C o l l i e r s t u r l e y m a rt i n t u C k e r | m i n n e a P o l i s - s a i n t Pau l
inVestment | s eCo n d Q ua rte r | 2009
the slide gets slipperier
Minneapolis St. Paul
for sale housing
The housing market will bottom when unemployment peaks, and this is most likely to occur in early 2010. On average, there are 10-15% of additional price reductions yet to occur. At the low price end of the range, $200,000 and less, the decline may be only 5%. The largest adjustments are for those homes requiring jumbo mortgages and particularly for homes in the $1,000,000+ range. Here we are talking 20-25% price declines. The lack of liquidity is limiting the number of buyers. There was an artificial slowing of foreclosures due to moratoriums during the first half of 2009. There are going to be more foreclosures because the lenders are taking action on those that were delayed, the number of default notices is rising, and the number of adjustable mortgages coming up for adjustment off the initial teaser rates is big. The investment play is to analyze neighborhoods in a city and ascertain where values will fall the least and have the potential to rise the most. One of the measures to consider is the price/rent ratio. This measure got way out of line during the price run-up and now is getting back to normal. Other metrics to consider are the number of homes for sale and in foreclosure in a neighborhood. Housing prices correlate closely with employment. When employment recovers and matches the peak of this past cycle (which was year end 2007), housing prices will match its peak about a year later. According to Moody’s Economy.com, employment gets back to the 2007 peak in the second half of 2013 and housing in the fourth quarter of 2014. Just like sledding in a Minnesota winter, it takes longer
to walk up the hill than to slide down.
Sales of apartment buildings nationally have dropped 75-80% from last year. Apartment cap rates have increased about 100 basis points since the first quarter of 2006, which was the high price point for apartments according to Real Capital Analytics. For garden style Class A projects, cap rates have risen from 6 to 7%. Fannie Mae, Freddie Mac, and HUD are still the primary sources for multifamily financing. Without them and their below commercial property interest rates (by 1.5% +/-), apartment caps would be much higher. Impacting this market but difficult to calculate is the increase in the vacancy rate of forsale housing that has been rented and that is available for rent. Also, impacting this market are the concessions to get new tenants and rising delinquencies by economically stressed tenants. The result is an economic vacancy surpassing 10% versus an occupancy vacancy around 5%. The biggest sale to date this year was the 344 unit Riverview at Upper Landing in St. Paul along the Mississippi River. This 2005 vintage property sold for $126,453 per unit.
Q2 09 Q3 09
multi-family offiCe industrial retail
k k k k
k k k k
n e W s u P P ly, a b s o r P t i o n a n d VaC a n C y r at e s
riverview at upper landing
saint Paul, mn buyer: intercontinental real estate Corporation seller: Prudential real estate investors Price: $126,453/unit size: 344 units
The greatest distress is in residential land and lots. Following that are malls and other retail, commercial land and development sites, and hotels. Apartments, office, and industrial follow further behind. However, we are early in the process and there are considerably more problems coming. Mortgage delinquency rates are rapidly rising providing us the evidence. The causes of the problems are decreasing
Colliers turley martin tuCker
first Quarter | 2007 seCond Quarter | 2009
occupancy, lower rents, and lower values precluding sales and refinancing at high enough dollar amounts. This year, US Bank estimates there is $271 billion of commercial real estate loans maturing. This figure grows every year to about $600 billion in 2017. Today, there is not a source for refinancing a good portion of this debt, short of loan maturity extensions, and loan pay-downs through equity infusions.
but neither straightforward investment sales. 12400 Wayzata Blvd. sold for $131/SF to its anchor tenant, US Internet, who has significant improvements in their space. Creekridge I & II reportedly sold for $143/SF. The property had one building that was leased and the other was vacant, but a new tenant was sourced for it. The buyer was a 1031 exchange buyer and had to invest around $500,000 to get that new tenant in, effectively increasing the price.
294 offiCes in 61 Countries on 6 Continents americas 133 Asia Pacific 64 emea 97 $48.1 billion in annual transaction volume 1.1 billion square feet under management 12,749 Professionals
The number of retail centers for sale has risen dramatically, but sales are slow. There is a significant bid-ask gap between buyers and sellers. Grocery anchored center cap rates peaked in 2007 at about 6.5% according to Real Capital Analytics. Today, cap rates have moved well into the 8’s and we foresee them having to go into the 9’s for there to be a meaningful number of sales. During the past cycle there was cap rate compression relative to the creditworthiness of the tenants and type of market the center is located in (i.e. primary, secondary, tertiary). Buyers today are paying closer attention to the quality of the tenancy, tenant longevity in a center, and sales histories of the tenants. Additionally, buyers who have equity capital want positive leveraged returns. They are also underwriting near term rollover tenants at market rents. In the Twin Cities, that means using gross rents versus net rents because of the high real estate taxes. During the second quarter, the sale of the 25,507 SF Pinnacle Ridge Shopping Center in Apple Valley was completed. The center is shadow anchored by Home Depot, and sold for a 10% cap.
Industrial investment sales have slowed across the country. Cap rates have climbed 150 basis points since the beginning of the year and continue to rise. Metro cap rates are mostly in the 9 – 10% range. Recent sales include Cobalt buying from AMB the 195,754 SF Louisiana Ave. Distribution Center for $40/SF. AMB also sold the 96,636 SF Circle Star office/warehouse for $46.34/SF in April.
united states minneapolis-saint Paul Colliers turley martin tucker 200 south sixth street suite 1400 minneapolis, mn 55402 tel: 612-341-4444 fax: 612-347-9389 researcher’s information: Jim mayland email: email@example.com tel: 612-347-9311
Generally speaking, income property values are going to fall 30 - 40% during this down cycle from peak to trough. These declines are separate from the distressed property segment. Investors know or fear the market has not bottomed and do not want to get in too early. Rent growth and absorption lag GDP growth. We do not see commercial property fundamentals improving until the beginning of 2011. When is the time to get back in? Probably in 2010. However, one must be willing to endure some short term anxiety. Office and industrial have the potential to recover the best. A retail recovery is going to take longer, as the United States is over-stored. While apartment physical vacancies are acceptable in the 5-6% range, the economic vacancies are considerably higher. Not until the economy regains solid footing will the economic vacancies in apartments dissipate. Without knowing exactly where the bottom will be, both investors and lenders lack confidence in making significant bets. The sorting out process is going to take time, so do not expect to see much increase in investment activity during the rest of the year.
By: Mark W. Reiling CRE SIOR
There are relatively few office properties for sale in the Twin Cities and around the country and there have been hardly any sales. The absence of sales makes it difficult to say where cap rates are today. Part of the challenge is that there is little debt or equity capital in the market for large transactions, except for distressed or opportunistic buys. In the Twin Cities there were a couple of sales,
this report and other research materials may be found on our website at www.ctmt.com. this is a research document of Colliers turley martin tucker – minneapolis/st. Paul. Questions related to information herein should be directed to the research department at 612-347-9311. information contained herein has been obtained from sources deemed reliable and no representation is made as to the accuracy thereof. as new, corrected or updated information is obtained, it is incorporated into both current and historical data, which may invalidate comparison to previously issued reports.
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