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RCA Report
R E A LT O R S ® C o m m e r c i a l A l l i a n c e
Published by the National Association of REALTORS® VOL. 9, ISSUE 2 ● SPRING 2008
IN THIS ISSUE
If you have the cash to cover a higher loan to value, there’s still permanent financing out there.
CHAIR REPORT
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Financial fallout: A tale of two markets
While Wall Street reels from the credit crisis and big-name developers are forced to sell assets they can’t refinance, many Main Street lenders remain ready and willing to make loans on commercial property. The reason behind this dichotomy can be summarized in three words—commercial mortgage-backed securities (CMBS). For the 28 percent of commercial real estate mortgages that are securitized (according to Goldman Sachs), the credit freeze that began with failing subprime home mortgages brought lending to a near standstill in the second half of 2007. But for the second- and third-tier market lenders who seldom securitize their commercial real estate loans, the impact of CMBS declines—at least thus far—has been minor. That’s good news for commercial property owners and commercial practitioners who focus on smaller properties. In the world of trophy buildings and megadeals, it’s a grimmer story.
Wall Street woes
Whatever their specialty, more unites commercial practitioners than separates them.
RCA UPDATE
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CIE ARRIVES NAR acquires ePropertyData and moves forward toward launching a truly national commercial real estate listing site. A F F I L I AT E S S P O T L I G H T IREM celebrates 75 years of serving real estate managers; CCIM Institute launches a new series of courses.
LEGISLATIVE UPDATE
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TA X E S Businesses get a write off and bonus depreciation of leasehold improvements. REMICS The IRS is closer to expanding operational flexibility for owners of properties financed through a conduit. ENERGY House extends credit for improving energy efficiency. SCORECARD Basel II takes effect; federal wetlands control expands.
“The financing world has turned upside down from a year ago,” says Kevin Phelen, CRE, president of Colliers Meredith & Grew in Boston and director of CMG’s Capital Markets Group. In the first half of 2007, conduit loans—which are designed to be syndicated—were up 70 percent over 2006 levels, according to Jamie Woodwell, senior director of commercial/multifamily research for the Mortgage Bankers Association. In the second half of the year, conduit loans were down 30 percent over ’06 levels.
Since conduits accounted for approximately two-thirds of all real estate loans, when they become “a nonfactor,” you’re bound to see problems, says John Doan, managing director for Babson Capital Management Ltd., a member of the MassMutual Financial Group. Although a few conduit deals are still being done, Doan expects total loans in this category to reach only about $100 billion in 2008, compared to $230 billion in 2007. And with spreads as high as 400 basis points over 10-year Treasuries, conduits have become the lender of last resort, says Eric Tupler, vice chairman of CBRE Capital Markets. Another part of the financing problem is that, despite demand, other traditional commercial real estate lenders aren’t stepping up to
See Financial on page 8
C O M M E R C I A L L E A D I N G I N D I C AT O R
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CLI slips again as markets slow
Commercial real estate activity will decline moderately in the months ahead, according to The Commercial Leading Indicator for Brokerage Activity. NAR’s commercial index slipped 0.4 percent in the fourth quarter of 2007, its second straight quarter of decline. However, the index still remains 0.1 point above the results from fourth quarter 2006. Rising unemployment insurance claims and falling durable goods shipments were the key factors in lowering the CLI. A weaker rate of return on investment as measured by the National Association of Real Estate Investment Trusts Price Index was also a factor. The only positive contributors to the index were growth in trade and rising personal income. The latest index suggests reduced business opportunities for commercial real estate practitioners over the next six to nine months.
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T&I BRIEFING CD
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Expert insights on Middle East development, NAR’s new commercial listing platform, and using social media.
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CLI Index Activity
INDUSTRY UPDATE
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95 1990 2007
The CLI, in red, is a leading indicator. The Activity line, in blue, represents actual commercial activity. Decreases in the CLI Index imply upcoming decreases in commercial net absorption and commercial construction.
Social networking is the next new thing, but only a few in commercial real estate are ready to embrace it, our survey finds.
NATIONAL ASSOCIATION OF REALTORS®
The Voice for Real Estate®
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CHAIRReport
Shared goals yield a stronger commercial voice
Whatever their specialty, commercial real estate practitioners share many common goals. We all want to promote and protect the interests and concerns of the commercial property industry against incursions by federal, state, and local governments; to safeguard property rights and the environment while preserving the highest and best use of land; and to foster education and innovative thinking that will ensure the present and future prosperity of the business. The REALTORS® Commercial Alliance provides a unique forum at which commercial specialists and the NAR affiliates to which they belong can come together. RCA can help all commercial practitioners recognize their common interests, find synergies between goals, and pool resources to achieve ever-higher accomplishments. The long-term cooperation between NAR’s Government Affairs division and legislative specialists at NAR’s affiliates is a prime example of how combining forces produces a stronger voice for commercial real estate in Washington. Research initiatives such as the Alien Land Ownership Guide, developed in cooperation with the REALTORS® Land Institute, and the coordination between the NAR’s CLI statistical index and the Society of Industrial and Office REALTORS®’ diffusionbased Commercial Real Estate Index have helped all practitioners gain a greater understanding of the future prospects for commercial real estate. RCA’s support of such existing initiatives as the CCIM & IREM Success Series has enabled these organizations to grow and expand an already stellar program. These shared undertakings are only the beginning. RCA is now actively soliciting affiliates’ participation in developing a new Tenants in Common (TIC) “tool kit” for all practitioners working in this active sector. Conversations are also underway between RCA and affiliates to develop complementary educational offerings that would expand the knowledge of commercial practitioners at every level of experience. By recognizing the power and knowledge of the many, we can unite into a more powerful and successful organization. We have already taken the initial steps toward a new level of coordination. Moving forward, we can work together to build one strong voice that speaks loud and clear about a bright future for all the commercial real estate professionals.
To contact NAR Commercial Real Estate staff: 888/648-8321. To find an online version of this newsletter go to REALTOR.org/RCA. For a complete listing of NAR legislative and regulatory initiatives, go to REALTOR.org. NAR President Richard F. Gaylord, CRS®, CRB, CIPS NAR Commercial Liaison Cindy Chandler, CCIM, CRE The Chandler Group RCA Committee Chair Patricia Nooney, CCIM, CPM®, SIOR CB Richard Ellis NAR Vice President, Commercial Real Estate Jan Hope
Patricia Nooney, CCIM, CPM®, SIOR 2008 RCA Chair
Ms. Nooney is a managing director with the St. Louis office of CB Richard Ellis, where she is responsible for global outsourcing activities. She was 2003 president of the Institute of Real Estate Management.
CCIM Institute (CCIM) 312/321-4460; www.ccim.com
Counselors of Real Estate (CRE) 312/329-8427; www.cre.org
Institute of Real Estate Management (CPM) 312/329-6000; www.irem.org
REGISTER TODAY for RCA’s Virtual Convention & Tradeshow - June 17 & 18
Network with commercial real estate professionals; listen to presentations from top industry thought leaders. Visit exhibitor booths offering the latest technology and learning tools ALL from your desktop when it’s convenient to you! Registration is free and participation enters you into drawings for prizes like $100 gasoline cards! REGISTER today at www.commercialsource.com
REALTORS® Land Institute (ALC) 800/441-5263; www.rliland.com
Society of Industrial and Office REALTORS® (SIOR) 202/449-8200; www.sior.com
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RCAUpdate
RECENT HIGHLIGHTS
CommercialSource.com hosts national property listings
RCA’s long-held goal to provide its members with a national, broker-centric commercial property listing service is almost a reality, thanks to NAR’s recent acquisition of ePropertyData, a major provider of commercial information exchange services for the commercial real estate industry. The acquisition was made through NAR’s new for-profit subsidiary, Second Century Ventures LLC, a strategic private equity fund created to support new technologies that will benefit NAR members. “This national listings and transactions platform will give our commercial members national exposure for all their sale and lease listings and provide the industry with an excellent and trusted resource to search for properties across the country,” said NAR President Dick Gaylord. ePD, based in Gig Harbor, Wash., operates two of the largest CIEs in the country: Commercial MLS.com, which serves the 4,500-member Commercial Brokers Association in Seattle, and CommercialGateway.com, which serves the 2,000-member commercial division of the Houston Association of REALTORS®. “For several years, we’ve seen Seattle and Houston as two of the most progressive and sophisticated groups in terms of technology,” said NAR Senior Vice President Bob Goldberg. “After they introduced us to ePD, it became clear that this company had the skills to become the exclusive operator of NAR’s national commercial platform.” The new listings and transaction platform will be located at CommercialSource.com, which NAR’s commercial real estate division expects to become the primary source for all commercial real estate information on the Internet. Members may elect to have their listings aggregated through their local CIE. Members who do not currently participate in a CIE may choose to post their listings directly through ePD’s Web site. There is no charge for NAR members to upload listings, although members can supplement the listings with additional features for a fee. Ultimately, millions of viewers will see the listings. Technical and productrelated issues will be managed by ePD. For information on creating a local CIE or aggregating data to NAR’s new commercial listing site, call Jeff Hornberger at 888-648-8321, ext. 5971 or visit www.commercialsource.com. Hear more on the enclosed CD.
AFFILIATES SPOTLIGHT
IREM celebrates 75 years of support for management professionals
For 75 years, the Institute of Real Estate Management and its members have led the way in transforming real estate management into a highly valued profession. To mark this milestone, the 18,000 individual and 505 corporate members of this NAR affiliate are holding a year-long 75th anniversary party. Among the highlights of the celebration is “IREM Week,” June 1 to 7, 2008. During IREM Week, the Institute’s 80 U.S. and eight international chapters will hold special activities for members and other constituencies, including fundraisers for local charities, banquets recognizing past and present IREM leaders, and joint educational offerings with industry peer groups. Mayors and governors across the nation will also issue proclamations that week praising IREM’s accomplishments. The REALTORS® Commercial Alliance, along with Yardi Systems, is a major sponsor of the anniversary celebration. “RCA has played a key role in identifying and framing the challenges facing commercial real estate. We are delighted to have RCA on board as a sponsor,” said IREM 2008 President Regina T. Mullins, CPM®. Ongoing events through the year include the association’s “Share Your Story” project, which lets members create an informal history of the Institute and its members by submitting comments at the association’s Web site, www.irem.org/75th. The yearlong observance will culminate with the 75th Anniversary Celebration and Inaugural Gala at IREM’s 2008 Fall Meetings, to be held Oct. 14 to 16 at the Hilton Chicago hotel. The Hilton’s site was previously occupied by the Stevens Hotel, where IREM’s founders gathered in 1933 to launch the organization and sign its charter. Robert L. Ward, CCIM, a long-time CCIM Institute senior instructor and 1978 national president, who played an active role in the development of the program’s course content. For registration and more information, contact Jim Van Dellen at 312-321-4465 or jvandellen@ cciminstitute.com.
CCIM Institute launches nondesignation courses
The CCIM Institute, through the Robert L. Ward Center for Real Estate Studies, is now presenting specialized, nondesignation courses on subjects ranging from negotiations and cost segregation to real estate applications using Microsoft’s Excel. Other class topics include feasibility analysis for investors and developers and strategic planning for commercial brokers. A driving force behind the launch is to give CCIM members additional opportunities to grow their business knowledge. The courses also provide CCIM designees as well as all commercial practitioners with timely and relevant education that allows them to keep pace with a changing industry. The program was named after
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LEGISLATIVEUpdate
TA X E S
Economic stimulus a mixed bag
Commercial real estate scored some victories and took some hits in the Economic Stimulus Package passed by Congress this winter. Two tax provisions will provide benefits to small business owners. The first permits a business to deduct as much as $250,000 of the cost of otherwise depreciable property as an expense. This expensing provision applies to property acquired and placed in service during 2008. A second provision will provide a 50 percent bonus depreciation deduction for the cost of leasehold improvements and certain other equipment. The provision is effective for improvements placed in service during 2008. Improvements placed in service during 2009 will be eligible for the bonus deduction, but only if they are made pursuant to a contract entered into in 2008. One big tax benefit for commercial property owners that didn’t make the cut was the 15-year cost recovery period for leasehold improvements, which expired at the end of 2007. property serving as collateral must be at least 80 percent of the loan amount. A loan may also be changed from recourse to nonrecourse status as long as the property remains the principal collateral. In response to the IRS proposal, NAR and its industry partners sent another comment letter on February 7, 2008, outlining their concerns. Most of these concerns focused on the administration of REMICs. The coalition seeks further clarification and requests additional exceptions for issues commonly related to loan modification.
ENERGY Energy credit extension clears House
REMICS IRS considers REMIC rule change
The Internal Revenue Service is assessing whether to change rules that govern the administration of loans securitized in real estate mortgage investment conduits (REMICs). Under current REMIC rules, property owners are restricted in how they manage and modify their properties. Such limitations prevent these borrowers from undertaking changes that would help attract tenants and respond to market trends. NAR has joined an industry coalition that includes the Mortgage Bankers Association, the Real Estate Roundtable, and other industry groups to urge the IRS to modify the REMIC rules and allow common modifications to properties so long as the basic terms of the securitized loan do not change. The suggested modifications to the REMIC rules will give property owners greater flexibility in managing their properties, provide more opportunities for commercial real estate practitioners to place tenants in buildings with securitized mortgages, and strengthen the flow of capital to commercial real estate by making securitization more attractive. On November 9, 2007, the IRS issued its proposed regulations related to REMIC rules. Under these proposed rules, property owners with loans held in REMIC could release, substitute, add, or alter the collateral on a loan, provided that the loan was “principally secured by an interest in real property.” To meet this “principally secured” test, the fair market value of the
The Renewable Energy and Energy Conservation Tax Act of 2008 (H.R. 5351), which would extend the tax incentives for improving energy efficiency in commercial buildings through 2013, passed the House in late February. The previous provisions, which gave commercial property owners credits of up to $2.25 per square foot for reducing energy consumption, expired at the end of 2007. The bill also extends the credit for energy-efficient retrofits to existing residential homes through 2014. Lastly, it allows a five-year recovery period for the depreciation of qualified energy management devices. Similar legislation has not been introduced in the Senate. The bill passed largely along party lines, which indicates that passage in the Senate will be difficult.
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LEGAL
SCORECARD
BASEL II ACCORDS
Creates a standardized approach for banks to estimate risk, but considers all commercial real estate loans a higher risk. Last action: The regulation, which will affect only the largest banks in the U.S., went into effect April 1, 2008, and will be implemented over a three-year transition period. Status: Concerns that Basel II would place large institutions at a competitive disadvantage and lower the availability of capital for lending have been lessened by the announcement by federal banking agencies that a comparable regulation will be issued for smaller banks later this year.
On zoning, it’s caveat emptor
A Massachusetts appellate court has ruled that a brokerage was not liable under the state’s unfair trade practices law for failing to verify the zoning of a property it listed for sale. In the case, a buyer purchased a building, which he planned to convert into three residential units. As he prepared to apply for the necessary zoning permit, he discovered a 20-year-old decision by the zoning board approving the conversion of the property to three separate units. Deciding he didn’t need another zoning variance, he withdrew his request to the zoning board and converted the property to three units. Three years later, the owner listed the now-converted property with a brokerage company. The salesperson inspected the property and obtained the tax records, which showed the property was taxed as a fourunit residence. The brokerage marketed the property as a three-unit residence. The property was purchased and used for several years as a threefamily residence. However, when the second set of buyers listed the property, the tentative purchase agreement fell through when the prospective buyers discovered that the property needed a zoning variance. Because of their zoning problems, the owners decided to sue the property’s previous owners for breach of contract and misrepresentation. They also sued the brokerage involved in their purchase for breach of the state’s unfair or deceptive trade practices act. A trial judge ruled that although the brokerage had not willingly misled the buyers, it should have confirmed the zoning status of the property. On appeal, the court reversed this ruling, stating that a real estate professional has no duty to investigate a property’s zoning. To read more, go to www.realtor.org/letterlw.nsf/pages/0208quinlan.
WETLANDS DEVELOPMENT
Would give the Environmental Protection Agency and the U.S. Army Corps of Engineers additional regulatory authority to further restrict development along the nation’s waterways based upon draft guidelines issued following Rapanos v. U.S. Last actions: NAR issued comments stating the draft guidelines misinterpreted the Court’s decision, would not result in cleaner water, and would erode economic development in communities near affected waterways. On the legislative front, the proposed Clean Water Restoration Act (H.R. 2421) would remove the term “navigable” from the Clean Water Act, thereby significantly expanding EPA and USACE authority over waterways. Status: Several congressional hearings have been held on wetlands issues, but neither H.R. 2421 nor a companion Senate bill, S. 1870, is moving forward legislatively at present.
ADA applies to Web
Failing to make your real estate brokerage Web site accessible to people with disabilities can land you in hot water. A recent ruling by a federal court determined that a lawsuit brought against Target Corp. for failing to make its site accessible to blind visitors could be classified as a class action suit. In the case, the National Federation of the Blind charged Target with violation of the Americans with Disabilities Act requirement to make places of public accommodation, such as retail stores, libraries, and real estate sales offices, accessible to the disabled. By failing to include code on its Web site that could be read by screen reader software for the blind, Target allegedly made it impossible for legally blind individuals to locate and enjoy its retail stores. In its ruling, the court found that legally blind individuals in the U.S. who had attempted to access the Web site constituted a class for the purposes of the suit. The court also determined that the NFB had standing to bring a class action suit since it had sufficiently demonstrated that the Web site’s inaccessibility posed a possible level of harm to its members and that protecting the interest of those members was part of the NFB’s mission. Classifying the case as a class action suit is significant because it greatly increases the potential fines a plaintiff might face. Although the court has not yet decided the underlying merit of NFB’s allegations, an earlier ruling in the case on a motion to dismiss had stated that ADA violations could occur on a Web site if the site interfered with a disabled person’s ability to enjoy and access facilities of public accommodation. To read more, go to www.realtor.org/letterlw.nsf/pages/1107nfb2.
T&I BRIEFING
A preview of your enclosed T&I Briefing CD. JIM YOUNG is the founder and CEO of Realcomm, an organization dedicated to expanding the connections between technology and commercial real estate. In addition to a wide variety of seminars, Realcomm sponsors regular tours to explore the cutting edge use of technology in foreign and domestic real estate markets. JAMES MARRELLI is vice president of Second Century Ventures, a wholly owned subsidiary of NAR. He is also the COO of ePropertyData, which will develop NAR’s national commercial property listing platform, part of the CommercialSource Web site. ALLAN BENSON is CIO of ePropertyData and one of its founders. This commercial information exchange provider currently operates two of the country’s largest commercial property listing platforms. BEN MARTIN, CAE, is director of communications and new media, Virginia Association of REALTORS®. He teaches executives about the customs and languages of the virtual world and how to deliver value through social media applications, such as blogs, wikis, and podcasts.
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INDUSTRYUpdate
Client building, Internet style
Commercial real estate and online social media sites such as LinkedIn and Facebook seem made for each other. These sites, which enable users to stay in touch with contacts easily and update them on recent business and personal activities with one posting, seem perfectly suited to an industry that still relies primarily on personal connections to find clients, investors, and tenants. So far, this seemingly perfect match is getting about as much enthusiasm as an appointment with the dentist. A recent RCA survey of members and other commercial professionals found that 71 percent had never used any form of electronic social networking to build their contacts or stay in touch with the ones they have. Are they missing the boat?
Do you need it?
“Yes,” says Ben Sardinas, a broker with Health Care Real Estate Services in Coral Gables, Fla. “Social networking is an increasingly powerful tool in professional life. It allows you to put yourself out there and let people know what projects you’re working on.” Another plus
is that, online, you can “ask questions in a natural and unobtrusive way, without the awkwardness of calling up someone you may not have spoken with in a year,” says Sardinas, who has used business networking site LinkedIn for about two years. Online social networking provides “an expedient way to build relationships,” agrees Jason Silfies, vice president, marketing & technology, Coldwell Banker Commercial. The franchise launched a new intranet, dubbed Bluprint, in January to encourage just such interaction among its 4,000 commercial practitioners and staff. “Our industry is best known as a relationship business. I see electronic social media contact between peers as a way to boost that networking,” says Silfies. Mark Inman, a broker with Coldwell Banker Commercial TEC REALTORS® in New Orleans, is an early Bluprint adopter who’s also used LinkedIn and Facebook. “Electronic social networking doesn’t replace face to face, but it’s another way to stay in touch and to get a glimpse of what people you haven’t talked to in a while are
doing. It streamlines the whole contact process,” he says. NAI Global, a commercial real estate company long known as an industry technology leader, already has a proprietary transaction management platform that allows brokers and clients to collaborate. Recently, however, the company began encouraging its brokers to use both Facebook and LinkedIn as additional ways to reach out and collaborate, says NAI Global President and CEO Jeffrey Finn. “Fundamentally our company is already a large social network of 8,000; we wanted to take the next step and put the network on steroids,” he says. In the future, NAI plans to launch a customized social net-
working platform that will allow all members of the commercial real estate community to share ideas on broad-based issues such as sustainability. Brian Tapp, a broker with NAI in Knoxville, Tenn., is part of a new Facebook group for industrial brokers set up by NAI Global and is finding it a great way to share ideas and deals. Tapp also networks through LinkedIn, spending about 30 minutes a day updating his profile and responding to questions on the network. He’s recently added testimonials to his online profile, which he believes will make it seem “more dynamic.” Blogging on ActiveRain and other sites is a major marketing strategy
Who uses what
Respondents to the RCA survey who use networking Web sites for business favored the following. Site LinkedIn CommercialSource chat room MySpace Facebook ActiveRain Percentage who use 36 18 16 14 14
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for commercial broker Sheryl Smith, CCIM, of Smith Real Estate Services in Sacramento, Calif. “I see blogging and social media as a way to establish credibility and to educate new investors and residential real estate practitioners about commercial real estate,” she says. “After people have read the blog for a while, they feel as if they know me even before they make contact.” Smith’s latest strategy is blogging about communities near her properties to better acquaint buyers with the area. A big benefit for finding clients is that a listing in ActiveRain or another social networking site often pushes your contact information high up in search engine results, says Jay Sprayberry of Coldwell Banker Commercial Trademark Properties in Raleigh, N.C. And because most commercial brokers don’t take the time do social networking, “It’s a great way for a new person to get started,” says the 27-year-old broker. “Social media are a wonderful way to cultivate contacts, but ultimately success still depends on moving potential clients to a faceto-face meeting,” says Stephen B. Lau, a commercial associate with Barclay Street Commercial Real Estate in Edmonton, Alb., Canada. In addition to LinkedIn, Lau participates almost daily in several business networking sites, including Plaxo and Naymz.com. He finds that he gets his best search engine results from Naymz, a businessoriented site that not only allows users to post profiles, but gives each user a “RepScore” based in part on references from other site registrations.
Does it pay?
venture project to construct a medical village in Broward County, Fla., through a social network contact. Farther north, Sprayberry has already located one retail tenant that took 2,500 square feet on a five-year lease thanks to his profile on ActiveRain. “I believe that electronic media are a great way for a boutique company like ours to reach smaller space users and investors, a niche often underserved by larger brokerages,” says James Iodice, vice president, brokerage, at Skyline Property Group in Troy, Mich. While closing deals remains the main reason most commercial real estate practitioners use social media, it isn’t the only benefit.
Drop in office investment volume in Q1 ‘08 from Q1 ‘07.
NAR Research
76%
social media space. For example, while there were some 33,000 residential real estate practitioners with profiles on ActiveRain in February 2007, there were only some 500 practitioners who listed themselves under the commercial heading. The biggest hurdle, at least based on the interviews for this article, is time. To really post three or so thoughtful blog pieces a week as well as respond to questions on other blogs can take six to ten hours a week and require months before you see a concrete result, says Jim Cronin, a blogging consultant and author who heads up the Real Estate Tomato.
Tips for successful social networking
Jim Cronin, president of Real Estate Tomato, shares his suggestions for social media success.
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Pick an audience and write for it. Don’t try to spread yourself too thin or you’ll serve no one well. Keep it conversational. You can be businesslike, but still keep your tone friendly and informal. Be consistent. Keep it up for at least a year. Keep paragraphs short and snappy. You’re not writing a novel—or a grammar book. Add pictures if you can. Show new properties in your community to illustrate a post. “It’s really, really hard work, which is why most people don’t stick with it.” Even updating your profile on LinkedIn, adding new contacts, and policing your profile for inappropriate links can take a couple of hours a week, he says. Iodice, who considers electronic networking central to his marketing plan, spends about 30 minutes every other day blogging and responding to questions from peers and consumers. Yet he admits that he dropped offline for several months last year for health reasons and is just beginning to ramp up again.
Gabriel Silverstein, SIOR, e-Pro®, who posts sporadically on ActiveRain, found an employee through the site after launching his own company, Angelic Real Estate, in 2006. He’s also made contact with “several interesting brokers who found me and may offer opportunities in the future,” he says.
How to make it work
While it may take a while for online networking to translate into actual business—as it does with face-toface contacts—Sardinas’s company became involved in a joint
Despite the fact that some 59 percent of those responding to the RCA survey felt that social networking was at least “somewhat valuable,” commercial real estate is still underrepresented in the online
Sardinas spends some three hours a week, primarily adding updates to his LinkedIn profile. Once a month, he also works on growing his contacts, which now encompass some 135 people directly and perhaps 125,000 through contacts of contacts (called degrees of separation on the site). Besides inviting contacts he makes in other ways to join the network, he regularly watches for LinkedIn members with lots of contact activity and invites them to link up with him. One strategy he finds effective is not limiting his contacts to those in real estate. “I include people I used to work with in technology consulting, bankers, and hospital administrators.” Having people with different backgrounds gives him access to a broader spectrum of people and a greater chance of touching someone interested in a particular project, he says. Lau, whose LinkedIn contacts number some 700, encourages all business associates he meets to join LinkedIn, even if they aren’t interested in using the site themselves. “I tell them that LinkedIn can serve as a portable Rolodex; two years from now, if you want to find me or want to search for a commercial real estate broker, you can do it using LinkedIn’s database,” he says. Lau also uses a creative strategy to expand his LinkedIn network. He hosts a live networking event each month exclusively for LinkedIn participants. Bringing a new contact is the price of admission. Ultimately, the key to success in social networking, like any other form of marketing, is persistence and repetition, says Sardinas. “You have to work it over and over again, and it has to be fun. But if you enjoy it, social networking is a great way to keep in touch and stay at the top of everyone’s mind.”
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Financial
Continued from page 1
2007 Commercial mortgage originations
Percentage change over 2007, showing a total drop of 11 percent in the second half. 70% 2007 - 2nd half 2007 - 1st half 17% -30% -15% -12% -4% -1% 49%
fill the void. According to MBA data, only government-sponsored enterprises Fannie Mae and Freddie Mac increased their commercial loan originations in the second half of 2007. Life insurance companies allocated approximately $60 billion to commercial loans in 2007 and will probably allocate about the same amount for 2008, says Doan. Although commercial real estate lending has become more profitable thanks to the rise in CMBS spreads, insurance companies can still earn more from investments such as AAA CMBS paper than from permanent mortgages, he explains. Even where funds are available from life insurance companies, borrowers with maturing conduit loans may find that life insurance companies’ demand for higher institutional-grade properties cuts off that avenue to refinancing. These conservative real estate lenders are now requiring loan-tovalue ratios of 70 percent or even 60 percent, with spreads in the range of 240 to 260 basis points over 10-year Treasuries (in late February), says Jerry Monash, executive director of investment services for NAI Global.
Main Street money
Conduits
Commercial banks
Life companies
Fannie/Freddie
Source: Mortgage Bankers Association
But if megaborrowers are struggling, local and community banks in second- and third-tier markets still seem ready and willing to finance sound commercial properties priced below $10 million. Unlike larger lenders, community banks seldom securitize commercial real estate loans and thus have dodged most of the fallout from CMBS. “Credit is available and affordable. With low interest rates, it’s a great time to borrow,” says commercial practitioner and mortgage broker Manny Jemente of Champion Lending Group in El Paso. Lenders in El Paso, he notes, are
lending with as little as 10 percent down to borrowers with good credit, providing that the building will produce sufficient cash flow to cover the debt. Buyers who intend to use property for a business and need to borrow under $1 million can still get very favorable rates with loans guaranteed by the Small Business Administration, advises Bill Davies, a former commercial real estate broker who now works as a commercial mortgage specialist for Acceptance Capital Mortgage Corp. Greg Schenk, SIOR, of the Schenk Co. in Columbus, Ohio, is also finding lenders willing to write permanent mortgages for commercial borrowers with experience and viable pro formas. Schenk is seeing some loans quoted at 5.7 percent for a five-year fixed loan. Fierce competition for business among the growing number of local banks has helped make these lenders more willing to provide financing and
kept rates and terms attractive, he notes. He has seen more emphasis on personal guarantees of loans, but “there’s no lack of capital if you have good relationships with lenders,” he says. And despite a January 2008 Federal Reserve survey of senior loan officers at U.S. banks, which found that 80 percent had increased their underwriting requirements on commercial loans in the last three months, Schenk says “we haven’t found that local banks in our area have significantly increased underwriting requirements, although they are looking a little harder at appraisals since commercial real estate price appreciations have slowed.”
Funding going forward
It’s this concern about the extent to which the financial crisis will affect commercial prices and demand that remains the greater worry for many commercial practitioners. Most of those we interviewed expect
Get clients the money
Got clients who need to borrow now? Share these tips from Bill Davies of Acceptance Capital, Murphys, Calif., to get the loans they need.
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Bring equity. You can’t expect to get a permanent loan without at least 25 percent down. Don’t base your pro forma on rent bumps. With threats of a recession, cash flow projections need to be based on facts, not hopes. Look for a lender that fits your niche. A company that specializes in your loan size and property type will often be more receptive. Talk to the lender before you make the offer. Know what your client will be able to borrow to avoid deals falling through.
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liquidity to return to the financial system by the second half of 2008, even if loan underwriting remains fairly conservative. “In 12 to 24 months, when the write-downs have been taken, a functioning conduit market will emerge,” says Dan Wald, managing director, NAI BT Commercial, San Francisco. Whether that recovery will be enough to prevent serious deterioration in commercial property prices and demand fundamentals is a harder question. Commercial property prices have already retreated from summer highs, and most experts anticipate that prices will decline 10 percent to 15 percent before the market hits bottom. Some, like Goldman Sachs, predict price falls in the 25 percent range. But commercial markets aren’t faced with a serious oversupply of product, which should prevent the “meltdown of the early 1990s when buildings were worth less than their debt,” says Wald. Others aren’t quite as certain. “Loans that were made between 2003 and 2006 will be resetting beginning in 2008, and there’s a risk that the cash flows to cover the debt service won’t necessarily be there, especially if the economy slows further,” says Monash. The risk may be even greater in 2010 or 2011, says Tupler. “Borrowers with interest-only loans should be able to cover debt service today even if fundamentals shift. It’s when these loans mature and need to be refinanced that you face the real risk if there’s not liquidity,” he says. For now, leveraged buyers without equity capital and sound pro formas are being pushed to the sidelines, but the many owners “sitting on good capitalization will ride out the storm,” says Tupler. For those who must sell, he notes, there’s still a lot of capital out there among REITs, pension funds, and foreign investors, and they’re looking for opportunities.
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R E A LT O R S ® C O M M E R C I A L A L L I A N C E R E P O R T