Archive for June, 2012

Institutional CRE: Are We There Yet?

Saturday, June 30th, 2012
Anything that transitions from “alternative” to “essential” takes time, right? As someone who has lived and breathed commercial real estate for the better part of nearly three decades (I know, I don’t look that old), it still amazes me how long it takes for true change to occur in our industry.
Economic calamities, like the one we just survived – or, I should say, keep surviving – are really nothing new, though the latest recession was a doozy. With the passing of each mess and subsequent recovery, we hear the same familiar song: Real estate will now go mainstream in the eyes of institutional investors. After all, they do need the help since public pension funds returned an average of just 5.7% over the past 10 years, according to the National Association of Public Retirement Administrators.
Certainly in recent years the new term “real assets” has taken hold as a sort of placeholder for “real estate.” I’m not sure what was wrong with the original moniker, since it’s been around since the invention of dirt, but it does provide a more marketable phraseology designed to appeal to the asset class gurus out there.
So, now the question begs, are we any closer to “essential” this time around? Thankfully we might be closer than most think, according to one of the largest advisors in the institutional marketplace, JPMorgan Asset Management. Will we see pension funds bump up their real estate allocations from the current 5-10% up to as much as 25%? That seems a bit far-fetched to me, but hey, this is JPMorgan we’re talking about.
See the rest of my new column right here in the June issue of Real Estate Forum.

In the News (June 25-29)

Saturday, June 30th, 2012
Check out these links to some of the new and noteworthy headline stories that are trending in the world of commercial real estate.

Carter Validus Buys Quail Pointe Medical

Saturday, June 30th, 2012
Carter Validus Mission Critical REIT, Inc., has acquired the HPI Integrated Medical Facility in Oklahoma City for nearly $9.3 million. Developed in 2007, the property is situated on approximately 3.23 acres at 14024 Quail Pointe Drive, strategically located near Healthcare Partners Investments’ (HPI) hospitals and a number of healthcare facilities.
The facility is approximately 35,000 sq. ft. and is 100% leased to HPI, a leading healthcare management company. This property provides comprehensive therapy programs focused on providing patients with a wide variety of post-operative rehabilitation services. It also serves as both a data center and HPI’s corporate headquarters.
Based in Tampa, Carter Validus Mission Critical REIT, Inc., is qualified as a real estate investment trust that acquires mission critical real estate assets located throughout the United States, focusing on assets in the data center and healthcare sectors.

Hotels Still Lodging a Comeback

Sunday, June 24th, 2012
America’s hotels continue to perform despite the sluggish pace of the economic recovery. San Francisco-based PKF Hospitality Research, LLC (PKF-HR) is forecasting strong growth in revenue per available room, or RevPAR, the key barometer of hotel health and performance.
According to the recently released June 2012 edition of Hotel Horizons, PKF-HR is projecting RevPAR for U.S. hotels will increase by 5.8% in 2012, and another 6.6% in 2013. These forecasts are identical to the RevPAR forecasts presented in the March 2012 edition.
The 2012 annual RevPAR growth forecast of 5.8% is the result of a projected 1.6% increase in occupancy and a 4.1% gain in average daily rate (ADR).
“Given the headlines of late, I understand why our clients are concerned about the future health of the economy and the U.S. lodging industry. However, the fundamental questions should focus on how many of these headlines were a surprise,” said R. Mark Woodworth, president of PKF-HR. “Sluggish job growth and economic chaos in Europe have been in the news for a while, and despite these conditions, the performance of the U.S. lodging market during the first quarter of 2012 was just as strong as we had forecast. Therefore, we see no reason to change our opinion regarding the remainder of the year.”
Second Half Slowdown
 PKF-HR is forecasting average quarterly RevPAR gains of 4.9% during the second half of 2012. This is less than the estimated 6.9% RevPAR growth enjoyed during the first six months of the year. “We are projecting a bit of a slowdown in performance during the second half of 2012. Some of the more critical uncertainties throttling demand growth will not be resolved until after the presidential election and decisions are made regarding tax legislation,” said Woodworth.
One of many economic measures monitored by PKF-HR is The Conference Board’s Leading Economic Index (LEI). “We believe there is a six to eight month lag between changes in the LEI and movements in lodging demand,” said John B. (Jack) Corgel Ph.D., the Robert C. Baker professor of real estate at the Cornell University School of Hotel Administration and senior advisor to PKF-HR. “The decline in the LEI observed during the last quarter of 2011 suggested a softening in the demand for hotel rooms during the third quarter of 2012. However, the LEI bounced back nicely during the first half of 2012, thus perpetuating our optimism for 2013. Recoveries from economic recessions are usually not even.”
Long-Term Optimism
“While our outlook for near-term horizon has not changed, we are now projecting more robust ADR growth in the outer years,” Woodworth noted. “From 2014 through 2016, we have increased our annual ADR growth rates by an average of 150 basis points. The solid growth in lodging demand exhibited in 2010 and 2011, combined with limited increases in hotel supply, will serve as the base for above long-run average occupancy levels from 2013 and beyond. Hotel managers should be able to leverage these market conditions and raise room rates.”
In 2012, 29 of the 50 Hotel Horizons markets are expected to achieve occupancy levels above their long-run average. With demand growth forecast to continue to rise greater than supply in most cities over the next two years, 42 of the 50 markets are projected to exceed their long-run average occupancy levels by 2014.
With ADR driving revenue growth in the future, hotels have the opportunity to convert growth on the top-line revenue to strong gains on the bottom-line. Previous research conducted by PKF-HR has found that profit growth is greatest for hotels when revenue gains are driven by increases in ADR.
“For the most part, the cost containment practices implemented by operators in 2009 were maintained through 2011,” Woodworth stated. “The combination of efficient revenue growth and expense controls will result in attractive levels of hotel profit growth through 2016.” PKF-HR is projecting unit-level net operating income (NOI) growth to average 10% per year through 2016. This is superior to the long-run average NOI growth rate of 3.9%.
Mid-Price and Mid-Section
Luxury and upper-upscale properties achieved the greatest gains in RevPAR during the initial stages of the industry recovery; however, going forward, PKF-HR believes the greatest gains in annual performance will shift to the more moderate-priced segments. “Capacity restraints and high ADRs at upper-tier hotels will force travelers to seek accommodation in the lower-tier properties,” said Woodworth.
In addition to mid-priced properties, hotel markets in the mid-section of the nation are starting to participate in the recovery. “The cities of Nashville, Houston, New Orleans and Salt Lake City are forecast to experience the greatest gains in demand in 2012. The early stages of the U.S. lodging industry recovery favored the large gateway markets. The return of demand to cities in the nation’s midsection is a sign that the recovery is expanding beyond the Atlantic and Pacific coasts,” Woodworth noted.

In the News (June 18-22)

Sunday, June 24th, 2012
Check out these links to some of the new and noteworthy headline stories that are trending in the world of commercial real estate.

Pru View: Greening Yields Greenbacks

Sunday, June 17th, 2012
While a gain of $56.4 million in property value might seem small change to many commercial real estate owners and investors, in this day and age it still represents real numbers. What’s surprising is that the nifty sum resulted from sustainable or “greening” efforts over the past year.
Prudential Real Estate Investors (PREI) adopted a socially responsible investment policy in 2011 and the $56.4 million in added value to its global portfolios exceeded its self-imposed $50 million goal. PREI isn’t done just yet, either, as it committed to adding an additional $100 million in value over the next 12 to 24 months.
PREI is the real estate investment and advisory business of Prudential Financial, Inc. (NYSE: PRU). As of March 31, 2012, PREI managed about $51.1 billion in gross real estate assets ($33.4 billion net) on behalf of more than 490 clients worldwide.
PREI added investment value to many of its properties around the globe through a variety of initiatives. For example, in the United States, the company calculated it added $9.6 million in value through solar roof leases, $5.4 million through a bidding process for power procurement, $3.4 million through more efficient parking lot lighting and $24.9 million through energy efficiency improvements such as lighting, motors and mechanical equipment.
Some specific examples include an industrial warehouse in New Jersey where the company leased 871,200 sq. ft. of roof space to a solar developer, generating 6,800 kilowatts of electricity and adding $3.9 million in value to the property. It also leased 420,000 sq. ft. of roof space across 18 self-storage facilities, generating 3,270 kilowatts of power and adding $5.1 million of value to the portfolio.
PREI is currently seeking LEED Platinum status for its new corporate headquarters in Madison, N.J., which opened on May 14, 2012, and recently achieved LEED Silver status for its new regional Atlanta office.
At Tiong Bahru Plaza, a suburban mall in southern Singapore, the company is installing variable speed drives for air conditioning chillers and water pumps, replacing chilled water pumps, condenser water pumps, cooling towers and a fan coil unit. The company projected these energy efficiency improvements will add more than $2.1 million to the value of the asset.
With an investment of $26,200 at the BHP Tower in Krakow, Poland, the firm determined it added more than $300,000 in value by replacing less efficient mechanical system components, reducing the operating hours of the mechanical system through a high-tech building management system, installing LED light fixtures in common areas, installing a more environmentally-friendly refrigerant, and other energy saving measures.
By improving energy and water efficiency with improved lighting and plumbing fixtures the company estimates more than $3 million in value was added to a portfolio of retail properties in Latin America.
“Our primary responsibility as an investment advisor is to add long-term economic value to our clients’ portfolios,” said Allen Smith, CEO of PREI. “Making a habit of incorporating sustainable practices, appropriate social policies and corporate governance into our decision-making process allows us to align our fiduciary responsibility with our goal of being good corporate citizens. Adopting a new socially responsible investment policy and exceeding our $50 million goal of added portfolio value demonstrates our commitment to our clients.”
Other achievements include:
• Completing more than 450 green building assessments
• Measuring the carbon footprint of 167 buildings in 16 countries
• Total green building certifications valued at nearly $8 billion
Click here to read the full PREI Sustainability Report.

In the News (June 11-15)

Saturday, June 16th, 2012
Check out these links to some of the new and noteworthy headline stories that are trending in the world of commercial real estate.

PREA Survey Forecast: Gloomy

Sunday, June 10th, 2012
Commercial real estate investors surveyed by the Pension Real Estate Association (PREA) are forecasting a rather gloomy outlook when it comes to total returns over the next 2.5 years.
Overall, respondents were negative in their forecast for the NPI through 2014. They predicted that for all property types, total returns would drop from 9.6% in 2012 to 7.9% in 2013 and continue to slide to 7.7% in 2014.
For the office sector, returns are expected to fall from 8.7% in 2012 to 7.8% in both 2013 and 2014.
Retail is expected to slide from 9.1% in 2012 to 7.5% in both 2013 and 2014. Industrial is expected to fall from 9.5% in 2012 to 8.2% in 2013 and 7.7% in 2014.
The apartment sector will see the largest decline in the next two years, though, with respondents expecting total returns to fall from a healthy 10.7% in 2012 to 8.6% in 2013 and 7.7% in 2014, which would drop the sector below office and in a tie with industrial.
PREA’s Consensus Forecast survey is part of the organization’s ongoing efforts to increase the flow of information and the level of transparency in the U.S. commercial real estate markets. PREA surveyed a subset of its member firms about their forecasts of the U.S. commercial real estate markets. The survey was conducted in May 2012 and asked about the firms’ latest forecasts of real estate returns as represented by the NCREIF Property Index (NPI).
Twenty-two firms participated in the survey this quarter, with the firms representing some of the most widely respected investment managers, advisors and researchers in the U.S. property markets. This report provides the average forecasts from the sample firms; individual responses remain confidential.
Click here for the summary results.

In the News (June 4-8)

Saturday, June 9th, 2012
Check out these links to some of the new and noteworthy headline stories that are trending in the world of commercial real estate.

Emerging Trends Update: Positive Outlook?

Sunday, June 3rd, 2012
Every fall, the respected Emerging Trends in Real Estate survey from PricewaterhouseCoopers and the Urban Land Institute marks the bellwether for commercial real estate forecasting for the year ahead. Now the duo has released a new mid-year update, which found shifts to a stronger commercial real estate outlook for the remainder of 2012.
Over 195 participants out of the 950 who completed the original 2012 Emerging Trends survey believe that profitability, lending, and investor markets all show brighter signs for the remainder of the year.
Here are the ups and downs, according to the survey update.
The Ups
As broader corporate profits continue to increase, commercial real estate companies likewise look to benefit. Participants forecasting good-to-excellent profits for the rest of 2012 increased over 7.5% from the original survey. 
Foreign investors and private equity will still lead the charge as active buyers of commercial real estate, but both values have declined slightly. The biggest jump came from private local investors and public equity REITs. According to Real Capital Analytics (RCA) through 1Q2012, private capital investors have completed the most deals, followed by public equity companies. 
Asset class investment prospects displayed increases, except in the investment grade bond arena. The largest jump of interest was found in the publicly listed homebuilders, as new home sales show slight signs of improvement in a market that continues to control supply. The second largest increase was found in the commercial mortgage backed securities. 
The sources of debt capital values displayed some positive signs in the  mid-year update. Insurance companies continue to be number one overall. However, government-sponsored entities’ value increased over 11% from the original ET survey in November 2011. Other strong gains were found in the CMBS market, commercial banks, and mezzanine lenders – all strong signs that the availability of debt is showing improvement. According to Commercial Mortgage Alert, U.S. CMBS deals total $10.8B, up over 12% year-over-year. In addition, RCA states that there were increases in lending as well in completed transactions.
All five major property sectors covered in the ET report had higher values in the mid-year update results. The apartment sector is still number one, followed by industrial/distribution. However, industrial/distribution had a significant increase in value. Leasing demand for industrial real estate continues to grow, as U.S. based manufacturing continues to show positive signs. Of particular interest to buyers are industrial properties located in hot-bed energy and high-tech markets, such as Austin and San Jose-Silicon Valley, where job gains, leasing demand, and rental growth are expected to lead the country. Hotels had the biggest gain overall but still placed third as corporate and individual travel show signs of improvement. 
In the “Markets to Watch” section, we asked participants to rate only selected markets instead of the 51 we cover in the full edition of Emerging Trends. The mid-year focused on the top 10, and then on hand-selected markets covering prime, secondary and tertiary locations. 
The largest increase was Boston, followed by Houston. Both markets have displayed job growth stronger than the national average, but Houston hands down leads the pack. Through January 2012, year-over-year change in employment was 3.7% compared to the national average of 1.5%. As stated in the original ET, markets with jobs in the IT, energy, and healthcare areas seem to score better overall. Three other markets that support the trend of showing large increases in the mid-year update include San Jose, Austin and San Francisco. 
Other signs show some interest in larger markets that have been damaged in the recession. For example, Detroit’s value increased 16% compared to the original report, as well as Phoenix, which was up 1.3%.
Denver, Seattle and New York showed increases, though not as strong as some of the others. Markets that are continuing to struggle include Atlanta, Jacksonville, Las Vegas, and San Diego.
The Downs
Washington, D.C. showed the biggest decline in market investment prospects, according to survey participants. Possibly too much real estate at very high prices, combined with the possibility of the Federal Government’s cuts has left a bad feeling in investor’s minds. 
Participants showed dismal expectations when asked on how they feel about changes in inflation, 1-yr treasuries, 10-yr Treasuries, and commercial mortgage rates now and over the next five years. No changes for the remainder of 2012 were seen, as expected. However, 5-year outlooks all increased, as participants understand that rates and inflation at this point can’t go anywhere but up.