCh 2010
recent inveStment tranSactionS
OFFICE Property Name Point 6 RETAIL Property Name Gabriel Brothers Plaza Shaker Towne Center Snow View Plaza Discount Drug Mart Discount Drug Mart City, State Kent, OH Shaker Heights, OH Parma, OH Dover, OH Carrollton, OH Sale Price $4,500,000 $17,800,000 $9,450,000 $3,243,000 $3,596,000 Sale Date December 2009 December 2009 December 2009 December 2009 January 2010 CAP rate: 8.8% (est.) CAP rate: 8.9% (est.) Additional Information CAP rate: 9.7% (est.) City, State westlake, OH Sale Price $2,000,000 Sale Date December 2009 Additional Information
Featured property | For Sale
Panera Plaza 2070-2074 walker Lake Road Ontario, OH 44862 • Potential of 20%+IRR for the
entire project
recent team SaleS
200 East Market Street Akron, OH 44308 • Long term acute care
hospital (LTACH) anchored by Select Medical.
• From marketing to close in
100 days. Property type: buyer: Purchase price: Building size: Deal closed: Medical Health Care REIT $20,500,000 54,450 SF December 2009
Property price: CAP rate: Current NOI:
*On in-place income
$2,450,000 8.65%* $185,984
Scott Pollock and Steve Latkovic specialize in advising clients in the disposition and acquisition of income-producing properties throughout Northeastern Ohio. we deliver our clients a seamless transaction to achieve optimal pricing and maximum returns in today’s ever changing real estate market. Additionally, services go beyond finding a buyer as we employ a due-diligence coordination team in addition to offering exit strategy planning. These services provide the highest surety of a flawless sale with minimal distraction to the seller and their tenants. For information on PCG Northeast Ohio, please visit our website at: www.cbre.com/pcgnortheastohio For up to the minute market information, you can visit our blog at: commercialinsider.blogspot.com
for more information, please contact:
: : Scott pollock Private Client Group 216.363.6467 [email protected] : : Steve latkovic, esq., cpa Private Client Group 216.363.6418 [email protected]
Cb Richard Ellis| 200 PublicSquare | Suite 2560 | Cleveland, OH 44114 | www.cbre.com/pcgnortheastohio
© 2010 CB Richard Ellis, Inc. This information has been obtained from sources believed reliable. We have not verified it and make no guarantee, warranty or representation about it. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the property. You and your advisors should conduct a careful, independent investigation of the property to determine to your satisfaction the suitability of the property for your needs. Licensed Real Estate Broker
Page 5
n e w s l e tte r
P R IVATE CLIEN T GRO U P
february/MarCh 2010
M ON TH Ly N Ew SLETTER
c a p i t a l m a r k e t s | p r i v a t e c l i e n t G r o u pRUA Ry 2010 FEb
www.cbre.com/pcgnortheastohio What Should We expect From commercial real eState debt marketS in 2010? Now that the commercial real estate debt markets have begun what appears to be a long, extended process of de-leveraging, CbRE Economic Advisors recently turned their attention toward thinking about some broad industry trends and how debt markets may evolve. Here are their thoughts on six key trends that are likely to play an important role in shaping transaction activity over the next several months.
key rateS
2/19/10 Tax-Exempt AAA Rated
(10 year GbA rate)
Month Ago 3.28% 3.25% 2.45% 3.70% 0.25%
year Ago 3.25% 1.80% 2.76% 1.25%
3.12% 3.25% 2.45% 3.78% 0.25%
Prime 5-yr US Treas. 10-yr US Treas. LIbOR 3-Mo.
MORE DISTRESS - while this trend may appear quite obvious to market participants, expect some subtleties as to how distressed Source: bloomberg and wall Street Journal assets come to market, and what types of assets comprise the distressed pipeline in 2010. with banks reluctant to take losses 2009: A Terrible to be the primary on performing assets, extensions will continue Year for the Record Books cap rate corner US Search maturing loan roperty for resolution of lenders’Results 21, 2010 in the avenue Trade Capital Trends - January portfolios short term. Expect some opportunistic investors to remain frustrated national trenDs on PriCinG over the | Cleveland which All Typesrelatively slow pace |atUS distressed assets migrate into Transactions c For those who thought 2008 was a transactions, especially on higher quality assets. terrible year in the annals
of US commercial property investing – and who didn’t think so? - 3 (MARKETS) Continued on page2009’s results put a surprising glow on such bleak memories. With $51.9 billion in investment sales showing a 64% retreat from 2008’s $146 billion - and a 90% plunge from 2007’s $522 billion - 2009 eveloper Survey sight. cbre 2010 mob i nveStor/ d limped ingloriously out of
provideS poSitive outlook The 2010 CB Richard Ellis Medical Office Investor/Developerfooting than clear that the New Year is beginning on better Survey was sent to 596 of the most For every property type, theinvestors, did the old one. influential medical office final quarter of 2009 estate an upturn, trusts vibrant one. country, developers and realmarked investment if not a(REITs) in theBut the direction clearly is more positive with 120 taking the time to respond. than one year ago, when the bottom
was nowhere in sight. Except that, with the year just past coming into full view, it is
Total Volume (in mil.) to simultaneously find both the stomach and the capital to $159.7 $424.5
This year’s survey contained eighteen key questions about the state of the medical Even the most glaring no-show in 2009, the entity-level deal, office investor/developer market. Some of the more showed signs of life toward the outlook for medical interesting findings in the survey includedyear-end, when Simon Property Group announced a pending expect, values for core office capitalization rates. As most would $2.2 billion acquisition. And portfolio “A” medical office buildings (MOBs), still product, namely class transactions were a factor in really just one sector – retail – where Cleveland almost a third of total remain at cyclical highs withthey made uprespondents reporting volume; 87% of the that overall, there were fewer than $10 billion in portfolio deals. cap rates are below 8.50% and 37% of Reported the respondents reporting Past 12 months For the most part, 2009 was the year of the one-off, when Newly Offered that cap rates for core product are Closed/Contract even those investors below 8.00%. with larger horizons were rarely able
US Total
Reported Closed/Contract Total Volume (in mil.) # of Properties Total sf Price/ sf Range (in mil.) Avg. Property $ (in mil.) Wghtd. Cap Rate $61,511.4 3,754 1,082,465,562 $68.7 $0.5-$590.3 $16.4 7.61% 7.78%
In contrast, there continues to be in wide spread 16 cap rates between 31 in take down assets a quantity. # of Properties care medical product and class “b” facilities, with over 82% of the Total respondents reporting that cap rates are1,943,541 sf 3,971,913 As the year dragged on andabove 9.00% and 36% of the waning tide of investment Price/the respondents reporting that cap rates are over 9.50% for class in just sf $88.9 $137.6 sales volume began its slow turn, cap rates continued “b” off campusone direction: up. Only apartment caps climbed fewer than product.
$3.7-$34.0 $5.1-$50.0
Range (in mil.)
100 basis points year-over-year, but then, only apartment Avg. Property $ (in on page 4 (SURVEy) $10.0 $13.7 Continued mil.)investors had government-sponsored enterprises Fannie and Freddie pitching in on financing. Wghtd. Cap Rate 8.59% 8.09%
Mean Cap Rate See hiGhliGhtS
7.86% Mean Cap Rate From the 2010 mortGaGe bankerS 8.42% In sales volume for all property types, there was an eerie uniformity in Real rate of Analytics vs. 2008 sales levels, as the Capital descent Source: aSSociation conFerence on paGe by more than 60%. CBD office, usually the king of subtypes, fell the hardest for any 4. subtype after subtype plunged
Page 1
sector with meaningful volume, down 78%, while humble strip centers turned out to be the jack of all trades: strips were down a relatively bearable 36% as the only subtype to endure a year-over-year decline of less than 50%.
P C G|no rth e a st oh i o
n e w sle tte r
www.cbre.com/pcgnortheastohio
february/MarCh 2010
market SnapShot
oFFice
Market Downtown Cleveland East Lorain County Medina County Northeast South Southeast Southwest Summit County west Totals Existing Inventory # buildings 368 352 488 375 446 322 150 456 1,535 431 4,923 Total RbA 42,658,451 13,762,585 5,451,126 2,978,241 6,994,420 9,903,202 3,033,104 7,790,742 27,452,786 9,099,020 129,123,677 Direct SF 5,232,400 1,416,614 514,170 267,837 962,027 1,237,812 300,475 683,880 2,213,466 1,154,366 13,983,047 Vacancy Total SF 5,374,738 1,459,808 514,170 269,798 970,992 1,290,877 318,208 686,450 2,430,560 1,156,368 14,471,969 Vacancy % 12.6% 10.6% 9.4% 9.1% 13.9% 13.0% 10.5% 8.8% 8.9% 12.7% 10.95% yTD Net Absorption (149,662) (93,412) (30,150) 80,224 (54,839) (27,909) (54,617) 28,094 (148,694) (90,313) (541,278) yTD Deliveries 0 155,583 0 50,200 1,300 0 0 0 162,471 26,000 395,554 Under Construction SF 525,000 0 0 82,240 0 0 0 0 32,600 0 639,840 Quoted Rates $17.32 $18.37 $16.03 $16.36 $15.42 $18.76 $18.99 $16.97 $15.89 $15.90 $18.70
induStrial
Market Akron Ind Downtown Ind East Ind Medina County Ind Northeast Ind Outlying Lorain Ind South Ind Southeast Ind Southwest Ind west Ind Totals
Existing Inventory # buildings 1,528 805 174 505 1,625 156 823 1,755 1,070 1,051 9,492 Total RbA 61,809,261 29,076,213 9,435,450 17,614,791 66,166,273 6,321,288 35,268,954 89,962,367 54,298,456 41,526,867 411,479,920 Direct SF 4,710,454 2,610,682 733,206 1,640,794 5,405,065 2,709,304 2,043,847 7,013,056 3,580,847 2,355,899 32,803,154
Vacancy Total SF 4,899,610 2,610,682 772,416 1,640,794 5,413,830 2,709,304 2,085,401 7,144,606 3,580,847 2,359,499 33,216,989 Vacancy % 7.9% 9.0% 8.2% 9.3% 8.2% 42.9% 5.9% 7.9% 6.6% 5.7% 11.16%
yTD Net Absorption (494,754) (125,184) (79,288) (448,554) (449,798) (70,131) (227,725) (480,572) (666,517) (528,208) (3,570,731)
yTD Deliveries 0 0 0 0 5,280 0 0 0 28,500 0 33,780
Under Construction SF 0 0 0 7,919 0 0 14,000 0 0 0 21,919
Quoted Rates $3.37 $4.10 $6.87 $4.22 $3.17 $2.36 $4.86 $4.28 $4.46 $3.46 $4.12
retail
Market Downtown Cleveland East Lorain County Medina County Northeast South Southeast Southwest Summit County west Totals
Existing Inventory # buildings 308 584 1201 802 1196 526 187 1152 3020 771 9,747 Total RbA 7,381,232 12,296,161 15,729,604 9,970,745 22,927,735 11,581,047 3,873,263 22,489,260 37,090,595 15,311,571 158,651,213 Direct SF 321,917 806,280 1,379,095 683,196 2,456,164 1,169,528 579,752 1,624,287 2,697,872 886,181 12,604,272
Vacancy Total SF 326,152 806,280 1,422,575 696,996 2,593,992 1,244,848 673,267 1,667,352 2,925,232 964,348 13,321,042 Vacancy % 4.4% 6.6% 9.0% 7.0% 11.3% 10.7% 17.4% 7.4% 7.9% 6.3% 8.8%
yTD Net Absorption 40,766 86,094 8,743 (87,185) (261,573) (484,558) (44,806) 98,793 (553,935) (19,985) (1,217,646)
yTD Deliveries 71,280 0 201,296 0 111,400 0 0 397,512 49,351 0 830,839
Under Construction SF 78,083 0 52,705 0 0 10,000 0 24,800 20,000 0 185,588
Quoted Rates $14.32 $12.98 $9.55 $12.10 $9.99 $8.31 $14.08 $11.37 $9.75 $12.70 $11.52
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Source: CbRE, CoStar Group, Inc.
P C G| no rth e a st oh i o
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www.cbre.com/pcgnortheastohio Continued from page 1 (MARKETS) Over the past year, distressed assets increased markedly, reaching some $172 billion at the end of 2009-a fourfold increase from year-earlier levels, according to Real Capital Analytics. Undoubtedly, the pipeline of distressed loans will see rapid growth, particularly in the development and hotel sectors, with income and occupancy shortfalls causing some bank lenders to finally throw in the towel, accept losses, and move to restore the health of their balance sheets. Distressed hotel deals will also continue to rise sharply as the industry struggles to right itself after an historical decline in revenue over the past year. A gradual recovery in hotel fundamentals by late-2010 will help to stem the tide of distress in the sector. Also, expect plenty of small-loan bank deals, busted developments and nonstandard property types that will require difficult valuation and resolution processes. “MIDDLE OF THE FAIRwAy” DEALS - The return of life companies, private funds, mortgage REITS and CMbS issuers will help support lending to high-quality sponsors on high-quality assets with stable leasing profiles. Growing competition for larger deals with high-quality sponsors could result in a number of larger, syndicated deals among bank and life companies. Deals with significant sponsor or leasing issues will continue to lack lending opportunities and will face significant restructuring challenges. A TwO-TIERED DEbT MARKET - At the same time, expect growing bifurcation of the real estate capital market, consisting of: (i) low-leverage capital becoming more plentiful from the above sources, which will compete for business with the best sponsors and (ii) distressed deals in which opportunistic funds take advantage of deeply discounted note sales or restructuring situations on troubled assets. It is likely that loan pricing will continue its trend of gradual improvement for the top tier assets as more capital flows into the sector; meanwhile, pricing expectations for distressed assets will remain highly discounted and uncertain. MULTIFAMILy LIQUIDITy - Tracking the decline in sales transaction and refinances, agency multifamily originations were off by more than 30% for the year ended in the third quarter of 2009, according to the MbA loan origination survey. However, this decline was not as dramatic as the more than 50% decline registered for all commercial and multifamily lenders over this time period. Expect the multifamily sector to continue to benefit from GSE lending. There is the risk, however, that lending volume may suffer under the weight of higher defaults and worsening credit issues, as well as eventual Page 3
february/MarCh 2010
regulatory moves to reduce the overall size of the agencies’ investment portfolios. CONSERVATIVE UNDERwRITING - Conservative underwriting is here to stay for the time being-a reflection of the relative lack of capital and the prospect that many property leases will rollover into markets where rents and occupancies have declined significantly. However, as lenders see that markets are beginning to bottom out and the prospect of recovery in the real estate market takes hold, look for average loan-to-value ratios to eventually increase to a 70% LTV standard. First mortgage loans will require 25- to 30-year amortization terms, significant rollover escrows, and cash management features. MORE CMbS DEALS - In late 2009, three single-borrower CMBS deals came to market, the first new issue deals since early 2008. Look for several more small-sized, low-leverage, single-borrower CMbS deals to come to market in 2010. As warehousing and hedging risks are gradually resolved, expect issuers to dip into the securitization market with larger multi-borrower deals. CMbS loans will remain conservatively sized at 50-60% LTV, leaving little room for rating agency interpretation over sizing AAA-rated bond proceeds. For the market to expand to higher levels of leverage, investors are likely to require higher levels of confidence regarding the rating agency model, the alignment of interest among various parties to the securitization, and a consensus that real estate fundamentals are on the mend. In particular, investors will need to have more confidence that loan originators have significant funds at risk, or “skin in the game”. with improving levels of price discovery for low-leverage deals, expect financing under the Term Asset-Backed Securities Loan Facility (“TALF”) to become less relevant for successful deal execution. The TALF program for new issue CMbS, which is scheduled to expire at the end of June, provides low-cost financing to buyers of AAA-rated CMBS. After successfully re-starting the new issue market, the number of future TALF trades may be rather slim over the next few months. However, the program will continue to provide benefits through effectively providing insurance or a “backstop” against adverse changes in pricing and widening loan spreads. For more insights from CbRE Economic Advisors, visit them at www.cbre-ea.com.
2-5 years (30%), followed by 5-7 years (20%). Of those that selected over 10-years for their hold period, 51%
february/MarCh ofce were P C G|no rth e a st oh i o health care REITs and 27% were medical2010
n e w sle tte r
www.cbre.com/pcgnortheastohio * Continued from page 1 (SURVEy) Pricing should hold steady as demand is expected to outweigh supply in 2010 with 52% of the survey respondents reporting that available medical office product for purchase (supply) will be the same as it was in 2009, while 55% of the survey respondents reporting that the amount of When survey respondents were asked howhigher were investors looking to purchase (demand) will be they than 2009. nancing medical ofce buildings, bank debt ranked
developers.
What is the average hold time frame for your medical ofce investments? What is the average hold time frame for your medical
office investments?
33%
30% 20% 15%
% of Respondents
RETURN REQUIREMENTS
2%
It’s not surprising that the results for a “market”
as number one, followed byparticipating life companies, debt from in a webinar For more information on
review of followed bythe survey, are using all cash from the funds rms that please contact Steve Latkovic at [email protected] or 216-363-6418. Some of the questions are answered below: on their balance sheet.
capitalization rate for medical ofce in 2010 varied
widely10-years 7-10 yearson product type. The majority o Over depending 5-7 years 2-5 years Under 2 years
survey respondents (87%) indicated that a “market”
What types of nancing sources are you utilizing?
6% Bank Debt 9%
What
types of funding sources are you utilizing?
capitalization rate for team “A” on-campus produc cbre’S debt and equity Class provideS inSiGhtS From the 2010 mortGaGe bankerS aSSociation would be conFerence below 8.50% and 37% of the survey
3% 2% Survey respondents also indicated a wide spread in their Life Companies 32% target all-cash internal rate of return (IRR) requirements All Cash
Credit Tenant Lease Financing % on-campus product, 42% of the survey respondents Revolving Line of Credit
for 2010 depending on product type. For Class “A” indicated that their target all-cash IRR for 2010 is
Other 16% survey respondents indicated that their target all-cash 22% IRR for Class “B” off-campus product Synthetic Lease Financing for 2010 is above
Bond Financing between 10.00% and 12.49%. In contrast, 39% of the
17.50%
What is your target internatl rate What is your target Internal Rate of of return (all-cash) Return (All-Cash) requirement for 2010? requirement for 2010?
14% time for 8% respondents’ medical24% ce investments, the of 90% 13% 70% 60% 10% Above 20.00%
6%
10%
10% 12% 80% over 10-years ranked number one (33%), followed by 15% 12% 20% 2-5 years (30%), followed by 5-7 years (20%). Of those 17.50% - 20.00% 15.00% - 17.49% 10.00% - 12.49% 7.50% - 9.99% 12% 2% frame for Class B OffCampus Below 7.50%
that selected over 10-years for their hold period, 51% 31% 50%
29% 42% were health care REITs and 27% were medical ofce 40% 12.50% - 14.99% 30% developers. 20% 10% 21% 27% 8% 23% 22% 24%
6% 0% What is the average hold time Class A OnClass ofce investments?A Off- Class B OnCampus Campus Campus
your medical
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33%
30%
% of Respondents
While there was a wide variation for the average hold100%
• The Debt Capital Markets are back, Las Vegas is not rate would be below 8.00% for the same • Liquidity has returned with Life Cos increasing allocationsproduct Demand should outweigh market; material increase that and Securitized lenders of those surveyed indicated in of a In contrast, 82% back in supply in 2010 with 52% effective capacity the survey respondents reporting that available medical “market” capitalization rate for Class “B” off-campus • Lenders have overcome their fear of commercial real estate, ofce product for purchase (supply) will be of same as still careful but working above 9.00% and 15%the the survey product would be to compete • Annuity $in 2009, while 55% of the survey respondents liquidity accounts it was are flooding lendersthat a “market” capitalization respondents indicated • 60-65% Leverage is the new 50-55% LTV reporting that above 10.00%of the same select • Up to 75% LTV bepossible on at least forinvestorsin looking to rate would is the amount some assets product. markets; as well as recapitalization, mezzanine, equity, hope purchase (demand) will be higher than 2009. notes, basis plays, etc • 6% Loan Coupon is the new 8% Wherewillyou is increasingly available, across the for medical What do be see investment supply/demand for • Positive leverage a “market” capitalization rate asset range inofce in 2010 compared to 2009? medical 2010? ofce • Competition for multi-family loans heats up as Life Co pricing narrows gap with agency terms 55% 100% 0% 52% 3% 3% 5% • The valuation cycle is at or past bottom, at least for better 6% 6% 4% 15% 90% quality assets; but there is a divide between high & low 39% 38% 6% 14% 17% quality 80% Above 10% 21% Higher • The residential market bottomed last year and is now 70% 9.50% - 9.99% favorably priced based on relationship to median income Same 50% 60% 10% • The cycle has moved past Fear, to38% Capital and6% then 9.00% - 9.49% 45% Lower 50% Fundamentals, should have a longer than typical run 8.50% - 8.99% (10 years or more) 46% 40% 8.00% Supply Demand • banks are beginning to break the extension pattern, forcing - 8.49% 30% borrowers to mark assets with sale or refinance on today’s - 7.99% 7.50% 20% reality 35% 34% 30% Below • This remains an orderly process, with abundant acquisition 7.50% 16% 10% capital succeeding accommodating lenders as a limit on 2% 2% 2% 2% 1% 1% 0% 0% 0% Over two thirds of survey respondents (70%) project price weakness Class A this Class B event Class B Off• The tone Class A optimism atOff- year’s Onand Oncould not medical ofce lease rates for 2010 to increase between Campus Campus Campus Campus possibly have improved more than it did compared to last zero year and two percent, while 10% of survey respondents
SUPPLY VS. DEMAND
respondents indicated that a “market” capitalization
MARKET FUNDAMENTALS
believe that medical ofce lease rates will experience
P C G| no rth e a st oh i o
n e w s l e tte r
www.cbre.com/pcgnortheastohio
february/MarCh 2010
recent inveStment tranSactionS
OFFICE Property Name Point 6 RETAIL Property Name Gabriel Brothers Plaza Shaker Towne Center Snow View Plaza Discount Drug Mart Discount Drug Mart City, State Kent, OH Shaker Heights, OH Parma, OH Dover, OH Carrollton, OH Sale Price $4,500,000 $17,800,000 $9,450,000 $3,243,000 $3,596,000 Sale Date December 2009 December 2009 December 2009 December 2009 January 2010 CAP rate: 8.8% (est.) CAP rate: 8.9% (est.) Additional Information CAP rate: 9.7% (est.) City, State westlake, OH Sale Price $2,000,000 Sale Date December 2009 Additional Information
Featured property | For Sale
Panera Plaza 2070-2074 walker Lake Road Ontario, OH 44862 • Potential of 20%+IRR for the
entire project
recent team SaleS
200 East Market Street Akron, OH 44308 • Long term acute care
hospital (LTACH) anchored by Select Medical.
• From marketing to close in
100 days. Property type: buyer: Purchase price: Building size: Deal closed: Medical Health Care REIT $20,500,000 54,450 SF December 2009
Property price: CAP rate: Current NOI:
*On in-place income
$2,450,000 8.65%* $185,984
Scott Pollock and Steve Latkovic specialize in advising clients in the disposition and acquisition of income-producing properties throughout Northeastern Ohio. we deliver our clients a seamless transaction to achieve optimal pricing and maximum returns in today’s ever changing real estate market. Additionally, services go beyond finding a buyer as we employ a due-diligence coordination team in addition to offering exit strategy planning. These services provide the highest surety of a flawless sale with minimal distraction to the seller and their tenants. For information on PCG Northeast Ohio, please visit our website at: www.cbre.com/pcgnortheastohio For up to the minute market information, you can visit our blog at: commercialinsider.blogspot.com
for more information, please contact:
: : Scott pollock Private Client Group 216.363.6467 [email protected] : : Steve latkovic, esq., cpa Private Client Group 216.363.6418 [email protected]
Cb Richard Ellis| 200 PublicSquare | Suite 2560 | Cleveland, OH 44114 | www.cbre.com/pcgnortheastohio
© 2010 CB Richard Ellis, Inc. This information has been obtained from sources believed reliable. We have not verified it and make no guarantee, warranty or representation about it. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the property. You and your advisors should conduct a careful, independent investigation of the property to determine to your satisfaction the suitability of the property for your needs. Licensed Real Estate Broker
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