The ideal time to invest in commercial real estate is 2010 – that’s when commercial property prices will hit bottom, according to a recently published survey of industry experts, including investors, developers, lenders, brokers, and consultants.

The Emerging Trends in Real Estate 2010 study, released last week by PricewaterhouseCoopers LLP (PwC) and the Urban Land Institute (ULI), says commercial real estate (CRE) players predict vacancies to continue to increase and rents to decrease across all property sectors before the market hits bottom next year.

The consensus is that property values will ultimately drop 40 to 50 percent on average from 2007 market peaks, making 2010 and 2011 the opportune time for investors to buy at or near cyclical lows.

The survey data also indicates that investors believe capital will slowly begin to flow back into commercial real estate markets by the end of 2010, led by all-cash investors.

The research firm Real Capital Analytics, Inc. estimates that commercial real estate loans in default, foreclosure, or bankruptcy now total roughly $130 billion. By being selective on offers from both distressed sellers and banks that are clearing out bad loans and real estate owned portfolios, investors will score bargains on premium properties, according to the study.

The CRE property market recovery will most likely begin to gain traction before 2012, and survey participants believe that the markets performing well before the crash should be the top-performers coming out of it, with investors continuing to favor global gateway markets on the East and West Coasts.

According to the survey, Washington, D.C. ranks number one as the “recession-proof” city. Value declines there have been less than other markets as employment is buffered by the federal government.

Long-term confidence holds for New York and Boston despite financial industry downsizing. West Coast gateways – San Francisco, Seattle and Los Angeles – have all suffered ratings declines, but remain among the survey’s top major markets. Texas markets also continue to show strength, according to survey participants.

As prices hit their floor, the PwC and ULI study predicts that lending will be conservative, expensive, and extended only to the most-favored banking relationships. Real estate investment trusts (REITs), private equity funds, and even refashioned mortgage REITs will start to provide loans to battered borrowers but at a steep price, the companies said in their report.

About Investment Analytics Group
Established in December 2006, Investment Analytics Group (IAG) provides integrated commercial real estate advisory services to investors. Our core services include asset level due diligence, asset management, financial modeling, feasibility studies and other related advisory services.
For more information visit us at www.iagroupllc.com or contact us at 208.846.8476 or info@iagroupllc.com.

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An interesting article in CIRE (Commercial Investment Real Estate) magazine discusses the landscape for brokers trying to close deals that we wanted to share.

The credit crunch has reduced office transaction volume to a trickle and factors weighing on the sector are likely to limit deal making through year-end. Asset values have declined nearly 30 percent from their peak, financing is scarce, and downward pressure on office fundamentals is exacerbating the wide gap between bids and asking prices.

It’s a difficult landscape for investment brokers and their clients to navigate, whether they are office buyers, sellers, or developers. In the first four months of this year, property owners put nearly $13 billion of office properties up for sale but only closed $4.4 billion in transactions, according to Real Capital Analytics. Nationwide, sales volume is down 70 percent from year-ago totals.

Perhaps more critical is a dearth of acquisition financing that hampers deals even where buyers and sellers reach a middle ground on price. Conduit providers have ceased to issue new loans due to a logjam of commercial mortgage-backed securities, and life insurers largely have reached the limits of their real estate lending allocations.

Yet today’s market provides opportunities for CCIMs to apply experience, training, and creative thinking to make deals work, says Stan Watson, CCIM, owner of Watson Real Estate in Ann Arbor, Mich. “You can pick lemons off a tree but you have to dig for diamonds, and right now that’s what we have to do,” Watson says. “We have to work a little harder. We have to be extremely creative.”

Just last year, Watson helped a client obtain $5 million in financing to develop a single-tenant office project on St. Joseph Mercy Hospital campus in Ann Arbor. Local lenders expressed interest in the deal but balked at the requested loan amount, so Watson pooled resources from five local credit unions to assemble the necessary sum. The tenant moved into the completed building earlier this year.

“You need to develop relationships and seek out those lenders that are really lending money, such as state-chartered banks, credit unions, or others you maybe haven’t considered before,” Watson says. “I never thought I’d be pooling credit unions, but in a market like this you start thinking what else can I do?”

Done Deals
What enables some deals to close while others founder? Details vary, but brokers say success comes from persistence and having the courage to take unconventional approaches to problems that otherwise would derail transactions.

Brian Andrus, CCIM, owner of Stonebridge Real Estate Co. in Clearwater, Fla., recently sold two office properties, and both required extra effort. In the first case, an office user was attempting to purchase a former automotive service station that had been converted for office use. The buyer lined up acquisition financing from a regional bank offering 85 percent loan to value to owner-occupants.

But before the new investor could close, the bank halted the deal, demanding documentation that the property had been cleared of underground fuel storage. After an exhaustive search, an environmental assessment firm working with the seller tracked down proof that the tank in fact had been removed years before, and the deal closed.

In another recent example, Andrus marketed an office project that required him to spend 40 hours reworking an existing lease to suit a prospective buyer. “Every deal is taking more care and more time,” he says.

Getting Up to Speed
When the credit crunch began, the highly leveraged buyers that fueled bidding wars in 2006 and 2007 effectively were excluded from the market. The few remaining active buyers demand lower pricing to reflect their higher cost of capital, which includes substantial equity and comes with an aversion to risk that must be placated with greater returns.

Throughout most of 2008, buyers and sellers simply disagreed on prices and trading slowed to a crawl while the market worked out corrected pricing based on existing income streams. Commercial real estate values have wilted in that time, particularly those predicated on income growth projections that did not come to fruition. The Moody’s/REAL Commercial Property Price Index showed office asset values in April 2009 were down 29 percent from one year earlier. Real estate investment trust share prices, which are considered a forward indicator, suggest commercial real estate values will decline 40 percent from peak to trough before the market hits bottom.

After more than a year of job losses and economic contraction, declining office fundamentals threaten to eat away asset values. Whether due to companies negotiating lower rates on lease renewals or tenants going out of business and defaulting on lease obligations, many property cash flows have faltered and further reduced the value of investors’ holdings.

“The office vacancy rate is now a little over 16 percent, and over the next six months it will creep into the high teens and maybe crest at 20 percent by the middle of 2010,” says Ben Breslau, Jones Lang LaSalle’s Americas research director. “Then it becomes a matter of when the economy picks up. If the economic recovery takes hold this year, we might see vacancy rates stabilize by the end of 2010.”

As a result of rising vacancy and softening demand, rental rates are flagging and will drop 8.1 percent on average over the course of 2009, the largest one-year decline on record, according to New York-based researcher Reis. Negative absorption this year will range near 70 million square feet, shy of the 100 million sf of negative absorption Reis tracked in 2001, but enough to make 2009 a painful year for the office market.

Buyers Want Bargains
For owners trying to unload distressed assets, speed is critical, says Brian E. Estes, CCIM, president of Prudential Commercial Real Estate in Jackson, Miss. That’s because the property usually is costing the owner money. Setting a price to meet the market also can be a challenge, because a distressed asset often lacks part or all of its income stream. Without income to use in extrapolating value, capitalization rates become irrelevant, so a buyer is more likely to consider a distressed property’s price relative to construction or replacement cost, Estes says.

Earlier this year, Estes helped a bank sell an 115,000-sf office complex after a foreclosure. He found an all-cash buyer who bought the complex, made improvements, and brought in new tenants. In a separate deal, Estes helped a client sell a struggling retail property that had lingered on the market for more than two years, finally moving the asset at a price equivalent to 40 cents on the dollar. “We knew no one would get financing to buy this shopping center, so the first all-cash offer we got, we took.”

Investors waiting to buy at rock bottom prices aren’t waiting for sellers to come down in price, brokers say. They are waiting for sellers to go into default and foreclosure. Owners are unlikely to sell even distressed assets for pennies on the dollar because they still hope to recover their investment. Banks, on the other hand, may be willing to sell at a substantial discount in order to unload foreclosed properties from their portfolios. “A bank is motivated to stop the bleeding,” Estes says.

So far in this cycle, such real-estate-owned sales are few. RCA tracked only 13 REO sales by banks to third parties in the past year. But distress is mounting. The inability to obtain replacement financing for a maturing mortgage or construction loan is a common source of distress for investors. By this definition, more than 525 U.S. office properties, representing almost $18 billion, have fallen into distress since February 2008, according to RCA.

Estes believes a wave of distressed sales soon will break on the investment market and provide investors with tremendous opportunities to snap up discounted assets. He passes along these words of advice, given to him by a banker earlier this year: “If you are an investor and you buy real estate from anybody other than a bank in the next two years, you probably will have overpaid.”

Creating Success
Against this bleak backdrop, how can CCIMs overcome both the national stagnation in office sales as well as the unique challenges of their individual markets? It’s a good idea to start building relationships with lenders who soon will take possession of foreclosed properties, says W. Darrow Fiedler, CCIM, director of KW Commercial in Santa Monica, Calif.

Even after a foreclosure, lenders may be reluctant to sell an asset at a discount right now because that would force them to realize portfolio value loss. This creates an opportunity for CCIMs to help those banks manage their REO properties, keeping them in operation to postpone the need for a sale until the market improves, Fiedler says. Ultimately, CCIMs will be in a good position to pick up the sales listings, too.

Investment advisers can help a property stand out and succeed by taking a comprehensive approach to its marketing, says Peter Kozel, chief economist for commercial real estate service provider FirstService Williams in New York City. That begins with establishing a business plan for the asset in both the short and long term.

“You have to come up with a consistent argument for the property,” Kozel explains. “What is the property’s reason for being? What niche does it have in the marketplace? What kind of tenant does it attract? What’s the outlook for that tenant base?” Today, not just prospective investors but even tenants are asking for details about a property’s capital structure, he says.

Jeremy Kronman, CCIM, executive vice president at CB Richard Ellis in Pittsburgh, agrees that a comprehensive plan of attack increases a building’s chances for retaining or even increasing its value. “We talk about what’s the plan for each individual tenant,” he says. “Today we’re sitting there with the owner and the lenders and talking about what loan to value they want to achieve. We’re not just leasing agents; we are whole-building consultants.”

Financial Footwork
Financing remains a serious challenge, and dependable financing can differentiate a buyer from other bidders on an asset, says David Brightwell, CCIM, vice president of business development at Validus Group in Tampa, Fla. He is lining up funding sources in advance to prepare for future acquisition opportunities. “In this market, the No. 1 offer doesn’t necessarily get taken because the seller will accept a lower offer from a buyer that he knows has the ability to close,” he says.

Government-backed lending through the Small Business Administration’s 504 program provides a good source of leverage for buyers who plan to occupy all or most of a new space themselves, says Steven W. Moreira, CCIM, president of Magic Cos. in Longwood, Fla. “That’s one government stimulus that is working,” he says. “A bank can write a construction loan under 504SBA and have a 90 percent takeout guarantee from the government.”

Yet even this oasis of capital may be evaporating, says Soozi Jones Walker, CCIM, owner of Commercial Executives in Las Vegas. In the past 12 months, banks have increased their scrutiny of 504 loan applicants and will decline those who don’t have a track record of strong financial performance, she says. “If a potential buyer has had either flat growth or a little bit of declining income, they won’t approve them,” she says. “It’s a great program; [504 loans] are just hard to get now.”

In this market of stress and distress, CCIMs must continue to bring all of their skills to bear in order to preserve the value of their clients’ properties and help investors identify assets offering the greatest possible return. Despite the persistent challenges of the market and economy, this is not the time to slack off: The best buys are made at the end of a recession and investors make the most money in a cycle during the first five years after recession, Walker says.

“There is no coasting, but there are success stories out there,” Kronman says. “When you do your homework and when the ownership, financing, and leasing are all talking, you absolutely can pull off success stories.”

About Investment Analytics Group
Established in December 2006, Investment Analytics Group (IAG) provides integrated commercial real estate advisory services to investors. Our core services include asset level due diligence, asset management, financial modeling, feasibility studies and other related advisory services.
For more information visit us at www.iagroupllc.com or contact us at 208.846.8476 or info@iagroupllc.com.

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This story recently appeared on GlobeSt.com, and hopefully the predictions by the experts are right. The decline in commercial real estate appears to be slowing, at least according to the latest statistics from the National Association of Realtors. So suggests its leading economic indicator, which registered only a 1.3 percentage point decline in its Commercial Leading Indicator for Brokerage Activity for Q2. The index reading was 101.5, compared to 102.8 in Q1. The index is at its lowest point since its inception in Q1 1994–as well as a steep drop from Q2 2008, when it was at 117.6.

“The decline is moderating a bit–we can hope that the steep declines may be coming to an end–but we are not nearly back to normal,” Lawrence Yun, NAR chief economist, tells GlobeSt.com.

The slight easing of credit and introduction of liquidity into the sector is largely the reason, he continues. TALF was extended for a few months beyond the December 2009 expiration date, Yun notes. Also, “there has been a nice gain in the REIT stock price index, which implies that credit conditions may be loosening.”

Yun’s best guess for commercial real estate recovery? “We’ll be bouncing along the bottom for some time, but meaningful gains won’t occur until the second half of next year.”

Getting to that point, though, will not be pretty. NAR is forecasting sharp increases in vacancies for the next year. It expects office vacancy rates to increase from 15.5% in the second quarter to 18.8% in the second quarter of 2010.

In the industrial market vacancy rates are likely to rise from 13% now to 15% in Q2 2010. Retail vacancies will edge up from 11.7% in Q2 2009 to 12.9% in the same period of 2010. Multifamily vacancy rates, by contrast, are expected to slip from 7.4% now to 7.1% in the second quarter of next year.

NAR is not the only leading economic indicator to point to an upcoming recovery. The American Institute of Architect’s latest Architecture Billings Index also suggests a rebound may be underway.

About Investment Analytics Group
Established in December 2006, Investment Analytics Group (IAG) provides integrated commercial real estate advisory services to investors. Our core services include asset level due diligence, asset management, financial modeling, feasibility studies and other related advisory services.
For more information visit us at www.iagroupllc.com or contact us at 208.846.8476 or info@iagroupllc.com.

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While some commercial real estate investments are loosing value, the medical office sector has shown remarkable resilience. According to a recent report from Marcus & Millichap, the segment is holding up much better than other property types and this trend projects to continue.

Currently the nation spends $2 trillion on health care annually, by 2013 that number is projected to grow to $3 trillion. In-fact, medical expenses have increased by an average of 7.7% over the past 10 years and now make up 17% of GDP. This exponential growth has been fueled by the large amount of baby-boomers who are steadily increasing in age and by 2013 the number of people over 55 will have increased by 20%. As more people advance in age, their medical expenses will rise correspondingly, fueling demand for the medical office segment.

Another driver of demand has been the shift from “an impatient to outpatient focus”. This has been caused by the steep rise in costs associated with hospital construction. A single hospital bed is now estimated to cost $1 million, driving many new hospitals to house around only 100 beds compared to older hospitals featuring close to 800. This decrease in supply, coupled with an increase in demand from an aging populace, has created a large need for medical office space.

These trends are reflected in the industry’s employment numbers. While the rate of job growth has decreased, job growth itself is still positive. 50,000 jobs have been added this year and another 200,000 are projected to be added by years end. By 2013, 2.4 millions jobs are projected to be added to the sector.

Despite these positive indicators, vacancy is projected to rise. This is due to the economic climate which is forcing many to abstain from health care expenditures they previously would have made. All told, vacancy is projected to increase by 100 bps this year, reaching 12.4% and rents will decrease by roughly 2.7%.

This increase in vacancy should be seen as a possible opportunity for those considering investment. Unlike other sectors, medical office real estate is virtually guaranteed to see a future rise in value as our population ages and health costs increase. Furthermore, if you couple a medical office investment with a net lease structure, you can create a passive investment that will see real growth in the future. This is perfect for someone who wishes to take a less active role in property management but still see his property value escalate. The combination of higher demand, less space and higher employment make medical office real estate an attractive net lease investment for the future.

About Investment Analytics Group (IAG)
Investment Analytics Group (IAG) was established in December 2006 ago to provide integrated commercial real estate advisory services to investors. Our core services include asset level due diligence, asset management, financial modeling, feasibility studies and other related advisory services. Our business model and services are not reactionary to what many other firms consider “opportunity” in this current distressed environment. For more information visit us at www.iagroupllc.com or contact us at 208.846.8476 or info@iagroupllc.com.

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There’s Value in Real Estate – An Article from The New York Times

The last thing most people are thinking of investing in right now is real estate. The collapse of residential values stung almost all homeowners. And the commercial market, from offices to shopping malls, is full of uncertainty as unemployment rises and consumer spending continues to be weak.

Greg Rand, managing partner at Better Homes and Gardens Rand Realty, a brokerage in the suburbs north of New York, even has a theory to guide investors. He calls it “house rich.”

Simply put, the days of buying almost anything and watching it appreciate are over. Those who want to make money in real estate now will have to do extensive research and expect to hold the property for at least a decade.

The crux of the idea is not buying a distressed property but “finding your Florida.” By that he means investing in a piece of real estate, be it residential or commercial, in a hard-hit place that has to rebound.

“Florida is in a storm right now,” Mr. Rand said. “It’s overdeveloped, overspeculated and overleveraged.”

Yet, with 78 million baby boomers expected to retire in the next two decades, the state’s long-term prospects are solid: a good proportion of them will want to be someplace warm and sunny when they stop working.

Mr. Rand is not alone in this. Some of the biggest players in real estate see opportunity around the country.

“We are now looking at one of those rare opportunities to invest in commercial real estate,” said Hessam Nadji, managing director at Marcus & Millichap, a commercial real estate investment adviser based in Encino. Calif. “There are plenty of properties in the $5 million to $20 million range, whether they’re apartments or shopping centers, that are located in places where supply is constrained.”
He added that these otherwise solid properties were for sale now because losses elsewhere were forcing their owners to raise money.

While many investors may not believe that real estate is returning as a steady, performing asset, the following criteria can guide those ready to re-enter the market.

Investing in real estate has always carried risk. But where many people went wrong was in taking a house vanity approach — they bought their dream home without knowing how its price compared to either historical levels or the prices in nearby neighborhoods.

Mr. Rand tells the story of the Trump Tower, in White Plains, which he represents. When the sales office opened during construction, buyers focused on the penthouse condominiums with views of Long Island and New York City. At that time in 2004, the going price for 2,200 square feet on a high floor was around $1.8 million, he said. That would seem to be a deal for a buyer in Manhattan, 30 miles south, but in White Plains, few single-family homes had ever sold for that much.

He said investors who bought units on lower floors — priced closer to $700,000 — did much better. The reason was that their fixed costs — mortgage, fees and taxes — were lower, which meant they could attract a larger pool of renters to cover their investment.

The lesson here was that anyone who really knew the White Plains market would have been more hesitant in buying a $2 million apartment as an investment. “The key is due diligence over sex appeal,” he said.

What makes or breaks any real estate investment is fixed costs. Investors need to know how they are going to cover the amount they have to pay, whether the property is rented or not.

In Trump Tower, the monthly fixed costs for the penthouse apartment were $11,100 with an expected rent in 2005 of $8,000, Mr. Rand said. On the lower floors, the costs and expected rent were the same, both about $5,000.

Any experienced real estate investor will tell you there are times when even the best properties, whether apartments or shopping centers, have vacancies and that means some of those costs fall on the investor.

This sounds obvious, but from 2005 until early last year, there were plenty of amateur investors who only realized this after their tenants left.

What signals a return to understanding that basic principle is a return of savvier investors.
“A lot of people who are coming back into the market that I’ve known for decades are saying the market is normalizing again,” said Harvey E. Green, president and chief executive at the commercial real estate brokerage Marcus & Millichap, and a 40-year veteran of the real estate market. The years “2005, 2006, and 2007 were the frothiest part of the marketplace, and these people stepped out on the sidelines.”

In other words, the smart money is back after years of watching. Consider the South Florida market again. Many people who got caught had visions of renters covering all the costs on properties they bought. When renters became scarce and values plummeted, these investors did not have a backup plan. A better way is to set a goal for the investment. Do you want to add to your cash flow immediately or can you afford to take a longer view of 10 to 15 years?

If your goal is to make money now, you will probably have to buy an older property and fix it up. This requires a more active role, and still, the return will not be what it was at the peak.

Mr. Nadji said investors in Class B commercial real estate — solid but not marquee properties — can expect returns in the high single digits. But most of those properties are not likely to appreciate in value for two or three years.

With a longer view, the options change. Ruth Trettis, a broker at Premier Properties in Naples, Fla., said one investor bought nine homes, worth more than $32 million, in the last year in Port Royal, the town’s most affluent neighborhood. Another investor bought three homes in Port Royal worth $14 million over a single weekend in May and a fourth one last month for $13.5 million (it was listed at $19.9 million).

So far, she said, neither buyer has done anything with the properties. Even though both bought these houses at steep discounts, the costs of just holding them are immense. But they clearly have a long-term goal and a belief in the area.

Real estate is like every investment today. Experts and amateurs alike have strong opinions on what will work and what won’t.

The message within the real estate market itself is mixed. Last week’s report on flat home sales from April to May seemed to be heartening, but it was misleading. Homes sell better as the weather warms up. The better indicator of a bottom will come when year-on-year numbers are flat, and those have yet to appear.

The one upside is inflation, or at least the fear of inflation. Hard assets like real estate historically do well when there is inflation.

What this means is the longer your time horizon for investing in property, the better your chance of achieving real returns.

“Real estate was never a short-term investment,” Mr. Green said. “It was just in that frothy market.”

In this sense, the one certainty is that the age of the flipper is behind us.

About Investment Analytics Group (IAG)
Investment Analytics Group (IAG) was established in December 2006 ago to provide integrated commercial real estate advisory services to investors. Our core services include asset level due diligence, asset management, financial modeling, feasibility studies and other related advisory services. Our business model and services are not reactionary to what many other firms consider “opportunity” in this current distressed environment. For more information visit us at www.iagroupllc.com or contact us at 208.846.8476 or info@iagroupllc.com.

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A heads up for real estate professionals: H.R. 2454, the cap and trade legislation approved by the U.S. House of Representatives on June 26, if passed into law, would have a profound effect on the real estate sector.

Key real estate-specific provisions of the House cap and trade bill are the following:

• National building energy efficiency targets would be established by the Department of Energy (DOE), linked to baseline standards set for commercial buildings under the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) Standard 90.1 – 2004 and for homes under the 2006 International Energy Conservation Code. [Note: The legislation also permits the national standard to be based on a recognized national consensus standard. Presumably, this would be Standard 189.1, the model building energy efficiency code being developed through an ANSI standard-setting process headed by ASHRAE, the Illuminating Engineering Society of North America and the U.S. Green Building Council.]

• Upon enactment of the bill, new commercial and residential buildings would be required to achieve 30 percent improvements in energy efficiency relative to baseline. By January 1, 2014, new residential buildings would have to improve energy efficiency by 50 percent; commercial buildings would be required to achieve 50 percent improvements relative to baseline by January 1, 2015. Additional reductions in energy use would continue in subsequent years at 5 percent additional savings every three years. DOE could accelerate or lessen these standards on the basis of lifecycle cost analysis. The baseline under consideration is 2005.

• Within a year of enactment of the federal legislation, state and local governments would be required to adopt the national code or revise their building codes to meet or exceed the federal standards. For states in which building codes are adopted by local governments, the state would be required to document that appropriate local building codes were adopted by jurisdictions representing 80 percent or more of the state’s population. Compliance would be verified by the Department of Energy. Competitive awards for local government, disbursed through the federal Department of Housing and Urban Development (HUD) would be used to assist localities with building code enforcement.

• The federal sale of carbon allowances would be used to fund building retrofit initiatives to promote energy efficiency, to be known collectively as the Retrofit for Energy and Environmental Performance (REEP) program. REEP would be administered by the U.S. Environmental Protection Agency (EPA), in consultation with DOE and the U.S. Department of Housing and Urban Development. REEP funds would be distributed through states and local governments and could be used for the establishment or operation of the establishment of revolving loan funds, loan guarantees, or other forms of financial assistance. [The REEP program is part of a larger effort to pass through to states funds raised by the auction of carbon allowances; this initiative allows state governments to establish State Energy and Environmental Development (SEED) accounts with proceeds raised by carbon allowance auctions.]

• Building energy performance under REEP would be documented through Energy Star Portfolio Manager, the Home Energy Rating System (HERS) rating system, or other energy modeling software approved by EPA.

• A model building energy labeling program would be created by EPA in consultation with the Department of Energy within a year of enactment of H.R. 2454. Labels would be proposed for new commercial and residential buildings and demonstration programs conducted to help develop the model label and to test the usefulness of labeling in additional building types.

• The development of net zero energy buildings would also be funded through demonstration grants.

What are the real estate industry implications of the House cap and trade legislation? If the bill should pass the Senate in substantially similar form later this year (by no means a sure thing) the U.S. real estate industry will be reshaped in the following ways:

• Increasing reliance on building codes (instead of voluntary standards such as LEED) to establish energy efficiency and green building practices.

• A stronger role for the federal government in prescribing building energy efficiency requirements.

• Increasing standardization in building energy performance metrics in the commercial and residential sectors.

• Greater reliance on the public sector and on public-private partnerships in creating and financing building energy efficiency programs.

• Growing employment in green collar jobs related to building energy efficiency.

An unanswered question is whether the increasing importance of building energy efficiency will accelerate real estate industry consolidation.

It is possible that the combined effect of new building energy standards and energy efficiency labeling will leave under-capitalized building owners — who cannot afford energy efficiency retrofits — at a more significant competitive disadvantage.

At the same time, the playing field could be leveled by public programs that provide financial assistance directed to smaller commercial property owners and households.

The legislation, if enacted, is transformative. Residential and commercial buildings, multifamily and low income housing, new and existing buildings, development and real estate finance will all be impacted. The surprise is how quickly the time frames are proposed. The reasons appear centered on the substantial opportunity buildings offer, with almost 48 percent of all greenhouse gas emissions and 70 percent of projected electricity use over the next decade.

About Investment Analytics Group (IAG)
Investment Analytics Group (IAG) was established in December 2006 ago to provide integrated commercial real estate advisory services to investors. Our core services include asset level due diligence, asset management, financial modeling, feasibility studies and other related advisory services. Our business model and services are not reactionary to what many other firms consider “opportunity” in this current distressed environment. For more information visit us at www.iagroupllc.com or contact us at 208.846.8476 or info@iagroupllc.com.

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Highlights from the Federal Reserve’s survey of economic conditions nationwide. The survey, released Wednesday and known as the Beige Book, is based on information collected from the Fed’s 12 regional bank districts.

BOSTON
(This region covers Maine, Vermont, Massachusetts, New Hampshire, Rhode Island and part of Connecticut.)

Most manufacturers say business was weak, with customers delaying or canceling orders. Biopharmaceutical and health care were bright spots. Most retailers are optimistic they are past the bottom, with a majority of merchants reporting less negative or more positive year-over-year sales. Family restaurants, though, have been hurt. Residential real-estate markets were sluggish, though there were some positive signs. Boston-area home sales fell only 5 percent year-over-year, and New Hampshire home sales were flat in June compared with a year earlier. Commercial real estate weakened further. Many companies continue to cut workers and benefits, if not pay.

In a separate Labor Department report Wednesday, the government said the unemployment rate in the metro area of Boston-Cambridge-Quincy rose to 8.3 percent in June, up from 7.5 percent in May.

NEW YORK
(This region covers New York and parts of Connecticut and New Jersey.)

The economy showed some signs of stabilizing, though economic activity may still be contracting. The job market remains weak, with some signs of leveling off. Manufacturers report stable conditions. Retailers reported sales as fairly steady, though down from a year ago. Moderate-priced merchandise sold better than premium lines. Tourism in New York City was sluggish, with Broadway theater attendance down more than 10 percent from a year earlier.

Manhattan hotel revenue ran 35 to 40 percent below a year ago. Housing markets showed signs of stabilizing in northern New Jersey and upstate New York but deteriorated in New York City and especially Manhattan. Commercial real-estate activity was steady. Bankers reported a drop in loan demand, particularly from households. Credit standards tightened, and delinquency rates were steady to higher.

In the New York-Northern New Jersey-Long Island metro area, the jobless rate rose to 8.8 percent in June, from 8.2 percent in May, the Labor Department said.

PHILADELPHIA
(This region covers Delaware and parts of Pennsylvania and New Jersey.)

Manufacturers reported drops in shipments and new orders, though makers of industrial materials noted slight increases. The outlook among manufacturers, though, is positive, with around one-half expecting orders and shipments to rise over the next six months.

Retailers had mixed sales results, with discount stores faring better than other. Retailers expect sales to strengthen slowly. Some fear, though, that consumer caution will extend into the back-to-school shopping season. Car sales were slow. Bank loan volume rose slightly, but credit quality deteriorated. Home sales increased, while commercial real-estate activity was slow.

The jobless rate in the metro area of Philadelphia-Camden-Wilmington rose to 8.7 percent in June from 8.2 percent in May, the government said.

CLEVELAND
(This region covers Ohio and parts of Pennsylvania, West Virginia and Kentucky.)

The economy showed signs of leveling off. Factory production stabilized at low levels. Steel makers expect a slight pickup in the third quarter. Most factories, though, foresee more layoffs and pay cuts. Retailers said sales were flat to slightly down, with shoppers focusing on less expensive necessities.

New-car sales were weak; sales of used cars were relatively strong. Home building remains slow, though most builders saw a slight increase in sales. Prices rose for lumber, shingles and concrete. Commercial real-estate activity was mixed, with some improvement for contractors taking part in government-funded projects and education projects.

In the metro area of Cleveland-Elyria-Mentor, the unemployment rate held steady at 4.7 percent in June, from May.

RICHMOND
(This region covers Virginia, Maryland, North Carolina, South Carolina and parts of West Virginia, North Carolina and South Carolina.)

Retail sales dipped, big-ticket sales “languished” and sales of U.S.-made cars stayed in the “doldrums,” while foreign-made autos fared better. Tourism was mixed. Manufacturing activity strengthened. Demand was stronger for clothing, chemicals, food, printing, publishing, rubber and plastics. A chemical maker in South Carolina reported growth in orders from China, India and other East Asian markets.

Housing activity was mixed. Real-estate agents in Fairfax, Va., described the heart of the local market as “hot,” with houses in $400,000-to-$1.2 million range selling fastest. Agents in Washington, D.C., made similar observations. But agents in North Carolina’s Greensboro and Asheville reported sluggish sales. Commercial real-estate activity weakened.

The unemployment rate for the metro area of Washington-Arlington-Alexandia rose to 6.6 percent in June, from 6.2 percent in May.

ATLANTA
(This region covers Georgia, Alabama, Florida, and parts of Louisiana, Mississippi and Tennessee.)

Retailers said sales were in line with expectations but down from last year. Tourism spending was sluggish. The contraction in home sales moderated, with more demand at the market’s low end. Commercial real-estate activity weakened, pushing up vacancy rates.

The contraction in manufacturing slowed. Most noted an improved outlook. Companies think the worst of the layoffs are behind them, but some in the auto, oil and gas businesses plan more job cuts. Farmers, especially those growing citrus crops, benefited from good weather.

The Atlanta-Sandy Spring-Marietta metro area saw its jobless rate rise to 10.7 percent in June, from 9.5 percent in May.

CHICAGO
(This region covers Iowa, Wisconsin, Michigan and parts of Illinois and Indiana.)

Consumer spending was sluggish, with households remaining price-conscious and focusing on necessities and holding back on expensive and luxury goods. Retailers braced for a “poor” back-to-school season. Factory activity was weak. The shutdown of several auto plants hurt, but the quick resolution of the Chrysler and General Motors bankruptcies boost business confidence.

Steel production rose as some businesses look to replenish shrunken inventories. Home building was slow, especially for apartments and condos. Foreclosed homes pulled down prices. Commercial real-estate contracted. Lower demand for livestock feed contributed to a drop in crop prices.

Chicago-Naperville-Joliet’s unemployment rate rose to 11 percent in June, from 10.4 percent in May.

ST. LOUIS
(This region covers Missouri, Arkansas and Kentucky, and parts of Illinois, Indiana, Tennessee and Mississippi.)

Manufacturing activity declined at a slower pace. Makers of furniture, fabricated metals, plastic products and paper are among those planning to expand and hire workers. But manufacturers in aerospace, electrical equipment and frozen food plan to cut back and lay off workers.

Retailers and auto dealers reported mixed sales. Home sales and home building declined. Commercial real estate struggled. In agriculture, farmers planned to harvest more acres of corn for grain as well as soybeans and rice but fewer acres of sorghum for grain.

The jobless rate for the St. Louis metro area rose to 9.9 percent in June, from 9 percent in May.

MINNEAPOLIS
(This region covers Montana, North Dakota, South Dakota, Minnesota and parts of Wisconsin and Michigan.)

Manufacturing activity declined. Oil and gas exploration edged up, while mining activity fell. Retail spending was “constrained.” Auto sales picked up slightly. Tourism activity slipped. Residential real-estate increased. Commercial construction was stable at low levels. Agriculture conditions weakened. Potato growers in the Red River Valley could lose 20 percent of their crop from heavy rains, while drought conditions persist in northern Wisconsin. Corn, soybean and wheat prices are expected to fall.

In the metro area of Minneapolis-St. Paul-Bloomington, the unemployment rate rose to 8.5 percent in June, from 7.7 percent in May.

KANSAS CITY, Mo.
(This region covers Wyoming, Nebraska, Colorado, Kansas, Oklahoma and parts of Missouri and New Mexico.)

Consumer spending was sluggish, but improvements were noted in auto sales and tourism. Factory activity expanded modestly. Makers of machinery for airplanes and for the oil and gas industries saw sharp contractions. Home sales were stronger. House prices were firm in Kansas and Oklahoma, but foreclosures weighed heavily on the Colorado and New Mexico markets. Commercial real estate weakened further.

The energy sector held back the region’s economy, with no change in drilling activity. Low natural-gas prices limited activity. In agriculture, growing conditions improved, thanks to ample rainfall. But soft demand for meat put downward pressure on livestock prices.

The unemployment rate in the Oklahoma City metro area rose to 6 percent in June, from 5.8 percent in May.

DALLAS
(This region covers Texas and parts of New Mexico and Louisiana.)

Retail sales were mixed. Department stores saw improvements, while “value-based” retailers saw slightly weaker activity. Auto dealers said sales were steady at low levels, and most are hopeful the worst is behind them. Manufacturers of construction-related materials and equipment said demand was flat.

High-tech manufacturers boosted production. Home sales improved in the lower-priced market for first-time buyers. Commercial leasing activity softened. Rising oil prices led some companies to boost the number of drilling rigs. In agriculture, drought continued to stress crops, and ranchers in the driest areas are cutting back on their cow and cattle herds at a loss.

In the San Antonio metro area, the jobless rate rose to 6.9 percent in June, from 5.8 percent in May.

SAN FRANCISCO
(This region covers California, Washington, Oregon, Idaho, Nevada, Utah, Arizona, Hawaii and Alaska.)

Retail sales were sluggish overall, but there were some signs of stability and improvement. Shoppers focused on necessities like food. Sales of furniture and household appliances was “anemic.” Demand for used cars was strong, while sales of new autos were stuck at low levels.

Manufacturing remained weak. Makers of fabricated metal products were especially hard hit. Production at airplane factories slowed. But conditions improved for makers of semiconductors and other information-technology products. Housing markets were weak overall, but low mortgage rates and falling prices propelled a pickup in some areas. Commercial real-estate markets weakened. Sales mostly held steady for crop and livestock products.

In the metro area of San Francisco-Oakland-Fremont, the unemployment rate rose to 10.3 percent in June, from 9.8 percent in May.

Copyright © 2009 The Associated Press. All rights reserved.

About Investment Analytics Group
Established in December 2006, Investment Analytics Group (IAG) provides integrated commercial real estate advisory services to investors. Our core services include asset level due diligence, asset management, financial modeling, feasibility studies and other related advisory services.
For more information visit us at www.iagroupllc.com or contact us at 208.846.8476 or info@iagroupllc.com.

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Real estate owners and investors always have choices. In times of uncertainty like our current environment, the majority of people opt to do nothing. Whether it is because people are gripped with fear or as a result of historically weak market dynamics, the number of closed property sales dropped precipitously in 2008. What should you, as an owner and/or investor, consider as we enter 2009 amid continued uncertainty? Here are some questions you should ask yourself:

1. Where are the opportunities to buy?
2. Is it even possible to sell property in today’s environment?
3. Will I be able to refinance, and under what circumstances?
4. What are the risks of doing nothing?

Buying opportunities exist today and are expected to get more plentiful throughout 2009. Many properties that were listed for sale in 2008 did not sell. We are starting to see more frequent price reductions and, in fewer cases, owners turning properties over to their lenders. An estimated $160 billion in commercial loans are coming due this year, and many of those borrowers will have to: a) invest additional equity into the property, b) find a mezzanine lender or equity partner, c) sell the property, or d) hand the property back to the lender. Many will choose options “c” and “d”, which will create some interesting buying opportunities later this year.

If you own a property and are considering selling it this year, your obvious concern is whether you might be selling at the bottom of the market. While prices may be down from the 2007 peaks, they are not likely to increase for two or three years. If you need to sell during this period, you will still be able to find a buyer provided that you are realistic about your property’s value.

If you are considering a sale/leaseback, you will be encouraged to know that demand remains strong among investors for good-quality, income-producing real estate. In fact, sale/leaseback transaction volume actually increased in 2008, indicating a flight to quality as investors turned away from speculative deals with “upside” in favor of lower returns with predictable cash flows. Unfortunately for sellers, cap rates are slowly returning to their historic averages, and are now 50 to 100 basis points higher than in the 2007 lows.

What about refinancing? With the demise of the CMBS market, and many banks and insurance companies on the sidelines, the remaining active lenders are being increasingly selective and tightening their underwriting standards. Appraisers are struggling to determine values in the absence of recent comps. Expect your lender to request a loan-to-value ratio of 65% or less with debt coverage ratios of at least 1.25. Many borrowers are opting for short-term floating loans, with the anticipation of obtaining permanent financing in two or three years when the markets (hopefully) will have stabilized.

Many other borrowers will end up renegotiating with their lenders. If their debt is non-CMBS, but rather portfolio debt on the balance sheet of the lender, borrowers may be able to buy the debt at a steep discount, possibly for only a fraction of the outstanding loan balance. This not only improves the borrower’s balance sheet and cash flow, but will free them up to acquire other assets.

The final option for property owners and investors is to do nothing. While this may seem to be the safe alternative, sometimes inaction is risker than action. Many owners who rejected offers last year, for instance, wish they could turn back the clock and accept those terms today. Similarly, sellers refusing to lower their asking prices may be well-advised to drop the price now in order to avoid further valuation declines later this year. For borrowers, taking a proactive approach with your lender may enhance your bottom line. And if you’re a buyer opting to remain on the sidelines, you may miss out on some great buying opportunities.

About Investment Analytics Group
Established in December 2006, Investment Analytics Group (IAG) provides integrated commercial real estate advisory services to investors. Our core services include asset level due diligence, asset management, financial modeling, feasibility studies and other related advisory services.
For more information visit us at www.iagroupllc.com or contact us at 208.846.8476 or info@iagroupllc.com.

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The Commercial Property New’s Dee Stribling wrote an interesting article about how the commercial real estate industry is changing its green movement. During the recent commercial real estate boom, developers and owners had the luxury of deciding how and if they would incorporate green elements into their new buildings. The CPN article argues that the one-time voluntary decision is becoming an industry mandate, driven by LEED and the US Green Building Council.

You can read the full article here.

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The global recession, decline in consumer spending and international trade have contributed to a number of big box retailers closing their doors in the last 18 months. Joining the ranks of Circuit City, companies like Linens ‘N Things, Shoe Pavilion, Mervyns and Tweeter have been shuttering their doors for the better part of a year. Other national retailers, like coffee-powerhouse Starbucks, are scaling back their U.S. chains to conserve cash.

While just a small percentage of the overall commercial real estate vacant space, property owners are finding it difficult to fill big box retail space. With few new chains stepping forward and thriving to expansion level in today’s economy, owners must get creative to fill that space.

Where short-term tenants (like discount bookstores) bring in some income, they will not sustain the overall space’s rent for very long. And subdividing a large retail location into smaller spaces may make sense today, but how will that impact the property’s value when the commercial real estate market recovers?

Unfortunately, there is no clear cut solution. While leasing out a vacant Circuit City location to a political campaign office in the short term may work in one market, it may not be supported in another. Property owners need to look at the industry’s history to find that these vacancies and the current market uncertainty will lead to the birth of new retailers in the future, much like Target and Walmart quickly overtook the market after the loss of Bradlees, Caldor and the pullback of Kmart.

The true challenge is finding a way to make the space profitable in the meantime.

About Investment Analytics Group
Established in December 2006, Investment Analytics Group (IAG) provides integrated commercial real estate advisory services to investors. Our core services include asset level due diligence, asset management, financial modeling, feasibility studies and other related advisory services.
For more information visit us at www.iagroupllc.com or contact us at 208.846.8476 or info@iagroupllc.com.

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