NAR: Commercial Real Estate Pinched by Wall Street Woes

WASHINGTON. DC - According to the latest Commercial Real Estate Outlook released by the National Association of Realtors (R), activity is slowing in leading commercial real estate sectors all in response to tightening credit and slow economic growth.

Lawrence Yun, NAR chief economist, acknowledges problems on Wall Street are affecting commercial real estate. “Although capital remains available for residential loans, the credit crunch is pronounced in commercial lending,” he said. “Combined with a slowing economy, the lack of credit is curtailing activity in the commercial real estate sectors. As a result, there’s been a slowdown in the net absorption of space, which is leading to higher vacancies and more modest rent growth.”

Patricia Nooney, chair of the Realtors(R) Commercial Alliance Committee, chracterized market conditions as complex. “We’re in an unusual situation where transactions are being curtailed not for lack of demand, but for serious challenges in obtaining financing,” she said.

Locally, the Cape Cod MA commercial real estate market has also experienced a clear drop off in sales transactions, a subject to be covered in my up coming Quarter III 2008 Market Report. Commercial leasing activity on the other hand appears to be the bright spot in the Cape Cod market. 

The NAR forecast analyzes quarterly data in the office, industrial, retail and multifamily markets. The COMMERCIAL REAL ESTATE OUTLOOK is published by the NAR Research Division for the Realtors(R) Commercial Alliance. The RCA includes affiliate organizations such as the CCIM Institute, Institute of Real Estate Management, Realtors(R) Land Institute, Society of Industrial and Office Realtors(R), and Counselors of Real Estate.

Barnstable, MA MSA Ranks 101 in Best Performing Small Cities Index

LOS ANGELES, CA - The Barnstable MA, MSA achieved a rank of 101 among 124 Small-Cities according to the Milken Institute / Greenstreet Real Estate Partners 2008 Best-Performing Cities Index released this month.

The index ranks U.S. metros based on their ability to create and sustain jobs. It includes measurements of both long-term (five years) and short-term (one year) employment and salary growth. Four measurements of technology output growth are also included because of the crucial role technology often has in regional economic growth.

The 2008 list of small cities contains 124 cities, compared to 174 last year following funding cuts permitting The Bureau of Labor and Statistics to collect data on fewer small metro areas. The decrease in the number of cities ranked resulted in a significant gains in year-over-year ranking for some metros. In 2007, the Barnstable, MA MSA for example ranked 137.

The technology sector advanced several newcomers to the top 10 in the annual ranking of where America’s jobs are being created and sustained, and metros that are highly dependent on export-intensive industries also showed success.

“This year’s rankings demonstrate that entrepreneurs continue to be the economic engine of choice for job growth, even in the face of national and global economic challenges,” said Ross DeVol, author of the report and director of Regional Economics at the Milken Institute. “We’ve seen energy, housing and even catastrophic events such as Hurricane Katrina impact a specific year, but consistently, those metros dedicated to growing their technology base and human capital beat the short-term shifts in the economy.”

Strong national economic downturns in housing and construction brought down last year’s top-ranked cities, with Florida and California metros being some of the hardest hit.

Several past leading cities fell due to the national decline in housing and construction markets, and metros that remain concentrated in manufacturing continue lag in the rankings. Rising energy prices have hindered the performance of cities where industries with high energy use are the key drivers, while benefiting those regions with significant oil and gas production and exploration activities.

The Milken Institute is a nonprofit, independent economic think tank whose mission is to improve the lives and economic conditions of diverse populations around the world by helping business and public policy leaders identify and implement innovative ideas for creating broad-based prosperity. It is based in Santa Monica, CA. (www.milkeninstitute.org)

Cape Cod Commercial Real Estate Prices and Assessments Inconsistent

Whether you are a buyer, seller, broker, banker, or appraiser no doubt the recent decline in Cape Cod commercial real estate sales has made pricing or valuing a property much more difficult. As we entrench deeper in the current market cycle, many practitioners needing a continuous finger on the pulse of prices and values will creatively apply alternative methodologies. In our market area, in lieu of an appraisal or other formal analysis the leading and most time honored proxy for real estate pricing or valuing is the property’s municipal assessment. 

I thought it would be interesting to see how this anecdotal alternative has measured up recently by comparing recent Cape Cod commercial property sale prices with their respective assessed value. The data sets included sales prices from 93 transactions completed between January 2008 and June 2008 and their Fiscal Year 2008 assessments. The properties sold were located throughout all areas of Cape Cod. This is what the analysis revealed:

• Nearly 30% of the recorded sale prices were below the assessed value and the remaining 70% were transacted at sale prices above the prevailing assessed value.
• In 17.4% of the transactions, the sale price and assessed value fell within 10% above or below 100% of the assessed value.
• Among all transactions, sale prices were on average 128.5% higher than the Fiscal Year 2008 assessments. The median was 120.5% higher.

As the analysis shows, property assessments are often an unreliable proxy for establishing a reasonable price or market value of Cape Cod commercial real estate. The analysis doesn’t suggest the assessments are flawed or established superficially. Additionally, assessing professionals I have encountered throughout the region are among the most astute, capable and concientious practitioners I have encountered in my 25 years in the real estate business. What’s more, assessed values are established for a unique purpose incorporating special criteria, specific time frames and statutory guidelines.

In a market cycle where the number of Cape Cod commercial property sales are trending down, price levels are in a state of flux and property assessments provide inconsistent guidance, where do we turn?

In short, I suggest doing what always produces superior results in a challenging market: adopt a back to the basics mindset where there is no substitute for well developed, comprehensive market intelligence and a willingness to devote more time investigating and truly understanding key market nuances.

 

 Joseph P. Egan is a MA Certified General Real Estate Appraiser with over 25 years of professional valuation experience. Through a specialization in commercial real estate and closely-held businesses, since 1991 he has completed over 600 appraisal, brokerage and consulting assignments concerning all types of commercial real estate assets and going concerns located on Cape Cod, Nantucket, and Plymouth County, MA. Clients served generally include attorneys, banks, corporations, developers, investors, and owners of closely-held and family businesses. Prior to relocating to Cape Cod, Joe worked in the New York Metro Area and throughout CT with leading regional and national appraisal firms such as Cushman & Wakefield. Please contact Joe here.

Using Rules of Thumb to Value or Price a Business - Salt to Taste

Rules of Thumb are either a single or tight range of multiples assigned to an income stream generated by a particular business. They are also available for just about any business and do vary from industry to industry.

Rules of Thumb should not be considered synonymous with transaction data points or multiples derived from specific transactions usually reported by a party involved in an actual business sale such as a business broker or other intermediary.  

Although there may be some limited exceptions, the fact is while easy to apply and understand, valuing or making a purchase offer on any business by relying on a Rule of Thumb is not a good idea. There are several valid reasons why:

• At best, a Rule of Thumb is an anecdotal average and if applied across the board it tends to penalize the best performing businesses and reward the poor performers.
• In a related sense, although some massaging may be attempted, Rules of Thumb are fairly static and do not go far enough in accounting for variations from business to business. Examples of these key variations may include differences in customer and employee loyalty, lease terms, location, cash flow trends, supplier relationships, the nature and quality of the FF&E, and barriers to entry.    
• Reliably developing the correct income stream to apply against a Rule of Thumb can be tricky. If this important task is incorrectly developed and the Rule of Thumb is subsequently applied, it could very well be equivalent to a double mistake.
• Ray Miles, the creator of the largest and oldest business transaction database and founder of the Institute of Business Appraisers suggests using a minimum of ten data points or transaction multiples in valuing a business under a Sales Comparison oriented approach. How convincing is that single Rule of Thumb or tight range looking now? 
• A certain mystery surrounds Rules of Thumb. For instance, like urban myths, who actually creates them and under what circumstances are they formulated (based on completed deals or general expectations, cash or seller financed transactions)? And how do Rules of Thumb stack up against empirical transactional data? 

Whether you are a business owner or looking to buy a business, no doubt somewhere along the line a Rule of Thumb or two will be placed on the table. If you are inclined to partake, just remember to reach for and apply a little salt.