The Northwood Group

Building Partner Investors

Experts in Commercial Real Estate Investment

Utah is one of the nations fastest growing states. Our commercial infrastructure continues to expand and develop at an unprecedented pace. The Northwood Group has helped to educate and guide our clients through real estate investments for over 18 years. Whether buying or selling, Utah Property Investors is a trusted and experienced partner in commercial real estate transactions.

Recent Transactions

Kaysville Retail

  • 6,264 square feet
  • Historic Kaysville Main Street
  • 2 Tenant Retail Building

Decker Lake Office Building

  • 73,954 Square Foot Office Building
  • West Valley City
  • Call Center Building

Just Sold – Layton Call Center

August 10

We are pleased the announce the sale of the Layton Call Center located at 2195 North University Park Boulevard in Layton, Utah.   The property consists of an 81,525 square foot building sitting on 9.69 acres adjacent to the successful Legend Hills Development northeast of the I-15 Antelope Drive exit.

Please contact us for more detailed information.

Thanks, Brandon (brandon@northwoodgrp.com)

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Utah – Unique Residential Market Update

August 3

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In recent months I have included a couple of updates on the residential real estate market.  I do so because although the residential and commercial markets are different, they are correlated and driven by many of the same factors.

Matt Green, Regional Director of Keller Williams Utah produces some very propriety and interesting breakdowns of the Utah market.  I have included an attachment to his assessment of the SLC market.  Breakdowns of Park City and of the Davis, Weber & Utah County markets are available upon request.

2015 – Q2 Market Report Graphs – Salt Lake County

A couple of the highlights of the report include:

  • Average days on market are lower that at anytime during the past 15 years excepting 2005, 2006, & 2007.
  • Median sales price is higher than at anytime during the last 15 years excepting 2007.

Please let me know if you have additional questions.

Brandon

 

 

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Just Sold – Kaysville Retail

April 20

We are pleased to announce the sale of a 6,000 square foot retail building located at 141 North Main Street on historic main street in Kaysville, Utah.  The building was acquired by a restaurant group that will operate under the name of Orlando’s.

Please inquire for additional information regarding the sale — brandon@northwoodgrp.com

 

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Just Sold – 1500 South Industrial

April 13

We are pleased to announce the sale of the 1500 South Industrial Building in Salt Lake City, Utah to Falgers, Inc.  The Northwood Group represented the buyer in the acquisition of this 120,000 square foot, 4 tenant, industrial investment.  The project is an older property with amazing functionality in terms of clear height, column spacing, loading, etc for a property of its age.  With rents cast during the down turn the market the property is well-positioned to take advantage of the strengthening market.

Please contact for additional information relating to this sale.

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Utah Residential Market Update

March 3

Although driven by many different factors, residential and commercial real estate markets are inter-related in many ways.  Savvy commercial real estate investors should pay careful attention to statistics such as natural population growth, net in-migration, unemployment rates, and of course interest rates.

All of these items greatly affect investors perceived vitality of a given market.  Population growth leads to a greater need for housing and retail properties and also creates demand for employment.  With employment growth comes the need for additional industrial and office commercial real estate.  These are some of the reasons that Utah has been such a sweet heart for commercial real estate investment over the last 5 years.  Commercial real estate investors inside and outside the Utah market love the vitality of this young and growing population and business leaders have recognized Utah as a great place to locate their companies to be able to capture much of this young talent.

Based on these sentiments you would expect that the residential housing market would be off the charts along the Wasatch Front — but it is not.  2014 actually saw slight decreases in activity over 2013.  I recently read an article written by Spencer Sutherland published in Utah Business Magazine in their January issue.  It discusses many of the residential Utah real estate trends over the years and what the market is currently seeing.  I have attached the link to the article as well as the full text of the article below.  A few of the interesting statistics (statewide) I found interesting were:

  • The number of new single family homes delivered dropped 14.1% from 6,142 in 2013 to 5,507 in 2014.
  • The numbers of existing single family home sales dropped 2.3% from 19,858 in 2013 to 19,408 in 2014.
  • Renter occupied housing increased from 199,734 in 2000 to 259,555 in 2010.
  • Apartment vacancy is as low as it ever has been at approximately 3%.

The articles offers potential suggestions for the trends that are being seen.  As I look at these factors I always compare the statistics to what I am actually seeing in the market.  The residential market actually appears to be healthy.  Neither sellers nor buyers have a strong advantage.  Growth appears to be steady which is promising.  I might argue that the decline in new single family homes is as much as a result of a lack of available land opportunities for homebuilders as it is a decline in demand. I have had a very difficult time procuring large tracks of residential land for my private as well as governmental clients.

Provided that the major economic indicators – population growth, unemployment, and interest rates remain positive I maintain a very positive outlook on the residential market and subsequent commercial real estate investment market in Utah.

Please enjoy the article below.

http://www.utahbusiness.com/articles/view/room_to_grow

 

Room to Grow

The Past, Present and Future of Utah’s Real Estate Market

By Spencer Sutherland

January 5, 2015

It’s been more than five years since the official end of the Great Recession, and all signs point to a recovered Utah economy. In 2014, the state’s employment numbers not only reached pre-recession levels, but they also surpassed them. Those numbers came after a strong 2013, where both home sales and home prices jumped by 10 percent. That’s why 2014 was supposed to be the year the real estate market finally left the recession in the rearview mirror—but that didn’t happen.

After three quarters of flat sales and prices, the year ended with slumping sales—despite historically low interest rates. What happened? And what should Utahns expect of the real estate market in 2015?

The Past

Tough times for real estate are nothing new for Utah. In fact, since the early 1970s, the state has experienced five unique housing cycles, each with peaks and valleys.

The late 1970s were notable because of an all-time high in new home construction, driven by the needs of baby boomers. Despite the growing population and high job growth rate, homebuilders got ahead of themselves and built more speculation homes than the market could support, resulting in a steep decline for housing.

Tough times returned in the 1980s, when the over-building from the ‘70s, combined with a recession, led to a 67 percent decline in housing activity. To make matters worse, interest rates climbed to more than 18 percent as the Federal Reserve tried to address the inflation caused by rising energy prices.

All of that turned around in the late ‘90s and early 2000s. With a growing number of Utahns hitting the ideal age for home buying—ages 25 to 34—the real estate market expanded into new territory. First-time home buyers were building new homes in Lehi and Eagle Mountain, baby boomers were moving into new homes in South Jordan and Riverton, and sub-7 percent interest rates made it a great time to buy a second home in Washington County. But then things fell apart for the Utah real estate industry.

In 2008, housing activity dropped by 50 percent. A year later, single-family construction fell to the lowest level since 1989. House prices fell by 20 to 25 percent and the state lost 40,000 construction jobs.

Today, the state is still working to dig its way out of the deepest housing decline in more than four decades. James Wood, director of the Bureau of Economic and Business Research at the University of Utah (BEBR), has spent years tracking Utah’s housing ups and downs. He says this cycle’s recovery has been slower than any other.

“Four years from the trough [of a housing cycle], we’re usually back to 80 percent of the pre-recession level peak,” Wood says. “We’re just barely over 50 percent now.”

Wood says the causes of the sluggish recovery fall into two broad categories: cyclical and structural. Cyclical factors include job loss, interest rates, price declines and negative equity. What makes the slow recovery so baffling is that despite the fact the state has successfully bounced back from most of the cyclical factors—meaning employment is at all-time high, interest rates have remained low, home prices have come back up, and foreclosures have dropped off—home sales and new construction still haven’t caught up.

Structural factors—those that will affect the future of housing—are equally problematic. One structural factor is a change in Utah’s demographics. “Our age structure is not quite as favorable as it was a few years ago,” Wood says. “The 18 to 30 age group—the group that forms new households—is not as large a percent of the population as it once was and that will be the case for the next few years.” Additionally, the state’s in-migration has slowed, resulting in less need for
new housing.

Income has also become an important structural factor. “If you look at long-term numbers, median household income has not changed much in real terms over the last 30 years. In fact, since 2007, median income in Utah has dropped by 7 percent,” Wood says. “When incomes are low, people postpone forming a household. They also double up in houses or stay with their parents.”

Another potential structural change is housing preference. “Some people have made the case that millennials are not as predisposed to home ownership as previous generations,” Wood adds. However, it’s unclear whether millennials are choosing to live in apartments because of a true preference or as a result of economic constraints like trouble qualifying for a loan in a tightened lending market. “The jury is still out on that structural change,” Wood says.

The Present

The impact of a slow recovery goes far beyond homeowners, buyers and sellers. Homebuilders have struggled as well. It has been tough for new construction to compete with the low price of foreclosed properties, and declining equity has kept many buyers from moving up to a more expensive home. As a result, building is down in every major county in the state.

Related industries have also felt the pain. Utah’s manufacturing sector fell by 20,000 jobs during the recession. Local companies that supply the construction industry with goods such as glass, gravel, sand, trusses and concrete took the hardest hit.

Housing woes have also impacted the retail space. “The weakness in the recovery of retail sales is traceable to the uncertainty and the unease that homeowners have now,” Wood says. “With less equity, [homeowners] are a little more hesitant to use equity for retail purchases.”

Factoring in inflation and a population increase of 250,000 Utahns, retail sales are 15 to 20 percent lower than before the recession. “I would make the case that part of that drop is due to the heavy debt load people were carrying, combined with falling housing prices. That contributed to uncertainty and caution with retail activity,” Wood says.

Not surprisingly, the retail segments that are having the hardest time recovering are furniture stores and home and garden retailers. “Those are big employers and they lay people off,” Wood says. “You can see it directly. The weakness in the recovery and the weakness in the housing sector affected retail sales in those two categories and we’re still seeing it.”

Despite the overall sluggishness of the housing recovery, there are plenty of positive indicators for the future. The market is seeing decent gains at the higher end of the price spectrum, with home sales in the $500,000 to $750,000 range up 9 percent year over year and the $300,000 to $500,000 range up 12 percent.

Why the lift in more expensive homes? “We saw a period where people who didn’t have to move chose not to because of the uncertainty in the economy,” says Rick Southwick, president of the Utah Association of Realtors. “People have some confidence again. They’re taking advantage of improvements in their equity position, selling existing homes, and moving up to larger, more expensive homes.”

Mid-level homes, ranging from $200,000 to $300,000, are also moving. Houses below that range, however, are not. “There haven’t been as many sales of starter homes because of a lack of inventory and qualification limits,” Southwick says.

Qualifying for a home loan continues to be tough, especially for first-time buyers. “We see statements in the media that lending is starting to loosen up, but we haven’t really seen that happening yet,” Southwick adds. “Right now you still have to have excellent credit to get a loan.”

The Future

Over the past year, there have been pockets of strong home sales around the state. Through September 2014, Utah and Tooele counties saw an increase of 6 percent in sales and Davis County’s sales jumped by 5 percent. “These areas are outside of the city center, so land is less expensive,” Southwick says. “There is still room to grow and there is a lot of new construction.”

Home prices increased the most in Uintah County, where the average sale was up 13 percent over the previous year. This increase was driven largely by in-migration to the county, stemming from the boom in oil and gas production in the area. Wasatch County home prices increased by 6 percent, driven in part by the area becoming a popular second home destination.

Across all counties in the state, 2014 sales benefitted from unexpectedly low interest rates that hovered around 4.1 percent and even dropped below 4 percent toward the end of the year.

Southwick anticipates that 2015 will largely look like 2014. Neither buyers nor sellers will have a noticeable advantage, though it’s still common for sellers to pay some part of the buyer’s closing costs.

It seems unlikely, however, that interest rates will remain as low. The National Association of Realtors expects rates to hit 5 percent by midyear. Despite the uptick, the association predicts the number of both new and existing homes to increase.

Despite the association’s optimism, Southwick worries about the impact of rising interest rates. “I’m not sure how much of an interest rate the market can sustain in the current economy,” he says. “From a historical perspective, 5 percent is still a great rate; it’s just higher than what people are used to. In the lower price ranges, it has an impact on what people are able to afford. If we see enough of a rise in interest rates that could put some downward pressure on prices.”

 

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JUST SOLD – Farmington Office Building

February 23

We are pleased to announce the sale/leaseback of a 13,000 square foot office building located in Farmington, Utah.  Details of the sale include:

  • 1.79 acres
  • Built in 2006
  • Tilt-Up Concrete Construction
  • Additional Reagan Billboard Lease
  • I-15 frontage

More information regarding the sale available upon request.

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Utah Commercial Real Estate Investment – How long can the bull run last?

February 6

I often get asked in everyday conversation, “How is the commercial real estate market in Utah?” That is an interesting question to answer because there as so many sub-components to that question.

  • Are we talking about the leasing market?
  • Are we talking about vacancy and increasing lease rates?
  • Are we talking about new construction?
  • Are we talking about commercial real estate investment demand?

It has been a very interesting commercial real estate market in Utah during the last several years as we have seen an increasingly strong appetite for investment properties while lease rates, in general, have not seen the increases that might be expected based on increasing property values. The easy answer to the question about the market is “Commercial real estate investors (new investors to Utah and repeat investors) continue to aggressively seek properties in Utah pushing cap rates down and prices higher”. With that being said, how long can this run last? Prices started to recover as early as 2010, starting slowly and continuing to heat up to today. Many would argue that we are in the final phase of the typical real estate cycle. The question is just how long that cycle will last – 1, 2, 3 years?

I recently read an article written by Kenneth P. Riggs, Jr. published in Commercial Investment Real Estate Magazine titled Sky High Prices? Investors don’t seem to mind. In his article Kenneth points out many of the strengths in the economy such as the more than 3 percent GDP growth with continued low inflation and unemployment.  Based on his analysis of this market cycle compared to past market cycles, the commercial real estate market may have another 18 to 24 months of run left. He has a few very interesting observations regarding availability of capital compared to underwriting standards. I love his quote that, “…be worried when the market starts to say, This time is different.”

by Kenneth P. Riggs Jr., CCIM, CRE, MAI, FRICS

“Price is what you pay; value is what you get.” — Warren Buffet

As we look to 2015 and beyond, the commercial real estate market is enjoying much positive press and continues to be a favored asset class relative to stocks, bonds, and cash. After the most recent commercial real estate downward cycle in third quarter 2008, followed by a rebound in 1Q10, we are at a new crossroads where prices are clearly outpacing valuations. This is the final phase of our up cycle, and the key question is, how long can this phase run? When we think about investments and investment cycles, we are coming to realize that the more things change, the more they stay the same. In other words, be worried when the market starts to say, “This time it is different.”

Economic Fits and Starts

In our search for how prices and values are aligning themselves, we first need to examine the economy. The outlook for the U.S. economy is much brighter than it has been since before the Great Recession. Besides more than 3 percent growth in gross domestic product in 2Q14 and 3Q14, inflation remains low and the unemployment rate declined to 5.8 percent in October 2014. In fact, job growth has improved enough that employers are on pace to add the most jobs on an annual basis since 1999, according to the Bureau of Labor Statistics.

However, a variety of headwinds is still holding back the progress that many economists had been predicting, with each setback causing forecasters to recalibrate their expectations. These recalibrations have been triggered by a workforce participation rate that has declined to 1978 levels, as the wages of the majority of workers remain relatively stagnant. In addition, the federal debt has ballooned to nearly $18 trillion, while major entitlement programs are underfunded. The housing sector has improved slightly, but the young adults we have relied on in the past to purchase homes are burdened with oversized amounts of student debt. Furthermore, many of the economies in Europe and Asia are contracting, and territory disputes from the Ukraine and Russia to Iraq and Syria have given rise to new acts of terrorism. However, in the end, the U.S. economy appears to have many resilient elements in place to withstand future disruptions in the financial markets.

Each quarter, Real Estate Research Corp., a Situs company, surveys some of the nation’s leading institutional investors about the economy and reports this information in the quarterly RERC Real Estate Report. As demonstrated in Figure 1, commercial real estate has been consistently rated higher than the alternatives, even as the economy has been recovering.

Flush With Liquidity

Despite the macroeconomic uncertainties, the global and domestic markets have provided investors more capital than they know what to do with. With investors searching for a place to park this capital (with good risk-adjusted and safe returns), the result has been asset prices pushed to all-time highs — which is making the market nervous. We see this in the stock market, with record-high performance, and we see it with commercial real estate, which, with its attractiveness as an asset class, including return performance, ability to hedge against inflation, and tangible nature, has attracted a great deal of capital.

Put stocks and real estate together and you get an idea of just how much in demand these two asset classes are. According to Bloomberg, investors are rewarding retailers’ efforts to spin their properties into real estate investment trusts. Sears Holdings recently announced plans to create a REIT for its properties, and shares increased 31 percent.

RERC also examines the amount of capital available for investment and compares it to the underwriting discipline. As shown in Figure 2, investor ratings for capital availability have greatly outpaced the discipline (or underwriting standards) for capital in 3Q14. It is worth noting that the last time the availability of capital outpaced discipline to this degree was in 2Q07 — shortly before the credit crisis that preceded the Great Recession.

The comparison of the availability and discipline of capital shows that we are again at an inflection point. The flood of capital chasing commercial real estate continues to pressure property prices to increase, especially for high quality assets in top markets. Some investors have noted that, given high prices, there is already too little product to invest in, which further drives prices higher and returns lower.

However, RERC expects values and prices to continue to increase as long as interest rates stay low. If RERC’s history of availability of capital versus the underwriting discipline holds up, this bull commercial real estate market has another 18 to 24 months to run. This is not to say the market is right, but it is the market.

It All Depends on Interest Rates

Although the Federal Reserve has concluded its recent quantitative easing program, monetary policy remains accommodative, with the federal funds rate remaining at 0 percent to 0.25 percent for “a considerable period of time.” The Fed’s target unemployment rate has been reached, but its target inflation rate is elusive, and growth remains slower than expected.

The market and most investors anticipate that the Fed will raise short-term interest rates in mid-2015, stating that it is too risky for the Fed to leave rates at current record lows much longer (in case the rates need to be lowered again when there is another recession). Others believe that the Fed will leave the funds rate very low for several years due to global pressure, as troubled economies in the rest of the world would be forced to pay higher interest rates.

As shown in Figure 3, risk-free rates in other developed economies have followed the U.S. trend to keep rates low, and as shown in Figure 4, 10-year Treasury rates have been declining for several decades. Despite the Fed’s clear message about their intent to increase U.S. Treasury rates at some point, some investors have become complacent, expecting Treasury rates — as well as interest rates — to stay low for much longer. Continuing low interest rates will be another significant benefit for commercial real estate investors.

Value vs. Price

As long as Treasury rates and interest rates remain low, the global investment environment for commercial real estate will be very attractive. Investors will continue to purchase real estate, prices will continue to increase, and values will continue to chase prices, as capitalization rates on a broad market perspective will further compress.

As shown in Table 1, RERC’s value vs. price rating for commercial real estate overall dipped slightly to 5.3 on a scale of 1 to 10, with 10 being high, during 3Q14. However, with the midpoint of the rating scale at 5.0, a rating of 5.3 indicates that value vs. price can still be found in commercial real estate overall, despite the slight decline in this rating during the past few quarters.

On a property sector basis, the value vs. price rating increased for each of the sectors (except for the hotel sector) during 3Q14. As shown, the industrial sector retained the highest value vs. price rating among the property types. However, all sector ratings were higher than the midpoint of 5.0, which means that prices still have room to climb before properties become overpriced (compared to their value) — at least as long as interest rates remain low and cap rates have room to further compress.

A Closer Look at the Property Types

Additional Considerations

As 2015 continues, commercial real estate investors are encouraged to keep in mind the following points:

  • The U.S. economy is resilient and will survive a looming short-term rate correction. In the long term (toward the end of the decade), the economy is positioned to demonstrate above-average growth.
  • Global pressures will continue to keep 10-year Treasury rates below 3.0 percent in 2015.
  • Commercial real estate will be a preferred asset class in 2015 relative to stocks, bonds, and cash, and this will continue to put upward pressure on prices and values throughout the U.S.
  • Commercial real estate space fundamentals will continue to improve slightly, except in the multifamily sector, where vacancy is increasing due to supply additions.
  • Required total returns and capitalization rates for the broad commercial real estate market will continue to compress in 2015, as long-term interest rates stay low.
  • RERC’s total return expectations based on our value forecast and income forecast reflect a total return in the low teens for unleveraged commercial real estate assets, and a total return in the mid-teens on a leveraged basis for 2015.
  • An increasing number of alternate property types (beyond the core property types) will continue to attract investors, including storage facilities, single-family housing, student housing, seniors housing, and medical office buildings.
  • There will be continued expansion of investment products and opportunities for retail investors through private real estate investment trusts, single property-REITs, club investing, and defined contribution options.
  • The market cycle is not different this time, but commercial real estate will see another strong year in 2015, only to be faced with another market down cycle looming out past 2015.

Office. The office market continues to struggle. The vacancy rate was 16.8 percent in 3Q14, which was only 10 basis points lower than a year ago, according to Reis. Despite that, effective rents increased 2.7 percent to $23.94 per square foot year over year. In addition, according to Real Capital Analytics, 12-month trailing transaction volume increased more than 27 percent to $121 billion in 3Q14 compared to the previous year, and prices psf increased by 6 percent to $245. RERC’s required pre-tax yield rate (internal rate of return) dipped to 7.9 percent, and the required going-in cap rate decreased to 6.1 percent in 3Q14. Figure 5 illustrates the spreads between RERC’s required pre-tax yield rates and going-in cap rates and 10-year Treasurys. Vacancy is expected to drop to 16.3 percent and rents to increase 3.7 percent by the end of 2015, according to Reis. Some metros are expected to outpace expectations, such as Portland, Ore., with stagnant cap rates in the office market, and Minneapolis, which is expected to see slightly higher rental growth than the national average over the next couple years.

Industrial. Vacancy in the industrial sector decreased to 9.0 percent in 3Q14, according to Reis, and was accompanied by effective rental growth of 2.5 percent YOY to $4.45 psf. Transaction volume increased by 6.0 percent, with prices increasing 17.3 percent to $77 psf over the past year, per RCA. RERC’s required pre-tax yield rate for the industrial sector declined to 7.7 percent, while the required going-in cap rate decreased to 6.0 percent in 3Q14. Reis forecasts the industrial vacancy rate to decline to 8.0 percent by 2016, and for effective rent to grow by 3.3 percent. Industrial vacancy is expected to decline even more in some markets, such as Sacramento, Calif., and Orlando, Fla.

Multifamily. The vacancy rate for the apartment sector increased slightly in 3Q14 to 4.3 percent, while the effective rent rose 3.91 percent during the past year to $1,117 per unit, according to Reis. As reported by RCA, 12-month trailing transaction volume increased 6.2 percent YOY to $104 billion in 3Q14, as the price increased 21.5 percent to $128,259 per unit, a new high. RERC’s required pre-tax yield rate declined to 7.0 percent, while the required going-in cap rate declined to 5.0 percent. Reis notes that due to expected completions of 444,000 units over the next two years, vacancy is likely to increase to 4.9 percent in 2015 and to 5.1 percent in 2016, although vacancy in some metros (San Diego, for example) is not expected to increase as much. Effective rental growth of 3.1 percent in 2015 and 2.6 percent in 2016 is expected.

Retail. According to Reis, retail vacancy declined slightly to 10.3 percent in 3Q14, while effective rent increased 1.91 percent to $17.07 psf. Transaction volume increased 8.1 percent YOY, with pricing increasing 24.8 percent to $214 psf, as investors have been purchasing higher quality retail properties. RERC’s required pre-tax yield rate decreased to 7.8 percent in 3Q14, while the required going-in cap rate declined to 6.1 percent, although this has had more to do with abundant capital and easier financing than improving fundamentals. However, Reis projects that vacancy will be 100 bps lower at 9.3 percent and rents will step up to 3.3 percent annual growth in 2016. Retail properties in some metros — especially Florida markets like Miami and Orlando — offer strong investment opportunities due to improving fundamentals.

Hospitality. Smith Travel Research reports that U.S. hotel occupancy rose 3.9 percent YOY to 62.7 percent during the week of November 9-15, 2014. Revenue per available room and the average daily rate increased 8.6 percent to $72 and 4.6 percent to $115, respectively, according to PKF Hospitality Research. Hotel volume increased to $33 billion on a 12-month trailing basis in 3Q14, according to RCA, while the price per unit increased to $154,798. RERC’s required cap and discount rates for this sector decreased more than for any other property type on a YOY basis in 3Q14, as RERC’s required pre-tax yield rate and required going-in cap rate declined by 80 bps to 9.2 percent and 7.2 percent, respectively. PKF predicts that hotel sector occupancy will reach 65 percent in 2015, which would be the highest occupancy achieved since the recording of this rate started. Investment trends for hotel properties seem to be moving further out from core urban areas for example, Long Island, N.Y., versus Manhattan.

Value Expectations for 2015

Commercial real estate is a favored investment alternative compared to stocks, bonds, and cash, especially in these uncertain times. Not only does commercial real estate generate high risk-adjusted returns compared to other investments, property is tangible, transparent, a hedge against inflation, and offers reasonable return performance on capital and income. (Income is currently approximately 60 percent of returns.)

Commercial real estate has more than recovered the value it lost in the Great Recession, as shown in Figure 6, and with respect to return performance, broad market prices and values have room to grow for approximately 12 to 18 months. This does not mean that commercial real estate prices and values are sustainable, but for many investors, there are no other good alternatives, and as a result, many investors will continue to pay nearly any price for the value commercial real estate offers.

Kenneth P. Riggs Jr., CCIM, CRE, MAI, FRICS, is president and CEO of Real Estate Research Corp., a Situs company, and publisher of the RERC Real Estate Report. For more information, or for a special CCIM member discount to the report, please contact RERC at publications@rerc.com.

 

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2014 Utah Commercial Real Estate Update

January 27

The Utah Chapter of NAIOP recently held its 2014 Year End Commercial Real Estate Symposium titled “Destination Utah”.  The event provided a fantastic overview of the Utah Commercial Real Estate Market.  Overall, the commercial real estate market in Utah is very strong boasting low vacancy rates, increasing lease rates and a robust commercial real estate investment market that is still providing opportunities for private and institutional investors alike.

There were several take-away’s for me that I found very interesting and telling:

    • Only 5% of the commercial real estate transactions nationwide in 2014 were distressed compared to 20% in 2010.  With that being said, there were almost no distressed deals in Utah in 2014.
    • Foreign investors were increasingly seen in the Utah Commercial Real Estate Investment market seeking the strong fundamentals that the market offers.
    • Nationally more money is flowing into secondary markets as commercial real estate investors seek yield not found in primary markets.
    • Although the Utah Commercial Real Estate Investment market boasts strong fundamentals, the increased presence of institutional and foreign investors makes Utah more sensitive to the global capital markets than it has been in the past.
    • Despite the severity of the economic recession, values for institutional grade properties in the US are 15% higher than the 2007 peak.
    • 2014 marked near record commercial real estate investment volume in Utah totalling $1.3 billion in sales (excluding multi-family).  This does not include owner-occupied sales.  The trough saw volume at only $194 million.
    • Average overall cap rates are at 7.25% which is the lowest in history (overall including all property types except multi-family)
    • Of the $1.3 billion in total transactoin volume, there were 112 deals under $20 million totalling $427 million and 11 deals over $20 million totalling $900 million.
    • The average cap rate for properties under $20 million was 8.03%.  (7.93% for industrial, 8.23% for office and 7.94% for retail) which shows that the 11 largest deals greatly pull down the average overall cap rate.
    • The Utah Commercial Real Estate Investor Composition was 46% from out of state investors and 54% for in state investors.  Of those investors 84% were private with 16% being institutional.  61% of commercial real estate investors in Utah were repeat buyers with 39% being new to the Utah market.
    • If you include multi-family properties the total transaction volume is $1.8 billion.

As you can see the market is very strong with a bright 2015 forecast limited primarly by supply of good commercial real estate investment product.

Following are a few other market statistics that are worth highlighting:

OFFICE MARKET

  • Overall vacancy is down to 10.02% in 2014 from 11.06% in 2013.
  • Overall lease rates were relatively flat slightly increasing from $20.08 to $20.10 per square foot.

INDUSTRIAL MARKET

  • Total industrial vacancy sits at only 5.5%.
  • Overall achieved lease rates increased from $0.31 to $0.38 per square foot.
  • There is a surge of speculative construction coming in the 100,000 SF + segment.

RETAIL MARKET

  • Overall vacancy dropped to 6.2% down from 6.9% in 2013.
  • Overall asking lease rates increase from $16.94 to $18.98 per square foot.

Although difficult to find there are still opportunities to invest in commercial real estate in Utah.  Those already invested here are positioned well and may have more value than they may have realized.

Please contact me at brandon@northwoodgrp.com for additional detailed market information or to discuss any commercial real estate needs that you may have.

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JUST SOLD – J&M Mobile Home Park

December 11

The Northwood Group is pleased to announce the sale of the J&M Mobile Home Park located in Layton, Utah.

The J&M Mobile Home Park is a uniquely situated commercial real estate investment located just off Hill Field Road across the street to the east from the Layton Hills Mall. It is a rare mix of quiet living and amazing access to services and amenities. All of the mobile homes are owned by the occupants, which is increasingly rare in small mobile home parks. The mobile home park continues to perform well with strong occupancy. The property was priced at an 8% cap rate.

Additional information regarding this sale is available upon request.

Mobile Home 2 test

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Interest Rates and Commercial Real Estate Investment Activity

December 8

Increasingly, conversations with investors lead to the hot topic of the historically low interest rates, their affect on current values, and the impact that rising interest rates will have both on value and commercial real estate investment activity.  It seems that there are as many diverging opinions on this as there are investors and we won’t know who is right until we are looking in the rear view mirror.

I am right along side these investors as I try to map out strategies for myself as well as the investors that I work with.  Opinions on these issues affect everyday decisions such as:

  • In terms of financing options, do I sacrifice a little on the rate today to get longer term fixed debt?
  • In negotiating new and renewing existing leases am I moving to an index based versus a fixed rate annual increase?
  • Am I willing to buy commercial real estate with long-term fixed lease rates (no increases)?
  • Is a 6% or 7% cap rate property a good fit for my portfolio?
  • Am I wise to own debt-free real estate?

Obviously the answers to these questions vary based on the investor and the portfolio objectives but they are interesting to ponder as we consider strategy in the coming years.

It was fascinating to me to watch during peak of the market in 2005-2007 as cap rates went to record levels.  Many investors stepped back saying that these prices were too far beyond historical levels.  Others said that commercial real estate investment had arrived as an “asset class” and that the historical cap rates no longer had relevancy.  We know how that turned out.  We are now looking at cap rates that look a lot like what they did prior to the recession.  Are we walking in front of that same train?  Time will tell but there are some very significant differences between 2005-2007 and today:

  • I see very few (if any) properties trading based on “pro-forma” rents.  Prior to the recession there was a lot of speculation on occupancies and future lease rates which never materialized.  Investors as well as lenders appear to be doing a much better job underwriting the quality of the in-place leases.
  • Thus far, most of the activity has remained in high quality, well-located properties.  The properties with too many “thorns on the rose” are simply not trading.
  • Although cap rates as similar, the major difference between the 2005-2007 market and today’s market is the spread between cap rates and interest rates.

I recently read an article written by William E. Hughes and published in Commercial Investment Real Estate Magazine that addressed cap rate and interest rates.  I have included the full article as well as a link below.   He shares a graph that is very telling.  In 2006, the spread between cap rates and the 10 year treasury note was only 200 bps.   Although cap rates are similar, there still remains over a 400 bps difference between cap rates and the 10 year treasury note.  The argument being that there is room for compression in that spread where interest rates could rise without an immediate correlating increase in cap rates.  Additionally, rising interest rates would indicate strengthening in the economy and additional consumer confidence which should also increase confidence in commercial real estate investment strengthening cap rates further.

I thought his article did a great job succinctly addressing a very complex and important topic to our industry.

 

Will rising interest rates stall commercial real estate activity?
by William E. Hughes

Strong capital flows, from both equity and debt sources, are boosting the liquidity of the commercial real estate market and driving transaction activity. Equity capital of all stripes — from local investors and 1031 exchanges to institutions that include real estate investment trusts, private equity, and sovereign wealth funds — have accelerated acquisitions and portfolio repositioning to capitalize on the low cost of capital, consistent revenue streams, and rising prospect for appreciation.

At the same time, lenders are back in full force just a few years after the banking crisis. The volume of commercial mortgages, after dropping about 10 percent during the credit crisis, reached a new high at midyear, rising by $140 billion over the past 12 months. Commercial banks have picked up activity in both fixed- and floating-rate loans, commercial mortgage-backed securities volume is strong a second year in a row, insurance companies and government-sponsored agency lenders remain competitive, and mezzanine funds abound.

The wave of liquidity has pushed property prices to record or near-record levels in core markets and is in the process of working its way to secondary and tertiary markets. Property sales are growing in nearly every metro, but investors are increasingly targeting assets in non-core markets as they pursue yields and opportunities with less fervent bidding activity.

A Stronger Economy

The increased liquidity reflects the generally positive outlook for commercial real estate, but the strengthening economy has also supported momentum. Gross domestic product has risen steadily over the last several years — aside from temporary setbacks such as the polar vortex of the first quarter — and the outlook remains positive through the end of 2014.

In addition, steady hiring has finally surpassed the 8.7 million jobs lost during the recession, and by year-end, the U.S. economy should employ 1.7 million more people than the pre-recession peak. Though many remain underemployed or have left the labor force, the hiring trends continue to point in the right direction. This combination of steady growth has allowed the economy to spur demand for commercial real estate while minimizing risks of inflationary pressure.

Job gains have supported limited income growth, but the surging stock market has helped household wealth significantly. As of the end of first quarter 2014, U.S. household wealth was up 19 percent from its 2007 peak and more than 47 percent from the trough in 2009. That has supported rising consumer confidence and substantive gains in retail sales. These steady positive factors will support a growing demand for commercial real estate space on a broad basis.

Interest Rates

Several years of low interest rates have helped the real estate market recover from its downturn with a lot less pain than would have been imagined in the wake of the 2008 credit crisis. The rapid recovery in asset values and rebound in lending have reduced the severity of what many thought would be a second thrift liquidation-style event. Increasing economic strength in recent months has lifted the prospects that the Federal Reserve will begin raising its short-term rates early next year, posing limited risk to the real estate momentum.

However, interest rates are unlikely to rise quickly enough to slow the economic momentum because demand for U.S. Treasurys remains robust. International investors in particular have sought out the security of U.S. Treasurys as a range of uncertainties plague parts of the world. While China has cut back its purchases, investors from Japan, Europe, and the Middle East have picked up the slack. Risks of escalating aggression in Ukraine and the Middle East cement the perception of the U.S. as a beacon of stability.

What’s more, the Fed is under little pressure to increase rates. The U.S. economy is improving, but inflation has remained in check and the Fed remains focused on the large number of workers that have dropped out of the workforce or are underemployed. The November elections are another wildcard that could re-ignite gridlock in Washington, D.C., and stall the nascent growth cycle.

Consequently, the Fed is unlikely to raise the federal funds rate until the signs that the economy is heating up really accelerate. Presently, most anticipate that this will not happen before the middle of next year, but there is a chance that the Fed will surprise and begin tightening liquidity sooner.

Once rates do begin to rise, the impact on commercial real estate may be nominal. Historically, capitalization rates have not moved in lockstep with interest rates, with tightening spreads being the norm during most growth cycles. As a result, should rates begin to rise later this year or early in 2015, it remains unlikely that cap rates will escalate in pace.

Although cap rates are near historical lows today, the risk premium — the spread between 10-year Treasury yields and cap rates — persists near historical highs. If Treasury yields rise because of positive factors — such as strong economic growth — investors will have a more optimistic outlook about property performance and be willing to absorb some of the rate increase in the form of lower risk premiums. The bottom line is that, aside from a major exogenous shock, interest rates and monetary policy are not likely to have a watershed impact on the economy or commercial real estate in the near term.

Commercial Real Estate Performance

In a real sense, the moderate pace of the economic recovery has been good for commercial real estate performance. Usually new construction comes roaring back after recessions, but incremental growth and the fresh memory of the severe recession has kept development largely in check. Construction is creeping back, particularly for apartments, but it is predominantly centered in core areas of the strongest metros. Supply factors will be slower to emerge and less problematic this cycle than in past recoveries.

Apartments. Apartments have been a favorite asset class for investors since the downturn. Not only did fundamentals remain more stable during the recession, but debt was available from government-sponsored agencies when other lenders tightened their lending criteria. Earlier this year, Fannie Mae and Freddie Mac reined in their lending, and their share of multifamily loans fell to 47 percent in 2014, down from 87 percent in 2009, but it appears they are increasing their allocations through the second half of the year. In addition, banks, insurance companies, institutions, and CMBS programs have stepped up their pace of lending, producing a highly competitive lending environment. Loan rates are mostly in the 4 percent range but can go as low as the mid-3 percent range depending on the term, leverage, and borrower credentials.

With pricing of premium assets in core markets selling with cap rates in the 3 percent to 4 percent range, investors are increasingly moving to secondary and tertiary markets in search of yield. But even those markets are becoming more expensive, as average cap rates for high-quality apartment properties reach below 7 percent.

Office. Investor demand in core markets remains intense. In the first half of 2014, 40 percent of the $50 billion of office sales came from six core markets where class A properties trade at cap rates in the 4 percent range. However, investors pursuing stronger yields and a less-competitive bidding process are increasingly branching into secondary and tertiary markets, where sales increased by 30 percent during the first half of the year. With suburban offices in many metros offering investors a 150-basis point yield premium relative to CBD office assets, investors have begun to search beyond core locations.

Readily accessible debt capital has also fueled activity this year as loan spreads have tightened by 25 bps from last year. Rates range between 4.4 percent and 5.25 percent for 10-year loans with moderate leverage, and leverage up to 70 percent is common. All lender types have become increasingly active, but national banks have increased their share of lending activity to 26 percent. CMBS will also be a positive factor, and it has already increased lending to this sector by $6.1 billion from last year.

Retail. Nationally, vacancy rates of retail properties have been tightening, as modest absorption has topped the limited construction pipeline. In the year ending in the 2Q14, only 37.4 million square feet of space, or 0.5 percent of total space, came on line. This gradual tightening of vacancies has recently sparked rising asking rents, but rents still remain about 11 percent below their pre-recession peak.

Despite the still-soft performance climate for many retail assets, investor demand is strong, particularly for single-tenant properties that are leased to national tenants. The volume and number of transactions between $1 million and $10 million reached a record $10 billion in the 1H14, while price per square foot and cap rates also hit new heights. Multi-tenant sales are also strong, although shy of peak prices. The availability of debt continues to improve, though lenders remain focused on stabilized properties. Local and regional banks are increasing market share, while CMBS is dominant in secondary and tertiary markets.

Industrial. Investors seeking relative stability and diversity to augment existing portfolios have increased demand for industrial assets. In addition, institutional investors have targeted portfolio assets to build a critical mass of assets in a given locality. Cap rates are tightening for all industrial segments, with warehouses making the biggest gains. Warehouse cap rates averaged 7.2 percent nationally in 1H14, and top properties in major markets traded at yields under 6 percent. Flex properties averaged 7.8 percent cap rates nationally in the first half.

Lenders are actively lending on industrial properties, although underwriting remains relatively conservative. National, international, and regional banks increased their share of industrial loans to 62 percent in 2013, up from 48 percent the prior year. Lenders have largely targeted debt yields of 8.5 percent to 9 percent, producing leverage of 70 percent, while offering longer term rates of 4.6 percent to 5.5 percent.

 

William E. Hughes is senior vice president and managing director of Marcus & Millichap Capital Corp., based in Irvine, Calif. Contact him at william.hughes@marcusmillichap.com.

– See more at: http://www.ccim.com/cire-magazine/articles/323690/2014/11/capital-markets-outlook#sthash.pcEbhkHc.dpuf

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JUST SOLD – Mountainland Office Building

December 1

The Northwood Group is pleased to announce the sale of the Mountainland Office Building in Layton, Utah.

The building, featuring unique “creative” office space, was acquired by a local advertising agency.

The building is approximately 7,000 square feet including office space and a lease to a local pizza restaurant.  More information on the sale is available upon request — 801-593-5500 or brandon@northwoodgrp.com.

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JUST SOLD – Decker Lake Office Building

October 6

The Northwood Group is pleased to announce that in conjunction with Newmark Grubb Acres it represented the seller in the sale of the Decker Lake Office building located at 2650 South Decker Lake Lane in West Valley City, Utah.

The building is a 73,954 square foot office / call center building.  More information on the sale available on request.

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Downtown SLC Multi – Family Development Site

September 29

We are pleased to bring to market a rare multi-family development site located in downtown Salt Lake City.  The property is located just 3 blocks north of the North Temple commuter rail and Trax Stations.

The property was recently re-zoned to Transit Station allowing maximum density limited primarily by height and parking.

What is unique about this opportunity is that the property is currently being operated as a stabilized industrial park which gives a developer the opportunity to receive a return prior to development or to potentially phase the development.  Following are a few specifications on the property:

  • 545 West 400 North, Salt Lake City, Utah
  • Purchase Price $2,150,000
  • 2.83 acres
  • 55,440 square feet of existing industrial buildings
  • Other properties in this zoning have been able to achieve density of 50 to 60 units per acre.

Additional information on the property available upon request.

 

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I-Transact Single – Tenant NNN Investment

September 29

We are pleased to introduce the I-Transact Single-Tenant NNN Investment.  I-Transact is the master tenant with a 7 year lease for the entire property.  I-transact is a leader in the payment processing industry both online and in brick and mortar stores.  A few features of the property are as follows:

  • 12,897 square feet on 1.79 acres
  • Built in 2006
  • Tilt-Up Concrete Construction
  • I-15 Visibility
  • Additional Reagan Billboard Lease
  • 8% Capitalization Rate
  • $1,915,000
  • More information on the tenant can be found at www.itransact.com.
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State of the Single-Tenant NNN Lease

September 29

The concept of the single-tenant NNN lease has opened the door for many investors to get into the commercial real estate investment market in a more significant way.  Prior to this product type many investors steered clear of commercial real estate investment as a regular part of their investment portfolio because an overall lack of management expertise, capital requirements, and real estate specific knowledge.  Most real estate for the average investor was in the form of REIT’s or maybe a rental home or two. The single-tenant NNN lease opened up the market to a method of real estate ownership that was viewed as simplistic and safer than in the past and the market has been flooded with investors seeking this product.

This has been both good and bad for the commercial real estate market as a whole.  It has added liquidity to the market which is a good thing.  It has arguably also led to the overpricing of these assets.

I recently received an interesting call from a local investor.  This investor was a highly educated professional in another industry.  His experience in commercial real estate investment was limited to a 1031 exchange that he had spearheaded for his family’s estate several years back which didn’t go very well.  They had made offers on several single-tenant NNN deals but seemed to get out-bid on nearly every one of them.  It was a very frustrating experience trying to enter this market.

Nevertheless, this investor has now set aside a reasonable amount of cash and is looking to invest himself in an attempt to create some passive cash-flow as he plans for retirement.  Upon calling me was already negotiating on a deal and felt like he needed a second opinion.  The deal he was considering was a brand new land lease on a to-be-built restaurant building with an average credit tenant.  The deal was priced at a 5.25% cap rate and was priced significantly higher than the value of the underlying land.  However, the broker has convinced him that the rents were replaceable in the event that the tenant defaulted, which I also believed to be true.

Now I want to be clear that I believe that all investors have different goals and objectives with their commercial real estate investment dollars.  There are some categories of investors for which this would be an appropriate deal.  I question, however whether it is right for a professional trying to build their nest egg that still has 15 to 20 working years left.  That type of deal appears to be too conservative on the return side and really not any safer on the risk side than many other assets.  The benefit that was appealing to this investor was the lack of management responsibility whereas he was very busy in his current profession.

Wouldn’t it be more prudent for an investor in this category to consider a multi-tenant building that could be purchased at an 8% to 8.5% cap rate (at a value at or near replacement cost) that already contemplates the expense of hiring management to take care of that property?  On a $1 million dollar cash investment the difference in annual cash flow and total cash accumulation over the next 15 to 20 years is substantial.  Again, there are different seasons for different investors and I am not making a blanket statement relative to all investors.  I’m not sure what decision this particular investor made after our telephone discussion but it made me think a lot about investment strategy for my clients.

Robert Carr of National Real Estate Investor Magazine recently published an article titled “PLATEAU PHASE – Is the single-tenant net lease market flatlining?”  The article comments on the decline in single-tenant net lease sales over the last year but attributes that primarily to a lack of supply and also notes that pricing for those sales still occurring is still going up.  A few comments from the article that I thought were interesting were:

  • “A rise in interest rates might diminish the appetite for net lease properties, but due to the lack of better investment opportunities, maybe not..”
  • “The competition and limited supply are also prompting buyers to adjust their acquisition criteria to include second-tier product with lower credit ratings, secondary-metro locations and shorter-term leases, and there is a great supply of those types of assets on the market.  When people say there is a shortage of product, “what they are really saying is that there is a shortage of the exact thing they want to buy.. Randy Blankstein”.

I believe that the single tenant NNN lease provides a great vehicle for many investors but it is not a “one size fits all” type of investment.  A commercial real estate investor really needs to consider his objectives and why he is investing in commercial real estate in the first place and then determine how and where to enter the market.  Sometimes popular opinion is good for the masses but not the individual.

 

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Utah Business Magazine Regional Report – Northern Utah

September 22

I recently had the opportunity to participate in a roundtable discussion surrounding business in the Northern Utah area put together by Utah Business Magazine.  The roundtable was set up to discuss issues such as real estate, education, tourism, economic development, and healthcare.

I thought that the discussion was fascinating and it was interesting to see the number of individuals participating with such an interest in this part of the state.  A few of the highlights that came out of the meeting that I thought were interesting and valuable were the following:

  • At the time of the printing the unemployment rate in Davis County was 3.9% and it was 4.5% in Weber County.
  • Some of the largest commercial real estate developments in the state are occurring in this region including Station Park, Falcon Hill, the Clearfield TOD.
  • Weber State University and both Applied Technology schools are doing amazing things to provide specialized expertise to existing employers and those looking to come into the area.
  • 300,000 square feet of new office space has come on the market in the last 12 months in Davis County.
  • Industrial vacancy continues to be very tight
  • The area is really taking advantage of the shift of commercial real estate investment to secondary markets being one of the strongest secondary markets in the country.
  • Hotel occupancies and convention booking are significantly higher.

The full article can be read by clicking on the following link:  http://www.utahbusiness.com/articles/view/northern_utah_regional_report

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Building Partner Investors

June 30

Along with the formation The Northwood Group we have formed Building Partner Investors (www.buildingpartnerinvestors.com).

The vision of BPI is to give small businesses the expertise and financial ability to increase cash flow and control for their businesses now and build long-term wealth for the future.

It does this by partnering with companies to acquire the buildings in which they operate their business by providing equity and access to financing and expertise in commercial real estate.  Most typically BPI will put up half of the required equity to help a businesses buy their building.

The principals of BPI come from the commercial real estate brokerage industry where some interesting patterns emerged.  Many successful business owners worked their entire lives generating a good income during their working years but failed to position themselves to have sufficient assets at retirement.  One of the primary miscues was failing to acquire the real estate they use in their businesses.

Reasons for this varied from business to business but many of the reasons included:

  • I don’t want to take working capital out of the business to acquire a building.
  • I’m making a better return in the business than I would in the real estate.
  • I don’t understand how to operate real estate and I don’t want to deal with tenants.
  • I was too busy and never got around to it.

Building Partner Investors is the solution for businesses that want greater control of their facilities not only for their businesses but for the growth of their personal financial portfolio.   Here’s how.

We provide equity to help you buy your building.

We understand how important working capital is and the concerns of tying up large amounts of cash.  We  use our cash to provide equity investment alongside business owners  for building acquisitions.

We provide real estate acquisition and management expertise.

What better partner to have than one with the knowledge to help you succeed?

We help procure financing.

Our relationships and great track record with lenders lead to better loan terms.  We can even provide credit enhancement in certain cases where financing is challenging.

We can help existing building owners monetize their real estate when needed.

For those companies needing to sell their buildings but still want to occupy and maintain control we can provide liquidity through a sale/leaseback buying all or a share of your building .

 

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The Northwood Group (www.northwoodgrp.com)

June 30

I am pleased to officially announce the creation of The Northwood Group (www.northwoodgrp.com) — a commercial real estate company that helps investors and business owners identify commercial real estate opportunities then structure purchases that help our clients reach their financial goals.

Who We Serve

The Northwood Group provides unique commercial real estate services for following groups:

Real Estate Investors

We work with investors looking for commercial real estate investment opportunities that want more than what is always seen on the open market through traditional channels.

Business Owners

Helping business owners use real estate as part of their growth strategy and wealth building tools is what we thrive on.

Government & Non-Profits

We consult with cities, counties, economic development groups, school districts and other government and non-profit groups with their commercial real estate needs.

Property Sellers

If you own commercial real estate you need or want to sell, we have investors that are looking for opportunities.  We want to see your property.

Our client’s interests always come first.  Our clients can testify that we provide very candid and realistic recommendations based on facts and experience.  We are very selective about opportunities and suggest that clients pass on deals more than we recommend moving forward.

Please learn more information at www.northwoodgrp.com.

 

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The “Why” of Commercial Real Estate Investment

June 1

Why do you invest in commercial real estate?  It is an interesting question with a multitude of answers none of which are right or wrong in and of themselves.  However it is an important question for us to understand individually if we are the prosper in our ventures.

The traditional interaction between the commercial real estate investor and the broker typically involves dialogue surrounding topics such as:

  • What type of returns are you seeking?
  • Do you prefer stabilized or value-added investments?
  • What is your risk tolerance?
  • Do you prefer single-tenant or multiple-tenants?
  • How much do you want to be involved in the management of your property?

These are all very important questions as the investor is interviewing the broker for competency and the broker is seeking understanding of the investors criteria.  These are conversations that I have had on many occasions.

However I noticed an interesting trend over the last 15 years as I have developed long-term relationships with different investors and completed several transactions with each.  Most fully understand the fact that they want to invest in commercial real estate.  They know what they like and why they like it but often they have not gone to the next level of understanding “why” they are investing.

Why are we investing in commercial real estate?  What is the ultimate outcome?  Does it have meaning in our lives outside of the intrinsic financial benefits it provides?  How do we know when we have enough?  Are we saving for retirement?  What are we going to do during retirement? Why are we willing to take this risk but not that risk?  What will this investment do for me in my life now and what will it mean to me in the future?

Over the years I have seen investors get in the game too early before they are sufficiently capitalized and I have also seen investors stay in too long, under estimating the completion time of the next project and being stuck working through a challenging property when they would prefer to be off doing different things.  As I have thought about this and talked with investors about it the most common responses generally fall into the following categories:

  • “I want to build “x” amount of cash flow so that I can retire by the age “y”.
  • “I enjoy doing deals and don’t know what else I would do.”
  • “I want to acquire as much as I can to pass down to the next generation.”
  • “I want to out-do my peers.”
  • “I want to create cash flow to be able to use for charitable service.”
  • “I need to invest in something and I don’t have confidence in the financial markets.
  • “I want to own hard assets.”
  • “I have to make up for past bad decisions and dig out of the hole I’m in.”
  • “I want to stick around to teach my kids how to invest and start their own portfolios.”

Although most do not come out and say it I think that many of us also fall into the pattern of just wanting to accumulate more.  There is nothing good or bad in any of these motives but I think that we can be smarter as investors and it can have more meaning and effectiveness if we really understand “why” we’re making investments and have that path clear before us.

For me, commercial real estate investment has the ability to produce cash flow more consistently than any other investment that I understand.  That cash flow has the ability to give me the freedom to be more discerning about the types of deal and the types of clients I choose to work with.  I also get a lot of joy from working with tenants and helping them to succeed in their businesses along the way.

I guess the point of these thoughts is that there is likely no right or wrong answer to the “why” of investing in commercial real estate.  That is not nearly as important as fully understanding what it means to us individually and to our own portfolio’s.  Understanding our own personal motives helps us to be better and more discerning investors and increases our opportunities for success.

 

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Just Sold – BAE – Single Tenant Data Center

May 30

BAE-Single Tenant Investment | 1890 W 4000 S Roy, Utah

FOR SALE: $1,750,000

Property Highlights

  • 15,000 SF Building
  • 1.28 Acres
  • 100% Occupied
  • NOI: $150,000
  • CAP: 8.57%

 

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The Time of the Secondary Market is Back Again!

May 19

2013 was one of the best commercial real estate investment markets in Utah since the downturn following 2007.  In fact, investment dollar volume nearly reached 2006 and 2007 levels.  The Utah commercial real estate investment market has always been viewed as a “secondary” market.  Like other secondary markets, investment volumes slow significantly during recessions as money (especially institutional money) tends to flow to the major markets.  However, unlike other secondary markets, Utah boasts incredible stability, low unemployment, and an  extremely pro-business government that is very competitive at attracting new employers.  For those reasons it has become a darling among all types of commercial real estate investors.  In addition to the out-of-state investors, there always remains a very entrepreneurial local investment crowd that creates more liquidity than other secondary markets.

In March of 2014, Beth Mattson-Teig of Commercial Real Estate Investment Magazine wrote an article on the current trend towards secondary markets titled “Surf’s Up — Investors Catch the Wave in Secondary Markets”.  You can find the link to the article here or the full text is below.  I believe that this trend is interesting and valuable to understand as it relates to the Utah Commercial Real Estate Investment Market.

 

commercial real estate

Second-tier markets

Surf’s Up Investors catch the wave in secondary markets.

by Beth Mattson-Teig

Secondary markets are riding a wave of recovery that has brought a welcome resurgence of investment sales activity. The expansion into secondary markets is the theme du jour in the commercial real estate market. “We have seen a massive movement of capital from primary locations to secondary locations, both on the equity and debt side,” says Dan Fasulo, a managing director at Real Capital Analytics in New York. “That has created not only an explosion of investment activity, but a corresponding rise in values in these secondary markets,” he adds. Growing confidence in the economic and commercial real estate market recovery has been a boon to investment sales in the past 18 months. Fueled by interest rates that remain near historic lows, investment sales surpassed $355 billion in 2013 — up 19 percent over the $299 billion in sales that occurred in 2012, according to Real Capital Analytics. After a considerable dry spell, secondary and even tertiary markets across the country are experiencing a spike in investment sales.

Commercial real estate transaction

That momentum is expected to continue in 2014 as investors both increase and broaden their interest in secondary markets as they search for higher yields. Certainly, secondary markets in Texas, such as Houston and Dallas, as well as West Coast markets including the likes of Portland, Ore., and Seattle have been on the short list for the past year. But investors also are stepping up buying across the country in markets ranging from Las Vegas to Nashville, Tenn.

“In general, there is so much more confidence among investors that they are willing to take more risk than they were in the past, and they are more willing to step up and buy properties that they were not willing to a year or two ago,” says Dave Winder, CCIM, director of office and investment properties at Boise, Idaho-based Cushman & Wakefield/Commerce.

For many markets, that confidence stems from marked improvement in the local economies. In Boise, for example, the unemployment rate has dropped from a high of around 10 percent to now below 6 percent. “It hasn’t been stellar job growth, but there is good job growth occurring,” Winder says. A significant amount of employment in Boise is driven by the residential market. Mortgage financing and residential construction stopped in 2007 and 2008 and now that industry is coming back, which is helping to drive the broader economy, he adds.

Sales Rise

Commercial investment real estate sales have been on the upswing since 2010. The increase in investment sales nationally is creating a trickle-down effect across markets. Greenville, S.C., for example, saw an uptick in activity in the past year among both buyers and sellers as more properties landed on the for-sale market.

“The activity that we are seeing now across the board in office, industrial, and even retail has been terrific,” says Brian Young, CCIM, SIOR, a senior vice president and managing broker at Cushman & Wakefield/Thalhimer in Greenville. In 2013, about $250 million in sales had either closed or were under contract for sale at year-end.

That is an impressive amount for a market the size of Greenville, which is home to about 840,000 people in the surrounding metro area. Although the number of transactions has increased, the total volume also was bolstered by a single large transaction. Cushman & Wakefield/Thalhimer listed the 2 million-square-foot Adidas campus last fall. Young expects that property, which will continue to be leased long-term by Adidas, to sell for about $125 million.

Although large institutional investors and real estate investment trusts are generally the ones that grab attention for their transactions, the lifeblood for many secondary and tertiary markets remains the smaller local and regional investors. Traditionally, Boise is an investment market that has been dominated by local and regional buyers and now that the sales market is rebounding, those same players are back and actively looking for new opportunities. “In the last year, transaction activity has increased exponentially in my market,” Winder says.

For example, Cushman & Wakefield recently brokered the sale of a 25,584-sf medical office building in downtown Boise. The building is 100 percent occupied by strong tenants, most of which have long terms remaining on their leases. It was purchased by a local investor with an out-of-town partner. The property sold for a lower-than-typical capitalization rate of 6.5 percent due to its strong tenants and stable, long-term cash flows.

Canadian buyers also have stepped up their buying activity in Midwest markets such as Minneapolis and Columbus, Ohio. They see opportunities to buy properties as real estate markets improve. And they also are using those investments as a hedge against the U.S. dollar, notes Shad Phipps, CCIM, a senior associate in the investment properties/private capital group at CBRE Capital Markets in Columbus.

In Columbus, Canadians are acquiring quality, multitenant office buildings in good locations that are still priced well below replacement value. For example, Montreal-based Amcor Holdings has acquired seven office buildings totaling about 950,000 sf from AEW Capital for $25.1 million. “I think there is opportunity here, and I think that is ultimately what they are looking for,” Phipps says.

Yield Search

The lure of higher returns has served as a magnet to draw capital to the secondary markets. Investors are clearly driven by the need to boost yield. Buying property in Manhattan or San Francisco at a 4 percent yield per year is just not going to cut it, Fasulo says. “So, all of a sudden places like Minneapolis and Pittsburgh and Phoenix that were considered a little risky have now come back on the radar,” he adds.

After moving to a near 10-year high, the price spread between properties in primary and secondary markets has started to narrow again. Pricing among the six major metros rose 9 percent through October 2013, while prices in non-major metros were up 13 percent, according to Real Capital Analytics.

Cap Rates by Property Type

Competition and bidding wars for core properties in gateway cities such as New York, San Francisco, and Washington, D.C., have prompted buyers to expand their list of target markets. “As these investors continue to look for a certain yield, they have been forced to look in secondary and tertiary markets like Greenville,” Young says. For example, Cushman & Wakefield/Thalhimer had the listing on a 221,000-sf industrial building in south suburban Greenville. The property drew about 10 offers and had five serious bidders that made it to the third round. Exeter Property Group, a Pennsylvania-based private equity firm, ended up buying the building in November for $9.7 million or a cap rate of 7.5 percent.

“You’re seeing more and more investors seeking a better yield and coming to markets like Lexington, Ky.,” agrees Bruce R. Isaac, CCIM, SIOR, senior vice president at NAI Isaac Commercial Properties in Lexington. Buyers are looking for well-located, highly occupied properties that are leased to good credit tenants. In Lexington, for example, apartments as well as single-tenant net-leased and grocery-anchored retail centers are in demand.

Typically, investors can find investments that generate returns higher than in primary markets. For example, Lexington currently has a triple-net-leased Walgreens property listed that will likely sell at a 5.5 percent to 6.5 percent cap rate. Even though that is an aggressive cap rate for Lexington, it is still well above the 4 or 4.5 percent cap rate that similar “A” credit net-leased deals could draw in larger cities.

Stability vs. Value-Add

Although buyers are making decisions based on their own unique investment criteria, there are two distinct strategies that have emerged. One group of investors is searching for stability and cash flow, while at the opposite side of the spectrum are those buyers pursuing the higher yields of value-add opportunities.

Both strategies are in play in the Columbus market. For example, CBRE recently represented the lender on the sale of a real estate-owned retail property that was 42 percent occupied in suburban Columbus. The 26,150-sf retail strip center ultimately sold to a local private investor for well below replacement cost at $850,000 or $32.50 per square foot. The new owner has since invested in the property, improved occupancy, and now has a property with positive cash flow. “These are the types of projects that, when bought at the right price and managed correctly, will produce quite a return for the owner,” Phipps says.

Commercial Property Price Indices

Buyers are more hesitant when it comes to acquiring properties that fall somewhere in between those two categories, Phipps notes. Those stabilized properties that are priced at market are generating less interest, because there is still some leasing risk. So, it lacks the security of a triple-net-leased property and also the upside of a more value-add buy.

There is a risk that rising interest rates could create price uncertainty, which could slow investment sales. However, some industry experts believe that concerns of higher interest rates are offset by improving market fundamentals in terms of rising occupancies and rents. “I see a wave of capital built up that feels every bit as deep as 2007,” Fasulo says. “I think you will see a continued expansion of recovery to different geographies around the country and into almost every property sector, irrespective of interest rates that may be moving higher. There is just too much capital right now.”

Beth Mattson-Teig is a business writer based in Minneapolis.

– See more at: http://www.ccim.com/cire-magazine/articles/323456/2014/03/surfs#sthash.2yRo4pqH.dpuf

 

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Sale/Leaseback of Commercial Real Estate

February 3

Over the course of my career I have been involved in many transactions in the sale/leaseback arena of the commercial real estate investment world, and I have completed numerous transactions ranging from small single-tenant deals to very large industrial properties. There has been much written on the benefits of a sale/leaseback to the seller in a commercial real estate transaction. In this post I would like to explore the sale/leaseback investment from the point of view of the investor.

What is a Sale/Leaseback?

First, let’s define what is meant with the term “sale/leaseback.” A sale/leaseback is a financial transaction where an owner sells its property and then immediately leases it back from the buyer as part of the same transaction. The seller gets the profits from the sale while keeping possession and use of the property, while the buyer is assured immediate long-term income on the property.

Benefits

To understand this from a commercial real estate investor’s point of view, we must first examine the reasons why a seller would consider such an option. The benefits for the seller of the property would include:

  • Liquidating equity into cash
  • Potentially reducing operating costs
  • Paying off existing debt
  • Improving the balance sheet
  • Strategically planning for a future sale of the business
  • Retirement strategy

Of these, raising cash for the growth of the business is the most typical reason I have seen for sale/leaseback. Most companies make a much better rate of return in their business than they do in their business real estate. It is also easier and less expensive to raise cash for growth and operations by selling their property than it is to bring in investor capital, partners or bank financing. The following link contains a placemat that we use when working with sellers on sale/leasebacks, including a sampling of some recent commercial real estate transactions that we have completed:

Sale-Leaseback Placemat  (click for samples of properties sold)

With that context in mind, let’s look at this more closely from the perspective of the commercial real estate investor. Why would an investor look for a sale/leaseback strategy as opposed to a more standard real estate investment model?

  1. Potential For a Higher Rate of Return: The capitalization rates for sale/leasebacks tend to be a little higher than traditional commercial real estate investments. Sale/leasebacks are often perceived as more risky and the motives of the seller are in question. Additionally, these types of commercial real estate transactions are performed more often by local and regional companies than national credit tenants, which also affects the rate of return.
  2. Ability to Negotiate Lease Terms with the Tenant/Seller: In a sale/leaseback, not only are you negotiating the purchase, you are also negotiating the lease. The lease amount, rent escalations, lease term and other lease considerations are all on the table, unlike a traditional commercial real estate investment where you are buying a lease that is already in place. Therefore, a lease may be modified and tailored to better suit an investor’s specific requirements.
  3. Obtaining Longer Lease Term: A critical point for the seller of the property is to maintain control of the property for as long as they are able. This means that sellers are often willing to sign much longer-term leases. Depending on the rent escalation schedule, this can be a real advantage to a commercial real estate investor.
  4. Control of Expenses: The most typical structure in a sale/leaseback is an absolute NNN lease. The sellers are used to paying the expenses and want to have the ability to control those expenses in the future. Commercial real estate investors can often expect a transaction with no building maintenance or expense responsibilities.
  5. Minimal Property Management: Because the operating expenses are usually paid by the seller, going forward there is really very little management for the new commercial real estate investor.

Risks

With those benefits in mind we must also consider the risks associated with this type of commercial real estate investment. Investment risks include loss in value of the real estate in a bad market and inflation on a lease with no rent escalations. The largest risk is the overall success or failure of the seller/tenant. A commercial real estate investor must have the ability to review and understand financial statements or hire that expertise in a transaction of this type to make sure that the company’s overall health is good. It is also important to look at what this new rent payment will do to their financial picture. There are a few things that I look for when evaluating a sale/leaseback transaction such as:

  • What does the company plan to do with the proceeds from the sale? Are they being reinvested back into the company? If so, in what? Are the funds from the sale being used to pay off debt? Are the proceeds going to be distributed to shareholders?
  • Is this building a critical component of their business? How easy would it be for the lessee to move or to close this location if things go bad?
  • Is the building functional and marketable if the worst happened and the business did close?
  • How does the proposed rent schedule compare to what current lease rates are in the market?
  • How does the price being paid for the building compare to sales of vacant buildings in the area?

You must make sure that the company has good intentions and is not planning to take its cash with no intention to continue operations and make lease payments. I have had clients evaluate a company interested in a sale/leaseback only to determine that they are not strong enough to support the negotiated lease. In some cases, they have been able to overcome that discovery by obtaining “credit enhancements” from the sellers. These are usually in the form of personal or other financial guarantees of payment. However, on some occasions, we have been able to negotiate provisions whereby the seller provides a security deposit equal to 6 months to 18 months of rent that is released to the commercial real estate buyer in the case of a default on the lease.

The types of commercial real estate investors buying sale/leaseback properties range from large institutional buyers focused exclusively on this property type to small local investors with only one or two real estate properties in their portfolio. I hope this exercise proves helpful as you consider this type of commercial real estate investment for your portfolio.

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2013 Year End Market Report & Statistics

January 24

Download Report

We are pleased to present the 2013 Newmark Grubb Acres Year End Market Report. A few highlights from the investment market include:

  • Total transaction increased by nearly 50% over 2012 levels to almost $1.4 billion, which was comparable to pre-recession levels.
  • Multi-family was the largest segment of the market, followed by office.
  • Commercial real estate market is currently constrained by lack of supply of quality investment deals.
  • Cap rate changes by property type differed but were relatively flat overall.
  • Single-tenant NNN activity remains strong.
  • There are 1,031 active exchange buyers in the commercial real estate market.
  • We are starting to see more activity in the Class B & C commercial real estate investment market.

Please click the link above for the full report.

 

 

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Western Park Mobile Homes

January 21

I am pleased to present the Western Park Mobile Homes in Logan, Utah. This well kept and clean park has a historic occupancy of over 90% for the last 20 years. The park consists of 53 mobile home sites, 11 RV stalls and a duplex. This property is adjacent to the Logan River Golf Course and Willow Park.

Price: $2,905,000

NOI: $203,409

CAP: 7%

 

 

Click Here for more information on this property and to connect with me today.

 

 

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Just Sold! Wasatch Auto Investment

January 21

847 Northpoint Cir. | North Salt Lake | Utah  We are proud to announce the sale of the Wasatch Auto Building. This multi-tenant investment was marketed and sold by Brandon Wood CCIM. Please click here for additional information or to find out how we can help with your property.

Property Features

  • 19,471 SF Building
  • 100% Occupied
  • 2.33 Acres Total
  • 4 Tenants
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Just Sold! Grocery Anchored Retail Center

January 6

184 W Parrish Lane | Centerville | Utah | We are proud to announce the sale of the Parrish Square Retail Center. This multi-tenant retail center was marketed and sold by Brandon Wood CCIM.  Please click here for additional information or to find out how we can help with your property.

Property Features

  • 32,709 SF Retail Space
  • Includes Shops Adjacent to Dick’s Market
  • Two Single Tenant Buildings
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Just Sold! Multi-Tenant Office Park

January 6

Woodland Office Park | 1528-1572 N Woodland Drive | Layton | Utah We are proud to announce the sale of the Woodland Park Office Complex. This multi-tenant office park was marketed by Brandon Wood, CCIM and Chris Falk CCIM, SIOR. Please click here for additional information or to find out how we can help with your property.

Property Features

  • 5 Multi-Tenant Office Buildings
  • Total of 53,103 SF
  • 6.4 Acres Total
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Utah Investment Snapshot – Q3 2013

October 21

The 3rd quarter real estate investment saw a mixed bag of increases and decreases. Learn more about the status of the industry.

3rd Quarter Real Estate Investment

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Just Sold! Single-Tenant NNN Medical Office Investment

October 21

Canyonview Clinic | 1159 East 12th Street,  Ogden, Utah

We are proud to announce the sale of the Canyonview Clinic building. This single tenant medical investment was marketed by Brandon Wood, CCIM. Please click here for additional information or to find out how we can help with your property.

Property Features

15,974 SF
1.55 Acres
Medical Office Building
Built in 1997

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Do We Need to “Dismount”?

October 7

I attended an event on Tuesday hosted by the Bank of Utah. Gus Whalen of Featherbone Communiversity was invited to speak, and he shared some insights into his family business that I think are very applicable to many of us in the commercial real estate investment industry.

Gus is the Chairman of The Warren Featherbone Company of Gainesville, Georgia and directs the efforts of the Warren Featherbone Foundation. The 130-year history of his family business has been quite remarkable, being in such diverse businesses as manufacturing, banking, agriculture, publishing and philanthropy. Gus has recently written a new book titled Hooked at the Roots.

The basis for many of his philosophies is that we are a very interdependent people – meaning that we need each other and need to work together to succeed. We cannot succeed individually as greatly as we can with others. Gus demonstrated this through the study of the mighty sequoia trees, which grow as tall as 310 feet but have roots systems that are less than 3 feet deep. How do they thrive? They grow near other sequoia trees and their root systems are interdependent upon each other.

I think that the most interesting quote to me was “if the horse is dead, then dismount.” Their family business went through several major changes in their industry. For example they were initially in the featherbone business, primarily building the structure for women’s corsets, with the dominant market share in this business. When plastic was introduced as an alternative, The Warren Featherbone Company had a great market share of a market that no longer existed. They then moved into making plastic covers for diapers (replacing the rubber ones of that day), which was great until disposables came along. They then moved into making baby clothing – and the story continues to go on as they adapted time and again in the face of market changes and crises.

I think that we face these same challenges in our commercial real estate investments. There are times when a once great location becomes obsolete due to changing demographics and population growth, or the ceiling heights in our older distribution facilities no longer meet current distribution requirements. There are dozens of examples of this in the commercial real estate industry where history says to stay the course but it may be that there is not a market for what we have. We may need to “dismount” and look for alternative uses for those properties. These are often painful experiences, but rarely as painful as continuing down a dead end path.

Sometimes change comes not in the property but in how that property fits into our portfolio. As our needs and circumstances change with age and other life events, our risk tolerance and income needs change. Maybe we’re moving from value-add to cash flow or from more intensive management to single-tenant NNN properties. In the commercial real estate investment business, we always need to consider how the portfolio is serving our needs now as well as whether or not it will serve our needs two or three years down the road.

It often takes us a little longer to “dismount” in the commercial real estate investment industry, so we have to allow time to go through the process on our own terms. We always need to be asking ourselves the question, “What’s next?”

A few of the other thoughts Gus shared that I thought were interesting:

  • Who we are is determined by what we are doing, and we need to be ourselves because everybody else is taken.
  • Are we stepping up on what we’re doing day to day?
  • To forgive is to give up all hope of a better past.
  • The country must get a handle on the importance of manufacturing jobs.
  • Our lives are split into thirds: One-third watching, one-third doing, one-third teaching.
  • Technology is important but children are more important.
  • He defines “crisis” as a “dangerous opportunity”.

I appreciate the opportunity to share these thoughts, and how they relate to commercial real estate property investments. Thank you to the Bank of Utah and Roger Shumway, Sr. for the invitation to the event.

When they sold the baby clothes company they had a  empty 130000 sf building g I. Georgia. They used it for the feather bone com university.  
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Revenge of the Secondary Markets

September 9

Newmark Grubb Knight Frank, as part of its Friday Market Insight series, recently published an analysis of an employment report produced by Real Capital Analytics. The chart below shows the top markets in the country in terms of job growth. Salt Lake City ranks 5th in the nation—which is good news for those investing in commercial real estate in this region. Please see the chart as well as the text of the report below:

Job Growth Numbers

As commercial real estate property investors migrate to secondary markets in search of yield, they are focusing on locations with the strongest employment gains, according to a recent report from Real Capital Analytics. Which markets does this include? The above graph shows the top 10 large metro areas with the fastest job growth rate over the past 12 months, as well as the bottom 10 large metro areas adding jobs at the slowest pace or losing them.

The Texas markets are in a class by themselves with Austin, Dallas and Houston – boosted by the energy, information and healthcare sectors – all growing about twice as fast as the 1.7% year-over-year growth rate for the U.S. overall. San Jose/Silicon Valley is also on the list of fastest job growth, although some would say it’s not a secondary market at all with its globally dominant technology base and geographic location at the southern end of the San Francisco Bay. Nashville and Salt Lake City, less obvious standouts, experienced relatively shallow downturns and have been adding jobs consistently since emerging from the recession. The other four markets on the list are more surprising: Indianapolis, with expanding healthcare and logistics sectors, has a diversified economy and low business and living costs. Three classic Sunbelt markets – Tampa Bay, Phoenix and Jacksonville – fell hard during the recession and are now rebounding.

Four of the 10 slow growth/no growth large metros are in the Midwest (Cleveland, Dayton, Milwaukee and St. Louis); three are in upstate New York (Albany, Buffalo and Rochester); and two are in the Southeast (Birmingham and New Orleans). Honolulu makes the list, too.

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JUST SOLD – Crossroads Landing – Single Tenant Investment

September 9

We recently closed on the Crossroads Landing – Single Tenant Investment.  The building was occupied on a long-term lease by the administrative offices of the Ogden Clinic.  The building is approximately 17,000 square feet.  Please contact me to request additional information.

 

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JUST SOLD – 136 East South Temple – SLC, Utah

August 21

We are proud to announce the sale of the historic 136 South Temple building. The office building was marketed by Brandon Wood, CCIM. Please Click Here for additional information or to find out how we can help with your property.

Property Features

  • 216,976 Rentable SF
  • 24 floors including six above-ground parking levels
  • In the heart of downtown SLC
  • Built in 1966 with extensive renovation

 

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2013 Newmark Grubb Acres Mid-Year Market Report and Statistics

August 6

We are pleased to present the 2013 Newmark Grubb Acres Mid-Year Real Estate Market Report. From the beginning, 2013 was off to a strong start, especially in the commercial real estate investment sector. For example:

  • Transaction volume increased 35% over the last half of 2012
  • The amount of square footage sold was at its highest level in at least 5-1/2 years
  • Overall price per square foot was at its highest level in 4-1/2 years

As always, I welcome your thoughts.

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Income Appeal of Commercial Real Estate Investment

June 28

I recently read an article in the June 22nd issue of The Economist.  The story articulates the benefits of commercial real estate investment as compared to other income investment vehicles and the reasons why.  The article is included below:

Buttonwood

Building the next boom

Commercial property may benefit from its income appeal

During the debt crisis of 2007 and 2008 commercial-property investors lost around half their capital. That slump reminded investors that the asset class is anything but a one-way bet. Lost ground has been regained, particularly in prime locations, although there is still nothing like the buzz around commercial property that there is around equities, with the Dow Jones Industrial Average hitting new highs and the Tokyo stockmarket surging by 77% before its recent fall.

But perhaps property is about to have another moment in the sun, thanks to its income appeal. Cash yields next to nothing and despite talk of “tapering”, central banks show no sign of raising short-term rates. The search for income has driven ten-year government-bond yields down to 2% or so; high-yield bonds belie their name by offering only 5%. Commercial property offers a decent income stream to yield-hungry investors plus the potential for some protection against inflation, something conventional bonds do not.

One reason why property may do well in a low-rate environment is the relationship between rental yields and the property investor’s cost of finance. If rental yields are high then investors or speculators will find it easier to cover their financing costs, and the potential for capital gains is the icing on top. (This is a rough-and-ready measure: landlords must pay maintenance costs and, in weak economies, may face a shortage of tenants and thus a high level of vacancies.)

Investment Property Databank (IPD) has figures for British property returns and rental yields dating back to December 1987. So The Economist compared the rental yield with base rates (as a proxy for the cost of finance) in every month over the past quarter-century, and then looked at the total return from property over the subsequent 12 months. The data were sorted into quartiles (see chart).

Sure enough, when the gap between rental yields and base rates was positive and high, subsequent property returns averaged 12.4%. When the gap between rental yields and base rates was negative, the average return was just 2.7%.

Rental-yield data for other markets are less reliable than for Britain because property values are not always marked to market. Despite these limitations IPD figures show yields ranging from 5% to 7% in developed markets, well above the level of interest rates in most countries.

There are some important caveats. First, property is very illiquid, unlike a bond or a share that can be bought and sold in minutes. Second, there are significant transaction costs. For retail investors looking to get diversified exposure to the commercial-property market, the easiest option is to buy exchange-traded funds (ETFs) based on the various property indices. But the effect of investing at one remove is to dilute the asset’s income appeal: the Asia index offers a yield of 3.5%, Europe 4.3% and America 2.7%.

Third, the relationship between low rates and property returns may have broken down in the current cycle. Banks are less willing to provide finance to landlords than they were during the credit boom. A prolonged period of sluggish economic growth means that it is difficult to find good tenants, particularly in the retail sector, which is facing the long-term challenge of internet shopping. The IPD numbers show very little rental growth over the past two years—a cumulative 1% or so in Britain, France and Germany.

A survey by CBRE, a property-services group, found that global office-occupancy costs (which include property taxes as well as rent) increased by just 1.4% in the year to end-March 2013. Nevertheless, the numbers do hint at where the bright spots in the global economy may be. Six of the ten markets with the fastest-rising costs are in North America, and the other four are located in Asia. Mumbai is as expensive an office market as Paris; costs in Ho Chi Minh City in Vietnam are almost as high as in Frankfurt.

So property investors may need to be selective. But the global economy faces four potential outcomes: a return to healthy growth (in which case rents should rise); a low-growth, low-inflation period in the doldrums (in which case the income appeal of property should help); a return of rapid inflation (as a real asset, property should offer some protection); or a deflationary slump. Only in the last case would property suffer. Three-out-of-four seems like good odds.

Economist.com/blogs/buttonwood

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Utah’s Diverse Economy

June 24

I thought you might find this following article published in the Salt Lake Tribune interesting.  It describes the diversity of the Utah economy and the resilience that it creates in the Utah market.
As Utah’s star rises after 2 recessions, lessons linger

Diverse economy has made Utah resilient, downturns have left it forever chastened.

By Paul Beebe

|  The Salt Lake Tribune

First Published May 17 2013 11:56 am • Last Updated May 18 2013 09:38 pm

With few exceptions, the pattern of jobs distributed across Utah is largely unchanged after two recessions since the turn of the new century.That underscores not only the unusual diversity of the state’s economy, but it increases the likelihood employment in the state will grow faster than in the U.S. for some time.It’s true the Great Recession gave construction a good drubbing , manufacturing employment ebbed and flowed between 2000 and 2012, and the information sector seems in permanent decline. But the other industries that make up the Utah economy have in total added tens of thousands of jobs — many with high-paying salaries — during the 13-year period that saw one of the wildest boom and bust cycles since the 1930s.”Those of us who lived through it will never be quite the same. But I think the economic forces in the Utah economy remain pretty much the same,” said Natalie Gochnour, chief economist at the Salt Lake Chamber and associate dean at the University of Utah’s business school.It’s been a rough-and-tumble ride, starting with the technology-led recession of 2001, which undermined storied Utah names such as WordPerfect and Iomega. Next was the remarkable stretch of growth that started in 2004 and propelled Utah to truly impressive heights.”For the fourth year in a row, Utah’s economy outperformed the nation in 2007,” economists said then, ticking off unrivaled growth in employment, personal income, housing prices and population in their annual report to then-Gov. Jon Huntsman.But the recession of 2007-2009, which started with the subprime mortgage crisis, ended all that in a big way and probably changed forever how Utahns view their financial circumstances and their appetite for risk-taking. Today’s watchword is prudence.

Record numbers of Utahns were thrust out of work as the downturn mauled the housing market and as other industries retrenched. Few people alive had ever seen Utah business conditions so depressed. Yet today, Utah again is a star. Employment at the close of 2012 was 16 percent higher than in 2000. U.S. employment was up only 1.4 percent, according to the Bureau of Labor Statistics. Utah’s modern economy seems second to none.

“Basically, these numbers show that Utah’s economy is quite diverse. It was quite diverse in 2000 and that trend holds [today],” said Juliette Tennert, Gov. Gary Herbert’s chief economist.

“Utah’s economy continues to evolve, continues to be very dynamic [and] continues to maintain economic diversity, which is a really good thing,” Tennert said. “Economic diversity helps to support economic stability. The more diverse an economy, normally we see a faster recovery from a recession, which we’ve seen in the most recent data.”

A Salt Lake Tribune analysis of employment data shows that eight of the state’s 11 industrial sectors added almost 190,000 jobs during the 2000-2012 period. At the head of the list was the education, health and social services sector, which accounted for close to one of every three new jobs. Its share of total employment rose to 13.1 percent of all jobs in the state from 9.5 percent at the start of the millennium.

Given that the state’s population jumped 24 percent, to 2.8 million people, that’s not surprising, economists say. Demand for private education services, health care and other social services was driven by rising numbers of young families with children, as well as by migrants from other parts of the U.S. and foreign countries. (Public education falls in a different sector — government. It was the No. 2 job generator, although its share of total employment barely budged.)

But another factor was at play. Three sectors — construction, manufacturing and information lost jobs and share; the trade, transportation and utilities sector’s share of total employment also shrank, although it still added jobs. As those sectors’s portions of total employment got smaller, the remaining sectors by default were bound to get larger — most notably education, health care and social services — and probably will continue to gain in importance over time.

“That sector is predominantly health care, and we have absolutely been pouring more of our collective resources into [it] as we’ve aged, as technology has improved the quality of health care — and as we’ve been unable to control cost increases,” Gochnour said.

John Maynard is one of some 62,000 people who landed jobs in health care. After being laid off from his welding job in 2008, Maynard searched high and low to find another opening in construction. After a year of picking up temporary work wherever he could, Maynard gave up and went back to school to be trained as a surgical technician. Now 39, he works for a surgical clinic in Bountiful. He has health insurance, a 401(k) retirement plan and vacation benefits, none of which he had before.

“I wish I would have learned this [lesson] when I was 18. I hated that I was laid off and I had to start all over again. But it will pay off in the long run,” he said.

The information sector shed nearly 3,700 jobs during the period as its share of total employment fell 10.5 percent. In part, the declines were tied to cutbacks at newspapers and other Utah media. Another reason was the collapse of the dot-com bubble that produced the 2001 recession. A third factor emerged as the frenzy to lay fiber-optic cables and ramp up other infrastructure to support the explosion of Internet and cellphone service subsided. Carrie Mayne, chief economist at the state Department of Workforce Services, thinks the information sector will not grow appreciably until some new technology is invented.

The mining sector — specifically oil and gas production — witnessed the most explosive dramatic employment growth. The number of jobs jumped almost 72 percent between 2001 and 2012, although most of the gain occurred in the past couple of years. Oil and gas production historically has followed a boom-and-bust pattern, but Mayne thinks the latest rise in jobs, particularly in the hydrocarbon-rich Uintah Basin in eastern Utah, will be permanent. Fracking technology allows drillers to extract more oil and gas from old fields and opens up new areas for development.

“All of the economic development people, the people in the state (Office of Energy Development), they all seem to think that this oil and gas [upturn] is not going to go away, that it’s not just a boom that is going to realize a bust later on. This may be something that booms for quite awhile,” Mayne said.

Leisure and hospitality jobs jumped more than 22 percent. Although Utah’s ski resorts and iconic scenery get most of the public’s attention, it was restaurant employment that took off in the 2000-2012 period. More than 16,400 jobs were added, a 25 percent gain driven largely by population growth.

Tim Ryan and Joe Fraser took note of the demand for new restaurants, and in 2009 they opened their first ‘Bout Time Pub and Grub, at Jordan Landing in West Jordan. Today, Ryan and Fraser own seven ‘Bout Time restaurants along the Wasatch Front. Their eighth location will open in Kimball Junction this week.

The pair plunged into the business of food because they believed the market for pub fare and drink four years ago was underserved. Many national and regional chains had avoided Utah because of its restrictive  liquor laws.

“That created an opportunity for us. We already live in Utah. We are Utahns, and we understand the licensing requirements and the marketplace a little bit better,” Ryan said. Today, the company employs 200 people, including 25 full-time staffers.

On another front, the professional and business services sector increased its share of total employment as the number of firms providing scientific and technical expertise continued to grow amid the state’s march to becoming more of an information-based economy.

However, temporary staffing employment is also inside the sector. Although the number of temporary employees today is largely unchanged from 2000, there has been a surge since 2009, when the recession ended. Employment in that area is up 76 percent. Mayne said employers typically bring on temporary workers in the early stages of an economic recovery. When it’s clear the recovery is real, employers then shift to hiring full-time workers.

Employment numbers were “very steady until the economic downturn, but now we are seeing definite growth,” said Barbara Fryar, area manager for staffing company Manpower Inc. “Right now, I know that Salt Lake City has one of the best outlooks for jobs in 2013, and we found that out through our employment outlook survey, which we do quarterly.”

Twenty-two percent of the companies Manpower surveyed said they plan to increase their staffs during the April-through-June quarter. Just 4 percent said they would decrease their payrolls.

Gochnour frequently speaks publicly about the diversity and power of Utah’s economy. Still, the downturn has left its mark. Almost four years after the Great Recession ended, large numbers of Utahns remain unemployed and face an uncertain future, she said.

“I do believe that this [recession] has caused a reset of sorts. For example, about 70,000 Utahns are unemployed right now. I’m absolutely certain that many of those have to be retrained, so the reset is toward higher job skills, and education has become more important,” Gochnour said.

One lesson of the past six years is that Utahns have learned to live within their means. Savings are up, borrowing is tempered, debts are down — shifts that will have an impact on the economy in coming years. For example, townhomes and condominiums are becoming more popular, and some builders are constructing smaller homes.

“We overextended ourselves, both at a household and at a business level” leading into the Great Recession, Gochnour said. “There’s a lot of caution out there.”

 

 

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Construction Cost Updates – Q2 2013

June 10

Several times each year we share estimates of commercial real estate construction cost changes on different property types. We think a review of the replacement cost of buildings is a good metric to consider when evaluating commercial real estate investments. Note that these numbers do not include land costs. The most notable construction cost increases were in metal buildings and masonry block industrial buildings, which saw 20% and 10.7% increases respectively over the 4th quarter of 2012. Class B office construction costs remained relatively flat, with slight increases in most other commercial real estate property types. Please click on the link below for the full report, prepared by Bonneville Builders here in Salt Lake City, Utah.

Ball Park Estimates Combined 2Q 2013

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Net Lease Market Continues to Expand

June 10

I recently read this article written by Mike Janseen of National Real Estate Investor magazine.  I think that it is very relevant to the single-tenant net lease market here in Utah. We are continuing to see increased demand and compression in cap rates in this product type. I’ve included it below for you to read. I hope you find this useful.

 

Lack of Construction Boosts Net Lease Values

 

Investors are increasingly moving into the net lease property sector, but with few new retail spaces coming to market, cap rates in the arena are expected to continue compressing.

Net lease has become “an in vogue sector at the moment,” says Randy Blankstein, president of the Boulder Group in Northbrook, Ill. Investors are staying conservative and are looking for opportunities that will yield steady, predictable cash flows. Meanwhile, with interest rates low, few investments promise significant yields.

“You still have the dynamic of a lot of people who are not getting a return on their treasuries or checking account, who are looking for a stable, steady income stream,” says Gregg Siebert, senior vice president of investments with Spirit Realty Capital in Scottsdale, Ariz. “The benefactor is the net lease sector.”

In addition, Siebert says, cheaper and more abundant capital is allowing more investors to enter the net lease space.

But few long-term net leased properties are available, according to a Boulder Group market report. Overall supply of net leased assets declined 14.4 percent from the third quarter of 2012 to the fourth quarter.

Some tenants are backfilling second-generation retail space rather than expanding. Owners are also taking advantage of low interest rates by refinancing and holding onto properties instead of selling. Meanwhile, some properties are not reaching the public market before changing hands.

Discount retailers, a subsector of the net lease market, are bucking the trend and expanding. Dollar General and Family Dollar are expected to add a combined 1,000 stores across the country this year. Auto-parts chains are also growing, says Brad Thomas, senior vice president of capital markets at Bull Realty in Atlanta.

However, discount stores tend to sign 10- and 15-year leases, and most investors are looking for larger properties and longer leases. “A lot of people have portfolios that are full of dollar stores and are looking to find other things to diversity their profiles,” Blankstein says.

Meanwhile, business models of retailers such as Best Buy and Barnes and Noble, often net lease tenants, are under pressure, inhibiting their growth, according to Thomas.

Blankstein expects the net lease market to remain active throughout the year. A Boulder survey found that a majority of active participants in net leasing expect this year’s volume to rise between 5 percent and 14 percent over 2012 levels. Investors are bidding up existing desirable properties, keeping cap rates on a continued trend of compression.

According to Boulder, cap rates fell 25 basis points in the fourth quarter of 2012 from the previous quarter, near historic lows for single tenant net lease properties in retail, office and industrial sectors. Median asking vs. closed cap rate spreads for retail properties declined seven basis points, with the most significant cap rate compression occurring among FedEx, McDonald’s and AutoZone sites.

“I think we’re almost scraping the bottom” in terms of cap rates, says Thomas of Bull Realty. “But some folks think there’s more room to go.”

“Everyone is looking for the same thing, long-term investment-grade properties,” Blankstein says. “And since new development is challenged, they’re becoming harder and harder to find.”

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Crossroads Landing Single-Tenant Investment

May 20

I am pleased to present the Crossroads Landing as an example of single tenant investment. This property has 17,512 square feet and has a 12 year absolute NNN lease in place, with 9 years remaining. This property is a corporate office for a well established and well known local medical group.

         Price: $3,268,838

         Annual Income: $228,790.56

         CAP Rate: 7.0%

 

For additional information on this property or questions about single tenant investment, please Click Here.

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Utah Investment Snapshot – Q1 2013

May 2

NAI West becomes Newmark Grubb ACRES

March 29

 What does the change mean for our clients?

This week our firm NAI West has become Newmark Grubb ACRES. NAI West has been a good platform for us for almost 15 years. However, we have concluded that Newmark Grubb Knight Frank is the right platform for our commercial real estate and property investment operations in the future. Some of the reasons for this change include:

  • a stronger presence in major commercial real estate markets
  • a stronger corporate service platform
  • a stronger international presence

These characteristics support our growth objectives and provide the base for what we think is the best platform for our current and future commercial real estate and property investment operations.

The fact is that we are the same group of real estate investment professionals that we have always been. Newmark Grubb ACRES retains all the same personnel, including brokers, property managers, and data and graphics experts. We have the same address and phone number. What has changed is that Newmark Grubb ACRES has added a new platform and affiliation that we think will allow us to serve your commercial real estate and property investment needs even better.

The official press release is included below:

FOR IMMEDIATE RELEASE

Newmark Grubb Knight Frank Expands Western U.S. Presence with Utah’s Leading CRE Firm – Salt Lake City (March 26, 2013)

Newmark Grubb Knight Frank (NGKF) today announced that Utah’s leading commercial real estate services firm NAI West, a former affiliate of NAI Global, will do business as Newmark Grubb ACRES effective immediately, giving NGKF a dominant position in one of country’s most active real estate markets and throughout the western United States.

“Utah is one of the few states to set a new post-recession employment peak,” said Barry M. Gosin, NGKF chief executive officer. “Its strong and diverse economy led by industries like technology, biomedical and genetic research, manufacturing, energy and mining, presents significant opportunity for our clients. We are extremely excited to expand our presence here with the exceptional talent and capabilities of Newmark Grubb ACRES.

“NGKF’s value proposition and success is driven by our unwavering client-centric philosophy. We continue to bring together best-in-class professionals across the country and, with our global reach and unmatched resources via our parent company BGC Partners and its affiliates Cantor Fitzgerald and Cantor Commercial Real Estate, the NGKF advisory platform represents one of the most powerful solutions in the real estate industry.”

Established in Salt Lake City in 1998, Newmark Grubb ACRES is led by founding partner Michael B. Falk, president. With four offices, over 100 professional brokers and more than 80 staff members, the firm provides a full suite of services with a focus on tenant and landlord representation, property management, corporate services, land and investment sales for office, industrial and multifamily property.

“We can better ensure the quality and timeliness our clients deserve by having a seamless, fully integrated platform. The choice in NGKF was driven by our research that no other firm could meet our clients’ needs as effectively. We look forward to partnering with the top-tier professionals at NGKF for our clients benefit.”

Low taxes, the youngest labor force in the nation, rank as the third fastest-growing population, a favorable regulatory environment and track record as a fiscally responsible state government earns Utah national praise. In 2012, Forbes magazine ranked Utah the No. 1 “Best State for Business and Careers” for the third straight year, and CNBC ranked Utah No. 2 for the “Best State for Doing Business”.

“Being ranked Best State for Business by Forbes three year in a row is evidence of our teamwork based approach to economic development in the State. Our public and private sector work together to create an environment for success,” said Jeff Edwards, president and CEO of the Economic Development Corporation of Utah. “Newmark Grubb ACRES is a strong local partner that will continue to help us grow our capability in the region.”

About Newmark Grubb Knight Frank:

Newmark Grubb Knight Frank is one of the world’s leading commercial real estate advisory firms. Together with its affiliates and London-based partner Knight Frank, Newmark Grubb Knight Frank employs more than 11,000 professionals, operating from more than 340 offices in established and emerging property markets on five continents.

With roots dating back to 1929, Newmark Grubb Knight Frank’s strong foundation makes it one of the most trusted names in commercial real estate. Its integrated services platform includes leasing advisory, global corporate services, investment sales and capital markets, consulting, program and project management, property and facilities management, and valuation services. A major force in the real estate marketplace, Newmark Grubb Knight Frank serves the local and global property requirements of tenants, landlords, investors and developers worldwide. For further information, visit www.newmarkkf.com.

Newmark Grubb Knight Frank is a part of BGC Partners, Inc. (NASDAQ: BGCP), a leading global brokerage company primarily servicing the wholesale financial and real estate markets. For further information, visit www.bgcpartners.com.

 

 

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Sustainability & Commercial Real Estate Investment

March 11

Green and Sustainable Building: What Does it Mean for You?

The trend in the world of commercial real estate is going green. The environmental impact of the “built” world is becoming more of an international issue every year. It has been reported that over 50% off all pollution comes from buildings. As a comparison, transportation makes up less than 25%. So even if we all stopped driving our cars the impact is minimal compared to the overall problem. Sustainability in buildings is becoming more important to builders, property-owners and tenants.

This awareness has spurred the creation of programs such as LEED (Leadership in Energy & Environmental Design) to provide designations for buildings to meet certain criteria in relation to design, sustainability, energy and overall impact on the environment. The buildings are awarded points based on compliance with different categories and then given different levels of designation depending on the criteria they adhere to.

The LEED program has done a tremendous amount of good to raise awareness and bring these types of issues to the forefront. The challenge that I observe with the LEED program is that it is a one-time designation that doesn’t ultimately reward building performance. In fact, there are some systems that are beneficial in some areas while actually less efficient in others.

As a real estate practitioner and investor, I am more acutely interested in the overall efficiency and sustainability of properties. I want to know how a building can operate better and with less energy consumption. There are many new delivery systems and technologies coming on line that can reduce operating costs. It will be very interesting to watch how these technologies evolve and impact the world of commercial real estate investment in the coming years.

In the meantime, does sustainability and building green pay? Studies show that LEED-certified buildings have higher average lease rates and higher average sales prices per square foot — the logic being that if operating costs are lower then that will directly affect the net operating income in a positive way, thereby increasing value. There are many companies that are choosing only to lease in LEED- certified buildings, which is increasing demand as well. So regardless of increased efficiencies, commercial property values are also being driven by the demand created by the “green” trend.

This trending towards environmental and energy sustainability is not going away any time soon. The impact will be different based on real estate property size, type and location. However, a commercial real estate investor in the market today needs to look carefully at the impact of the green trend as it evaluates different investment opportunities.

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JUST SOLD – Single-Tenant – Jiffy Lube

February 28

We are pleased to announce the recent sale of the Jiffy Lube Single-Tenant Investment located in South Ogden, Utah.  The property was a single-tenant, NNN leased, property with a 15 year lease to Jiffy Lube.  It was purchased via a 1031 exchange by a local investor.  Please contact me if you are interested in single-tenant investment, NNN leased deals as they come available or if you would like more detail on this sale.

 

 

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JUST SOLD – Single-Tenant – Bonneville Title Building

February 28

We are pleased to announce the recent sale of the Bonneville Title Office Building located in Layton, Utah. The sale consisted of a 7,000-square foot office building located on I-15 in Layton leased to a single tenant, Bonneville-Superior Title. The property sold to a local investor completing a 1031 exchange. Please contact me if you are interested in single-tenant investment sales as they come available or if you would like more detail on this sale.

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Salt Lake City the 5th Fastest Growing City in the Nation

February 19

Morgan Brennan at Forbes Magazine wrote an article a few weeks ago on the fastest growing cities in the United States. Salt Lake City ranked as the 5th Fastest Growing City. Statistics such as a 3% job growth rate and 4.8% unemployment in 2012 helped to spur that designation. Additionally, Utah was ranked by the same publication as the “Best State for Business & Careers” and had the 5th highest rate of population growth in the country. A link to the full article is below along with a full text version of the article following that.

http://www.forbes.com/sites/morganbrennan/2013/01/23/americas-fastest-growing-cities/

Text Version:

“When Chuck Gordon and Mario Feghali started Sparefoot, the 25-year-old entrepreneurs relocated to Austin, Texas, from Los Angeles, having received seed money from local tech incubator Capital Factory. Four years later, the self storage “marketplace” startup has blossomed into a 60-person company with plans to expand its presence in the state capital. The company is currently tacking on additional office space (that’s likely to include a firehouse-style pole between floors) in its downtown building.

“It makes so much sense to be here. For starters, there is a ton of bright talent to recruit from,” says Rachel Greenfield, Sparefoot’s marketing manager. “Austin in general is a very relaxed place full of smart people who work their tails off…we’re keeping our culture intact as we scale, just like Austin is.”

Thanks to the 51,000-student University of Texas at Austin, a bevy of Silicon Hills startups like Sparefoot.com, and the presence of mega corporations like Whole Foods and Dell (in nearby Round Rock), the Lone Star State’s capital is an economic powerhouse. With an estimated annual population growth rate of 3% for 2012 and 2013, a 3% rate of job growth in 2012, 4.9% unemployment, and an economy that expanded 6.3% last year, Austin takes the top spot on Forbes’ annual list of America’s Fastest Growing Cities for the third year in a row.

Behind the Numbers

We started with the 100 most populous Metropolitan Statistical Areas (MSAs), which are cities and their surrounding suburbs, as defined by the U.S. Office of Management and Budget. We rated these geographic areas based on six metrics. Using data from Moody’s Analytics, we assessed the estimated rate of population growth for 2012 and 2013, the rate of job growth in 2012, and the rate of gross metro product growth, or economic growth, for 2012. We also factored in federal unemployment data and median salaries for local college-educated workers, courtesy of Payscale.com. The result is a list of the 20 fastest growing metro areas in America in terms of population and economy.

Perhaps not surprisingly, cities in Texas — which welcomed more than 427,000 newcomers from August 2011 to July 2012, according to the U.S. Census Bureau — dominated our list. Houston ranked second, behind Austin, followed by Dallas in third place and San Antonio in ninth. Robust labor markets, unemployment rates under 6% (well below the national average),no state income tax, a business-friendly regulatory environment, and strong population inflows all contributed to Texas towns’ high rankings.

Fourth on our list is the boomtown of Raleigh, N.C. Situated between Raleigh and nearby Durham is the Research Triangle Park, where more than 170 companies have outposts, including major corporations like EMC, Cisco and First Citizens National Bank. Raleigh is also home to a multitude of universities and colleges, helping create a highly educated population: Roughly 50% residents ages 25 and older have college degrees. Over the past two decades ending in 2010, the Raleigh area’s population and jobs market grew at some of the highest rates in the U.S. The population is currently expanding at a rate of more than 3% annually and job growth was 2.3% in 2012. “We have been able to grow the worker pool by attracting a good deal of the graduates from the local colleges with a great quality of life at an affordable price. In turn, it’s attracted companies in search of talent,” explains Harvey Schmitt, chief executive of the Greater Raleigh Chamber of Commerce. “Our employment numbers now exceed those at the beginning of the recession.”

Salt Lake City ranks fifth, thanks in large part to a strong jobs market. The so-called “Crossroads of the West” posted nearly 3% job growth last year on top of a tiny 4.8% unemployment rate. “Salt Lake City serves as a commercial and financial hub regionally and it has a well-developed insurance-financial sector,” notes Pam Perlich, a senior research economist at the University of Utah who specializes in city and metropolitan planning. “The economy has become very diversified.” She points to a blossoming technology presence, growth in biomedical and genetic research, and a steady energy and mining sector. Several major transportation projects like a new light rail system have helped lure new businesses and residents to the area as well.

The presence of corporations and the promise of employment have spurred Americans to relocate to the intermountain hub: “People have continued moving here even as we have lost jobs during the last three downturns in economic cycles, so our migration patterns have come to resemble larger metro areas and you see that in the increased number of foreign-born residents,” adds Perlich.

Given the fact that Forbes ranks Utah as the best state for business and careers, it’s perhaps not surprising to see two other Beehive state cities on our list: Provo (No. 7) and Odgen (No. 20). Utah boasts an economy that has expanded 2.3% annually since 2006 (compared to a national rate of 0.5%). It logged the fifth-highest rate of population growth last year, according to the Census Bureau.
A surprise on our list is Phoenix at No. 8. Hard hit by the bursting of the housing bubble, the desert metropolis is welcoming a fresh influx of newcomers, particularly from California and the Midwest. Its projected population growth rate of 2.7% for 2013 is the fourth highest of any city on our list. The jobs market is beginning to make a comeback too. “Population growth is a key catalyst of Phoenix — and Arizona’s — economic growth,” says Lee McPheters, a director of the JPMorgan Chase Economic Outlook Center of Arizona State University’s W. P. Carey School of Business. His research team does its own economic rankings each month based on Bureau of Labor Statistics data; it resembles Forbes’ findings. He says employment is on the rise in construction, the service sector, healthcare and warehousing (Amazon has an outpost in the area). “Interestingly, it’s younger people ages 20-29 coming in now who don’t have a house to sell, are unmarried, that are the driver of growth here now.”

For more information on property investment in one of the fastest growing cities in the United States, click through the other articles on our blog.

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2012 NAI West Year End Market Report

January 28

We are pleased to present the 2012 NAI West Year End Market Report.  2012 was a progressive year for the Utah market and forecasts are strong for 2013.  As always, I welcome your feedback.  Please click the button below for a full copy of the report.

 

 

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Just Sold – King’s Gate Office Building

January 23

We are pleased to announce the recent sale of the King’s Gate Office building to a local Utah commercial real estate investor. The building is a 21,190-square foot, two-story office property built in 2008. The commercial building was taken back in a foreclosure and we were hired to dispose of the asset. Please feel free to contact us for more information in regards to this real estate sale or other commercial real estate transactions and investments.

 

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2013 Outlook Positive for Commercial Real Estate

December 20

Utah Business Magazine published an article today dealing with the outlook for commercial real estate in 2013.  The article also addresses the highs and lows of 2012.

The link for the article is below and the full text is in the body of this post following the link: http://dev.utahbusiness.com/articles/view/2013_outlook_positive_for_commercial_real_estate

2013 Outlook Positive for Commercial Real Estate

Press Release

December 20, 2012

Overall, Utah’s commercial real estate market had a positive 2012. Throughout the year markets statewide fluctuated with the economy and presented significant opportunities for owners, investors and users of commercial real estate. The positive momentum experienced throughout 2012 has made commercial property owners and brokers excited and optimistic for 2013.

A prevailing sentiment throughout the market is that owners and users of property feel more secure and less hesitant to make real estate moves. Continued low interest rates have made new construction or purchases more feasible for owners and investors, while lease rates remain reasonable for tenants.
Some of the common trends throughout the industry are:

  • Utah’s economy is strong and has created an ideal environment for buyers, sellers, and tenants in all areas.
  • Class A space has experienced the strongest demand increase in all areas.
  • All segments of commercial real estate will see continued growth through 2013.

Office Market Outlook

Looking forward to 2013, office real estate users, owners, and agents are excited and optimistic. “We are seeing activity in areas that have been slow for the last four or five years, such as Davis and Weber Counties,” said Chris Falk, vice president – Northern Region for NAI WEST Commercial Real Estate. “South Davis County will have nearly 220,000 square feet of new office space come online in 2013. Seventy percent of which will be spec space.” Commercial real estate agents in the area are eager to see large users of space (20,000 square feet or more) enter the area.

All of this new development should impact vacancy rates, which have not changed significantly over the last year. According to Falk, office condos will be an area that will experience growth in 2013, “The significant amount of available space coming on line, combined with record low SBA loan rates, should help the office condo market flourish this year.”

Falk stated that the biggest potential hurdle for the office market would be a negative perception of the general economic and business environment. Tentative business owners putting strategic moves on hold could prolong and slow the ongoing recovery. “Waiting could be more negative than anything at this point. With low interest rates and other economic incentives, this is the ideal time to make real estate acquisitions,” said Falk.

Retail Market Outlook

The retail real estate market has had a very positive 2012. Vacancy rates dropped this year, and landlords have been able to experience a little relief as lease rates have increased slightly. The trend is that the local and national economies continue to progressively improve.

According to Andy Moffitt, retail specialist with Mountain West Retail/Investment, 2013 should be incrementally better than 2012. “This has been one of the best years ever for retail brokers. Much of this has come due to low CAP rates and low interest rates on financing. We expect to see this continue into 2013. We don’t expect it to be a blowout year, but we are looking forward to continued improvement.”

Areas of growth in the coming year are expected to be in the fast casual restaurant market, as these continue to increase in popularity and chains seek to open more locations. Mid-box retailers are also seeking to reposition into higher quality properties. Additionally, investment opportunities are plentiful as sales prices and interest rates remain low.

However, Moffitt also explained that big-box retailers may be looking to reduce store sizes over the coming year. Opportunities to shrink by 5,000 square feet can lead to significant savings for retailers. Additionally, there are no significant construction projects on the horizon. “With the completion of City Creek, Station Park in Farmington was the other marquee construction project in 2012,” said Moffitt. “Grocers and shopping center owners have nothing planned for the coming months.”

Local industrial data indicates modest upward projections of lease rates, number of leases and total square feet leased. The market is seeing less and less one-year lease renewals and more 3-5 year deals; a sign that many tenants are finally in a position to step up and take advantage of the diminishing low-lease rate opportunities. The decrease in square feet sold and number of sales should begin to flatten out while average sale prices of class A and B product will continue to increase.

Investment and Multi-Family Market Outlook

Investment and multi-family indicators show a very positive outlook for 2013. In 2012, investment property sales increased well beyond expectations as demand for class A assets fueled the acquisition of numerous properties, especially retail and apartment properties. Both owners and sellers will have significant opportunities as vacancy levels decrease and lease rates remain low.

Commercial real estate professionals maintain that the investment market will continue to see growth as market fundamentals improve. “There seems to be less insecurity in the market,” said Rick Davidson, NAI WEST executive real estate agent. “Institutional investors have realized that class A real estate is the best hedge against the uncertainty of these political and economic times.”

Overall, Utah continues to have one of the healthiest commercial real estate markets in the country. 2012 proved to be a very positive year and 2013 looks to continue that trend. Across all market segments, outlooks remain positive and agents and owners alike are optimistic for the next twelve months.

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Capital Market Review – 12-17-12

December 18

Following a link for the commercial real estate Capital Market Review for December 17, 2012:

Capital Market Review 12-17-12

In terms of interest since our last post there has been a slight decline in rates with office rates dropping below 5%.  December has been the busiest month for CMBS issuance in 5 years which is a good sign for the capital markets.

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Commercial Real Estate – Salt Lake City vs Intermountain West

December 11

I am often asked how the Salt Lake City commercial real estate market compares to the surrounding commercial real estate markets. The following link contains an outline of how Salt Lake’s industrial, office and retail markets compare to Phoenix, Denver, Las Vegas, Reno and Boise. In all areas, our local commercial real estate market has one of the lowest vacancy rates and some of the lowest lease rates of all major Mountain West markets.

Please feel free to contact me for additional information related to this topic, or with other commercial real estate and investment property questions.

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Utah #1 in Pro-Business Rankings

November 26

Pollina Corporate Real Estate, Inc. recently released its rankings for the top ten pro-business states in the country. After three years in second place, Utah is the first state west of the Mississippi to earn the top designation. This is a significant achievement affecting commercial real estate in Utah.

The rankings are based on a number of factors including taxes, human resources, energy costs, financial incentives and evaluations of state economic development programs. Brent Pollina, vice president of Pollina Corporate Real Estate and co-author of the study is quoted as saying, “Utah is a great example of what enlightened and motivated political leadership can accomplish with a solid plan.”

The strength of the Utah economy plays a significant role in the long-term value of commercial real estate investment in the state. Utah state unemployment rates recently dropped to 5.2% as the rest of the country inched back up to 7.9%. This resilience fuels the demand for office and industrial occupancy. The strong local economy continues to have strong residential growth as well, which fuels the retail demand. The Pollina Corporate Top 10 Pro-Business States study reinforces what we already know to be true: commercial real estate investments in Utah are more stable than most other commercial real estate markets in the country.

You can see the full article at http://www.pollina.com/top10probusiness.html.

 

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Just Sold – LWH Business Park

November 20

We recently represented the seller in the disposition of the commercial real estate investment known as the LWH Business Park in Layton, Utah.  The LWH Business Park is a 30,000 SF industrial flex park in a high traffic, high visible location on Hill Field Road on the west side of Layton. Many of the Tenants occupy here because of the visibility. The park has had historically high occupancy and has been a stable cash flow investment for the current owners.  Incubator industrial properties have been a popular commercial real estate product type with investors over the past couple of years.  They have shown good resilience during the economic downturn and due to the short-term nature of the leases, they are viewed as a strong inflationary hedge.  Please contact me for additional details related to this sale.

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Effects of Election – Utah Commercial Real Estate Market

November 20

The Election and Commercial Real Estate
As the country went to the polls last week there were many issues influencing how the American people chose to vote. The country’s opinion regarding who would be the best leader of the free world for the next four years was split even among similar demographics with a few exceptions. In the end the voice of the people elected President Obama to be our leader for the next four years.

With the election over, those who voted for Obama and as well as those who voted for Romney are left to wonder what the effect of that decision will be on their individual self interests. How will their lives and industries be affected over the next four years and beyond? The intent of this post is to discuss what effects this election may have on the commercial real estate market in Utah. It is not intended to be an exhaustive document but to touch on some of the ways that the election results may affect us in the commercial real estate industry.

Uncertainty versus Clarity

Many in the commercial real estate industry have looked forward over the past few months to the election with hopes that either result would eliminate much of the uncertainty that has plagued the real estate market this year. Many commercial real estate investors have patiently awaited the outcome as they have planned their acquisitions and dispositions this year. Other investors have disposed of property assets during the second half of the year with growing concerns of increases in capital gains taxes rates in 2013.

Surprisingly, clarity has not returned to the market with the conclusion of the election. The fiscal cliff and questions regarding the President’s economic agenda have left investors pondering. In fact, in my discussions with commercial property investors during the past week some have delayed otherwise active acquisition strategies as they attempt to understand where things are going.

Business Confidence

The life-blood of the commercial real estate investment world is the success of the businesses occupying properties and paying rent. Although investment activity in commercial real estate has strengthened during the past year, business growth and occupancy has lagged in several areas.  Businesses have been more reluctant to grow than investor’s portfolio’s have. The most common response we hear from companies when asked about their business is that:

  1. Their businesses are profitable, even as profitable are they were prior to the recession.
  2. Their revenue has been relatively flat or slow growing for several years.

What this says is that they have learned to do more with less. Businesses suffered the pain of the initial downturn. They made the difficult decisions regarding cost cutting to stay alive. Now that they are again profitable they are hesitant to re-invest and grow as they did in the past.

This is all without including the effects of health care reform and how it will affect who they hire, how many people they hire and what types of positions they will be opening.

Commercial Real Estate vs. Other Asset Classes

Stock market fluctuations have led many investors out of that market and into the commercial real estate market – many for the first time. There has been a strong demand from individuals and companies wanting to invest in something that they can see, smell and touch. This commercial real estate investment trend should continue until confidence returns to the stock market. Fears of inflation also have led investors back into commercial real estate as it has proved to be a very viable hedge against inflation in past cycles.

Interest Rates

Commercial real estate is more sensitive to interest rates than probably any other economic factor. Many of the deals being transacted across the country could not get done at current pricing if interest rates were to significantly rise. Long-term fixed rate debt becomes increasingly valuable as expectations of a recovery progress.

Taxes

Tax policy, particularly capital gains treatment may be the most significant issue coming out of this election. Is there going to be a capital gains category? If so, where are capital gains tax rates going to be in 2013? 2014? 2015? Those taxes will largely affect the number of real estate sellers coming into the market and limit the number of transactions available for commercial real estate investors.

Conclusion

It will be interesting to see how things progress as 2012 wraps up and we come into 2013. A significant percentage of individuals in the commercial real estate industry tend to lean right and be a little more conservative to differing degrees. Many commercial property investors express real fears of what is perceived to be a negative election result as it relates to the local, national and world economies and more particularly, commercial real estate.

The challenge that those on the right face is not what effect the election will have on the commercial real estate industry but what affect their investment decisions will have on the industry and the economy as a whole. A policy of “doing nothing” even when good opportunities present themselves may create a self-fulfilling prophecy as our fears create the very circumstances we wish to avoid.

With that being said, there are some real challenges and concerns in the economy in coming years and investors should “move” with caution and scrutiny as they always do. The most important verb in that sentence is that they do “move” and make decisions based on objective analysis as opposed to emotional fears.

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JUST SOLD – Logan Mobile Home Park

November 6

We have recently closed on the sale of the Logan Mobile Home Park in Logan, Utah.  The park consisted of a 53 unit mobile home park on 5 acres.  It was a unique mobile home park whereas it is situated in a very good area near the local city golf course and baseball fields.  The buyer was a local investor and purchased it for cash flow purposes.

We sold another mobile home park investment last month and I included a few thoughts regarding this type of commercial real estate investment.  I am including those same comments below:

Why Mobile Home Park Investment?

Several of my clients have been seeking mobile home park investments as an alternative to their typical commercial real estate investments in the last 12 months.  Their theory being that because of most cities reluctance to grant zoning for new mobile homes parks, existing parks are experiencing strong occupancies.  Unlike most commercial properties, a few vacancies have very little impact on the overall return.  It is also a commercial real estate investment type that tends to do better in recessionary economies.  The hope is that strong occupancies due to a lack of new supply will provide greater than average rent growth.

Challenges with Mobile Home Park Investment

The challenge with mobile home park investment is understanding management.  There are more nuances dealing with tenants than in traditional properties.  Its is also a property type you might not feel proud telling your friends that you own.

If you can get over some of these hurdles there are some real financial advantages.  Please feel free to contact me for additional information on the deal points.

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JUST SOLD – Tradewinds Mobile Home Park

October 23

We have recently closed on the sale of a mobile home park investment. The Tradewinds Mobile Home Park in Bountiful, Utah was sold to a local investor. The park was an older park consisting of individual, single-wide mobile homes. The purchase included the park only. No homes were included in the sale.

Why Mobile Home Park Investment?

Several of my clients have been seeking mobile home park investments in the last 12 months.  Their theory being that because of most cities reluctance to grant zoning for new mobile homes parks, existing parks are experiencing strong occupancies.  Unlike most commercial properties, a few vacancies have very little impact on the overall return.  It is also a commercial real estate investment type that tends to do better in recessionary economies.  The hope is that strong occupancies due to a lack of new supply will provide greater than average rent growth.

Challenges with Mobile Home Park Investment

The challenge with mobile home park investment is understanding management.  There are more nuances dealing with tenants than in traditional properties.  Its is also a property type you might not feel proud telling your friends that you own.

If you can get over these hurdles there are some real financial advantages.  In addition to this park I have other clients under contract on other parks that we’ll discuss in the future.

 

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Utah Investment Snapshot – Q3 2012

October 22

We have just completed our analysis for the 3rd quarter of 2012.  Please click the link below to see the Q3 Utah Investment Snapshot:

Utah Investment Snapshot – Q3 2012

A few of the highlights from the report are as follows:

  • Cap Rates have remained relatively steady over the trailing 12 months with the exception of office properties which has seen a decline.
  • The total number of investment property transactions and total transaction volume in Utah has increased for the previous 3 years straight.
  • Multi-family properties are the most active segment followed by retail, industrial, and office.

Please feel free to contact me with any questions regarding the market information provided.

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Capital Market Review – October 8, 2012

October 17

Please see the following link for the Capital Market Review for the month of October 2012:

Interest rates remain low across the board with the lowest rates in the multi-family sector.  The 10-year treasury was up a bit due to the unexpected decline in unemployment.  Institutional buyer continue to lead the charge on commercial real estate investment purchasing high-quality assets both in major and more continually secondary markets.

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Fixed Rate versus Inflation Indexed Rental Increases

October 1

Annual rent increases are a commercial real estate investors best friend.  Commercial real estate has long been lauded not only for its strong investment performance but for its hedge against inflation.  What other asset can you leverage with fixed rate financing and then have the income increase with time?

When looking at the leases that comprise that income landlords and investors have historically favored fixed rate rental increases.  I am defining a fixed rate rental increase as an increase in the rental amount based on a fixed percentage or dollar amount.  For example, the rent could increase by 2% annually or 10% every 5 years.  Sometimes it is described as a fixed dollar amount as in $500 per year.  This rental increase method has been preferred because it is easily definable, calculable, and it simplifies budgeting. 

Currently investors face a dilemma when looking at new leases or analyzing commercial real estate investments.  There are many economic experts in the country concerned about inflation in coming years.  This creates a situation where a fixed rate increase may not keep up with the time value of money creating a situation where the value of the lease actually decreases year to year. Many investors are turning towards rental increases based on inflationary indexes such as the consumer price index (CPI) and other methods.  The challenge with this method is that there are many ways to calculate this index and it is difficult to track.  It requires an annual discussion with the tenant to determine what rent will be going forward and is sometimes the source of contention and bad feelings if there is a disagreement on how the escalation is being applied. 

The flip-side of this coin is that tenants are looking at these same considerations.  They don’t want the risk of inflation passed to them either.  Strong credit tenants are often times even able to negotiate flat lease rates during their lease terms.  In recent years tenants such as Family Dollar and Walgreen’s have become darlings for commercial real estate investors and 1031 exchange buyers.  For example, Family Dollar will typically sign 10 year leases during their initial term and will typically require a flat lease rate during that term.  Similarly Walgreen’s has been able to obtain leases as long as 25 years with no annual increases.  Many investors have concluded that they are willing to take that risk in exchange for the strength of the tenant.  What will the value of those rental dollars be at the end of those leases?  It is a crystal ball question but if we do experience high degrees of inflation those leases could become problematic.

Regardless of how each individual commercial real estate investors views the threat of an inflationary market, each should be considering this aspect of the investment both in lease negotiations and new property acquisitions.

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Raw Land Discussion

September 17

 

Raw Land InvestmentDuring the economic downturn, I have had many clients come to me with an interest in taking some of their money out of the securities markets and investing it in raw land. Their theory being that if economic troubles continue, at least they’ll have something they can see, touch, & smell.  These are typically individuals who do not own real estate besides their personal residence and often don’t feel like they can or want to understand the management associated with income-producing commercial real estate investments.  There are some merits to investing in raw land, but there there are also some challenges associated with it.  The intent of this discussion is to lay out the factors that an investor should consider when comparing raw land to income-producing commercial real estate or other financial markets.

POTENTIAL BENEFITS TO INVESTING IN RAW LAND

  • Very Little Management – in most cases, the management will be no more than making sure the weeds are cut, maybe negotiating a lease with a local farmer, or paying the property taxes.
  • You Own a Hard Asset – Even during difficult times the land can be of value.  It can be farmed or built on even if markets don’t allow for it to be sold at a good price. Unlike stocks or bonds, raw land will always be there even if its economic value is gone.
  • Scarcity – The quantity of raw land is limited.  As land is developed it becomes more scarce.  Scarcity creates value.
  • Appreciation – Raw land has the potential for huge appreciation if purchased in the path of growth or if zoning can be changed to allow other uses. Over time the value of raw land has historically appreciated.  Over shorter periods is has definitely lost value at times but the trend line is historically upward.
  • Inflation Hedge – Raw land tends to be a pretty good hedge against inflation.

POTENTIAL CONCERNS TO INVESTING IN RAW LAND

  • Illiquidity of Investment – This becomes a challenge if you have to sell at a particular point in time.  If you have flexibility you can sell during good times but very few people have that flexibility.
  • Lack of Cash Flow – Appreciation is your only source of return.  There is generally no cash flow coming off of raw land.  In most cases the cash flow is negative once property taxes are taken into consideration.  With farm land you can often lease it  to a farmer but rarely does the amount that a farmer can pay cover the property taxes.
  • Governmental Restrictions on Land Use – The use of the raw land and resultant value are heavily impacted by surrounding property owners and the cities the property is located in.
  • Lack of Tax Advantages – Since there is no building there is no opportunity for depreciation.
  • Financing Difficult – Financing raw land is difficult and therefore an investor is typically unable to leverage returns as it would on a traditional commercial real estate investment.

raw land investmentIf the decision is made to invest in raw land then there are a number of factors affecting which property to buy.  For example, is it in the path of growth?  What is the condition of the soils?  Where are utilities and services for the property?  What will it cost to get them to this property?  Do I want agricultural, commercial, residential or other types of property?  When will the market allow the property to be developed?  Where does the property sit in the city’s master plan?  What will ultimately be built on this property?  Do I want to develop or sell the property when the time is right?  Are there any easements which would adversely affect the property value?  Does the property have enough water available for development?  These are just a handful of the questions that need to be asked.

Under the right scenario’s investing in raw land can be a great investment.  I have many clients who focus solely on this type of strategy.  I also have many clients who refuse to buy raw land for the reasons listed above but primarily it is because of a lack of cash flow.  I have found that as an investor’s net worth increases, his propensity for doing land deals increases.

I hope this is helpful as you assess the place of raw land in your commercial real estate portfolio. Contact me for more information.

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The LIBOR Scandal and Commercial Real Estate Investments

September 14

I recently read an article that details the potential effects of the LIBOR scandal on Commercial Real Estate Investments. The article was written by David Bodomer of National Real Estate Investor and was a good editorial on the subject.  The summary that I took away from it was that the effects on commercial real estate are likely to be minimal unless LIBOR goes away entirely which is unlikely.  The biggest effect is more likely to be further uncertainty to the capital markets in a time when we are attempting to recover. The full article is reprinted below.

What the LIBOR Scandal Means for Real Estate

Sep 12, 2012 11:21 AM, By David Bodamer, Editorial Director

In early July, British investment bank  Barclays PLC announced a surprise settlement with agencies from the  United States and Europe and admitted that, for years, it had been  reporting false information to the British Bankers’ Association as part  of the process of determining the London Inter Bank Overnight Rate  (LIBOR)—a key metric used as the basis for trillions of dollars’ worth  of other financial products, including some commercial real estate debt. The bank agreed to pay more than $450 million in fines: $200 million to the U.S. Commodity Futures Trading Commission, $160 million to the  criminal division of the U.S. Department of Justice and $92.8 million to Britain’s Financial Services Authority.As a result of the scandal, key  executives—including Barclays Chairman Marcus Agius and Barclays CEO  Robert Diamond—announced their resignations. The bank is now fighting to regain the trust of investors, borrowers, other banks and regulatory  agencies in the wake of the revelations.And, allegedly, it wasn’t alone. More than a dozen other banks remain under  investigation by European and U.S. financial regulatory bodies for doing the same thing as Barclays. More fines may be handed down. And they are likely to be heftier than what Barclays paid since agencies went easy  on the British bank for being the first institution to step forward and  admit to wrongdoing.The scandal has also triggered dozens of  lawsuits as community banks, borrowers, investors and municipalities  affected by LIBOR try to recoup potential losses that resulted from  inaccuracies in the reported rates. For example, entities including  Charles Schwab and the City of Baltimore filed suits against the banks  that submit LIBOR rates accusing them of price fixing, under the Sherman Antitrust Act.The docket has gotten so full, in fact,  that  U.S. District Judge Naomi Reice Buchwald in early August suspended  several new lawsuits until the outcomes of the many lawsuits in progress had been determined.Overall, it is estimated that up to $800  trillion in loans, swap arrangements, derivatives and other financial  contracts are based on LIBOR. So changes in the rate—as well as its  manipulation—have massive potential knock-on effects for a wide variety  of institutions.The scandal has died down some since the  initial firestorm early this summer. But it threatens to flare back up,  depending on the results of the investigations and negotiations still  taking place.There were two phases to Barclays’ duplicity.  Barclays admitted to reporting the rate higher prior to 2008 in order to improve its position on some derivatives contracts. In this phase, it’s possible that borrowers that placed loans on LIBOR were paying higher  interest rates than what should have been available while lenders  benefited.Barclays admitted to reporting lower rates  after the financial crisis. This primarily would have benefited  borrowers and hurt smaller lenders that looked to LIBOR as the benchmark on which to base interest rates.There are direct implications for the commercial real estate sector.LIBOR is commonly used to set the rates for  construction loans, floating rate bridge loans and two-, three- and  five-year mini-perm loans. Loans are priced at a spread to LIBOR itself.So manipulation of LIBOR means that loans done  during the past decade may have been mispriced, depending on the extent  that LIBOR was distorted. Barclays alone couldn’t have shifted the rate  that much. But if more banks were doing the same thing, rates may have  been off significantly.LIBOR was also used by conduit lenders for  floating rate loans. This largely affects legacy issues since overall  CMBS issuance remains low today. But here too borrowers probably  benefited. If anyone got cheated it was investors at the back end that  may have gotten lower returns on their investment than if LIBOR had not  been manipulated.

Still, analysts don’t believe the CMBS sector has been affected that greatly by the situation.

“‘The current LIBOR controversy does not effect CMBS defaults, losses or ratings, given significant interest rate  stresses assumed in our analysis. Plus only a small portion of CMBS are  floaters,” says Dan Chambers, managing director with rating agency  Fitch.

Borrowers have “enjoyed record low, dirt cheap  rates,” says Mark Scott, founder and principal of Commercial Mortgage  Capital Corp. “But you have to believe that lenders are going to be  upset regarding the fact that they were undercharging customers. They  could have been getting a greater yield had LIBOR not been manipulated.”

What happens next is anyone’s guess. In the  worst case scenario—LIBOR being scuppered entirely—existing loans and  new loans would have to be set to a new index. That process could be  drawn out and at least temporarily slow the volume of lending until new  standards are agreed upon.

To date, however, the worst case appears  unlikely. Banks and borrowers have shown no desire to shift away from  LIBOR. And while there have been calls to reform how the number is  determined to add greater transparency to the process, there are few,  for now, calling for it to be eliminated entirely.

In the commercial real estate sector, lenders  continue to originate construction and bridge loans based on LIBOR and  volume has not been affected since the scandal broke out.

For example, in late August, Prime Group Realty Trust refinanced its 330 North Wabash Avenue property in Chicago with  the proceeds of a $200 million first mortgage loan from Landesbank  Hessen-Thuringen Girozentrale and New York Life Insurance Co. The loan  consists of a $111.9 million initial advance to repay the existing first mortgage loan on the property and $88.1 million in subsequent advances  for tenant and capital improvements.  The interest rate on the loan is  30-day LIBOR plus 2.85 percent.

The process

At the heart of the issue is the way LIBOR is  determined. The rate is set by a panel of 18 banks that report daily  estimates of what interest rate they think they would need to pay to  borrow money for three months from other banks. The top four and bottom  four estimates are discarded, and that day’s LIBOR rate is the average  of the remaining 10 rates.

However, the numbers aren’t based on actual  transactions—they’re estimates. So there’s no way to check their  accuracy. In fact, the money center banks have largely stopped borrowing from each other since 2008. Instead, they do most of their interbank  borrowing directly from central banks where interest rates close to 0  percent remain available. What that means is that LIBOR has become a  theoretical measure rather than an index of actual market activity.

Moreover, banks have a massive incentive to lie about what the rates are for various reasons.

According to the British news magazine The Economist, “[E]ven relatively small moves in the final value of LIBOR could have  resulted in daily profits or losses worth millions of dollars [on these  investments]. In 2007, for instance, the loss (or gain) that Barclays  stood to make from normal moves in interest rates over any given day was £20 million ($40 million at the time).”

In the wake of the financial crisis LIBOR took  on another meaning: it became a proxy for the health of the major  financial institutions. Those reporting higher LIBOR rates were seen as  weaker. Therefore, banks had an incentive to report lower rates to  signal to investors that they remained solvent and stable.

Richard K. Green, director of the University of Southern California Lusk Center for Real Estate, has been attempting to create a model to determine whether banks would be more likely to over- or underreport LIBOR given different market conditions.

The overall premise is that every bank would  lie in order to improve their position. But because banks, depending on  different scenarios, could find it fortuitous to report both higher and  lower rates, it’s difficult to determine exactly how LIBOR is likely to  be distorted.

“The outcome of gaming is not at all clear,” Green says. “Weak banks have an incentive to say a low number, so they  can borrow at low rates. Strong banks have an incentive to say a high  number, so they can lend at higher values.”

Green plans to continue to develop the model  and try to determine how the gaming of LIBOR ultimately affects  borrowers, including commercial real estate investors.

What has happened

So far, the commercial real estate sector seems immune from any potential deleterious effects of the LIBOR scandal.

Commercial and multifamily mortgage origination volumes during the second quarter of 2012 were up 25 percent from   second quarter 2011 levels, and up 39 percent from the first quarter of  2012, according to the Mortgage Bankers Association’s (MBA) Quarterly  Survey of Commercial/Multifamily Mortgage Bankers Originations.  Anecdotally, lenders and intermediaries are reporting that activity has  remained healthy throughout the summer, even after the news about LIBOR  broke.

The MBA index does not include construction  loans. But indications are that originations have not slowed in that  area of the market either.

“We have not seen a slowdown in the momentum in construction lending,” says Sam Chandan, president and chief economist  of real estate and economics analysis firm Chandan Economics. The firm  tracks loan volumes and activity nationwide.

Moreover, some experts argue that even if LIBOR was distorted the effects were likely too small to have hurt borrowers  dramatically.

“It seems minimal in how it may impact  commercial real estate and quite frankly, it’s unquantifiable,” says  William E. Hughes, a senior vice president and managing director of  Marcus & Millichap Capital Corp. “You get an interest rate, you’re  floating it 300 over LIBOR, but the fact of the matter is there is  little impact if LIBOR was a few basis points higher or lower than it  should have been. … I’m not sure you can effectively quantify the  impact in a transaction unless it’s an ultra-large transaction or  ultra-large client.”

But it may not have affected borrowers at all, Hughes argues.

“If banks conspired to increase LIBOR,  correspondingly, they could have been adjusting spreads down. Or if  rates were down, spreads may have been up. So the all-in rate may not  have been affected at all,” he says.

One sign that the sector has not sweated the  LIBOR situation that much is the fact that it seems no commercial real  estate firms are involved in the myriad lawsuits that have been launched in recent months. None of the sources interviewed for this article  could name an example of a commercial real estate borrower joining a  potential  class action lawsuit.

The implications

Part of what’s at play is that borrowers in the commercial real estate sector don’t look that deeply into how LIBOR is  determined. They engage the measure more passively.

“We line up at the pump and pay the price there and shop around for the best deal,” says Jeffrey Weidell, president of  Northmarq Capital LLC, a financial intermediary. “The cynic in me says  LIBOR is like a sausage. Nobody wants to know how it gets made. … It  is probably always manipulated. But as long as the rate is low,  borrowers are ultimately satisfied.”

That means the biggest challenges for the  commercial real estate sector would only emerge if LIBOR ceases to  exist. At this stage, that seems unlikely. Replacing LIBOR would be  extremely disruptive because of the number of derivatives contracts that would have to be rewritten. The financial industry would like to avoid  this. Instead, the United Kingdom’s Financial Services Authority is  developing recommendations for how to overhaul LIBOR to make it more  transparent and allow it to retain its position as a major benchmark for other interest rates. The authority has issued a 58-page paper  outlining some potential reforms and discussions are expected to  continue throughout the fall on the potential changes.

Still, if LIBOR were to be dumped, there are several scenarios in how it could be replaced.

One idea that’s being floated is a hybrid  system in which banks would continue to give estimates of their  borrowing costs, but also mandate that the numbers include some  documentation as to how the estimate was reached or examples of actual  transactions.

“I think it’s not going to shake things up,  unless there’s some massive overhaul and the elimination of LIBOR,” says David Pascale, senior vice president with George Smith Partners, a real estate investment banking firm. “The market would become volatile  unless it was telegraphed well in advance and it was orderly.”

Many loan documents do outline specific  conditions of what happens if LIBOR ceases to exist, says Scott. The  rate will be reset according to a rate based on U.S. Treasuries reported two days prior to the rate lock.

However, other documents are more vague on what will happen if LIBOR is discontinued.

“In some documents, it says if LIBOR goes away  that we will come up with a new index. But it doesn’t say how,” Weidell  says. “If that happens, there will be scrambling.”

The replacement index for LIBOR doesn’t  necessarily need to be in the same interest rate range as LIBOR itself.  After briefly spiking in late 2008 and early 2009, one-month LIBOR has  generally been less than 0.30 percent since. Three-month LIBOR has been  about 20 basis points greater and six-month LIBOR has been about 50  basis points greater.

The replacement index could be a higher base.  But the spread could be tightened. That would leave the all-in rates for borrowers on loans virtually the same as they are.

Two likely possibilities are that the finance  sector would turn either to short-dated Treasuries or the corporate bond market. “The likelihood that we’d see the reliance on a benchmark that  is more esoteric than that is very low right now,” Chandan says.

Another possibility would be the prime lending  rate, which runs approximately 300 basis points above the federal funds  rate determined by the Federal Reserve Bank.

However, such a shift may not be as disruptive as it sounds.

“The use of LIBOR as a benchmark is in part a  reflection of the indices being fairly well embedded,” Chandan says. “But that doesn’t mean we haven’t developed alternative benchmarks that  are more transparent and calculated in a way that is market based.”

Ultimately, the most serious outcome of the  LIBOR situation may not be the direct effects. Instead, the problem is  that it adds further uncertainty to capital markets that still have not  fully recovered from the 2008 financial crisis.

“It’s more anxiety and uncertainty in a market  that has very slowly been trying to find its footing,” Scott says. “The  commercial real estate lending market has been soft over the past three  years. … It’s just starting to feel its way out of the dark. This isn’t  earth shattering, but it is a cause for pause.”

Further development of the LIBOR scandal could  shake up capital markets because of the sheer volume of financial  products it affects. The sorting out of trillions in derivatives  contracts, for example, could eat up time and resources and end up  slowing the pace of lending again.

“It would cause investors to be risk averse and be bad for credit markets,” Pascale says.

Another cause for concern is that the LIBOR  scandal is another black eye for the financial services industry, which  could increase the calls for further regulation. That, in turn, may have unintended consequences for the commercial real estate sector by making capital more expensive and harder to come by.

“We have all this talk of more control, more  government intervention, more oversight and that could lead to more  restriction and less of an open market world in which we live,” Hughes  says. “I think therein lies the biggest potential risk.”

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The Square Footage Dilemna – BOMA Standards and more.

August 20

One of the great challenges when buying commercial real estate today is understandingthe size of the building that you’re buying.  There are so many different ways to measure a building that it makes it difficult to compare buildings accurately.

There are many property owners throughout the country that will measure their properties according to BOMA (Building Owners and Managers Association) standards.  This organization has attempted to come up with standards for measurement of different property types that can be universal among markets.  Unfortunately, property owners are not required to abide by these standards.  Many national tenants will require in their leases that the building be measured according to these standards which can help to bridge the gap.  The link to the BOMA Standards is http://www.boma.org/standards/Pages/default.aspx

So how do most investors analyze square footage?  Most will rely very heavily on the rent roll and the existing leases.  The logic being that if two parties who are financially incentivized to come up with the correct square footage have agreed on a particular square footage number, then it likely will be correct.  They will then back that up with the appraisal.  However, there is no assurance that the appraiser is not relying on the rent roll and leases as well.  There is also the differences in property types.  The square footage is much easier to identify in a small single-tenant retail deal than it is a 30 story, multi-tenant office building with lobbies, hallways and fitness areas to appropriate to all of the tenants.

What then should an investor do?  I don’t know that there is a correct answer for every investment.  Should an investor hire an architect during the due diligence process to verify for themselves?  I have rarely seen this in practice although that is one possible solution.  I think that a proper understanding of the potential pitfalls is sufficient for most investors so that potential discrepancies can be identified early on and the decision can be made on how much due diligence to do on this particular issue.

 

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Capital Market Review – August 13, 2012

August 20

It is interesting to look at how interest rates have moved over the last couple of months.  Across the board rates have continued to drop since May.  Additional lenders have continued to come back into the market.  Underwriting remains strict but there are more sources of financing re-entering the market weekly.

One note in the report that caught my attention was the Fitch Ratings which project that $24 billion of US CMBS loans are set to mature over the next 12 months and of these loans 41% would be unable to refinance (without additional cash) based on Fitch’s defined stressed refinance parameter (DSCR of 1.25, rate of 8%  amortized over 30 years).

It will be important to watch over the coming year how many of these loans default and how many are able to be refinanced.

Please see the following link for the Capital Market Review for the month of August 2012:

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NAI West Mid-Year Market Report

July 31

NAI West recently completed its Mid-Year Market report detailing the state of the economy in Utah, and more specifically the state of Utah property investment.  A few of the highlights are below:

A few of the highlights of the market report are as follows:

  • Utah has the 3rd lowest unemployment rate in the US at 6%.
  • Just under $1 MM square feet of industrial spec space has been completed and most of it has been absorbed.
  • Overall office vacancy is down to 13.98% with Class A office space at 9.43%.
  • Positive retail absorption for the 3rd straight quarter.
  • Property investment market remains strong with volumes very similar to the first half of 2011.
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Capital Gains Tax Scheduled to Rise Sharply in 2013

July 27

Please click the link below to an article written by Suzy Knimm at the Washington Post.  It details the changes in the capital gains tax rate structure set to take place in 2013.  In addition to the capital gains tax rate there are some nuances in the health reform law and itemized deductions that would have an affect on the overall rate.

This has implications on all of us in the commercial real estate investment world that need to be part of our overall outlook on our investment decisions.

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Linneman Letter – July 2012

July 23

Dr. David Linneman is the Chief Economist of NAI Global.  In the latest copy of his newsletter he describes the challenges that are currently facing the American Investor.  Despite moderately healthy GDP growth, several other factors are causing investors uncertainty with how to invest and what the future holds.  This is an interesting and insightful article for the studious commercial real estate investor trying the navigate the commercial real estate investment world.  Click the link below for the full article:

 

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JUST SOLD – DGS STORE FIXTURES – PAYSON, UTAH

July 2

I am pleased to announce that last week the DGS Store Fixtures Property was sold to a private out-of state investor.  The 200,000 square foot facility was leased by DGS Store Fixtures on a 15 year lease.  The tenant is a manufacturer of retail store fixtures for a number of customers across the United States.  For more information regarding the sale, please feel free to contact me.
 

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Utah Business Magazine Article – Northern Utah Regional Report

June 27

In March I participated in a round-table discussion related to the business and economic climate of Northern Utah.  Particpating along with me were government, education, & business leaders throughout the area.  The state of the commercial real estate market played a big part of the conversastion.  Please click the button below to see the article in it’s entirety.

The information provided in the article is very pertinent to investors considering acquiring properties in the area.

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NNN Leases versus Absolute Net Leases

June 25

Structuring commercial real estate investment sales I have found that there is a wide range of disagreement regarding how sellers of property refer to the leases on the properties that they are selling.  I have also found that many investors expectations regarding how leases are identified are varied.  There are many types of leases including gross leases, full-service leases, modified-gross lease, net leases, NN leases NNN leases, absolute net leases, etc and many of these leases mean different things to different people.  Most often I see confusion in relation to NNN leases and absolute net leases.  I thought that it may be helpful to discuss these two types of leases in detail.  First let me start with the definitions:

  • NNN Lease – This is a lease where the base rent is net to the Landlord.  The tenant is responsible for property taxes, insurance and maintenance, hence the   N-N-N.  What is typically not included in a NNN lease is roof and structure and that is why you will often see a “reserve” being taken out of net income prior to calculating value to account for roof and structure.
  • Absolute Net Lease – This type of lease is often referred to as a bond-able lease or a hell or high-water lease meaning that the tenant is responsible for all of the expenses and repairs relating to the building including the roof and structure.

The confusion comes when a property is advertised as one type of lease and upon review of the lease it is discovered that it is different.  The most common frustration that I see is when an investment property is being advertised as a NNN lease and an investor assumes that means that the roof and the structure are the tenant’s responsibility.  I often hear the comment, “The seller told me this was a NNN lease and now I find out that I am responsible for the roof and structure”.  Definitionally, a NNN lease typically does not include the roof and structure but some investors interpret a NNN lease as meaning something different.  Parking lot replacement often comes into this discussion as well.

With that being said, regardless of how a commercial real estate investment property is being advertised, it is important to ask specific questions about the lease prior to submitting offers to avoid any surprises when expectations are different from reality.  A little bit of additional due diligence and underwriting up front can save a lot of time and money on the back end.  I hope that is helpful.

The text of this website is available for modification and reuse under the terms of the Creative Commons Attribution-Sharealike 3.0 Unported License and the GNU Free Documentation License (unversioned, with no invariant sections, front-cover texts, or back-cover texts).

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JUST SOLD – CROSSROADS LANDING OFFICE PARK

June 4

I am pleased to announce the sale of the the Crossroads Landing Office Park.  The park consisted of a 24,201 square foot, 3  building office park in South Ogden, Utah.  The tenants consisted of the Ogden Clinic and Morgan Stanley both on long-term leases.  The property was purchased by an out-of-state investor.  It was this investor’s first acquisition in Utah.

Please contact me if you are interested in learning more information about this sale or about other potential commercial real estate investments in Utah.

real estate investment, utah

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Utah Among Top States in Commercial Real Estate Construction

May 29

The Deseret News recently published an article relating to commercial real estate construction spending.  I found it interesting and insightful into the economic climate of the state and how it may relate to a commercial real estate investor.  Please click the following link to view the article.  My comments and summary of the article are following the link.

A recent study found that Utah ranks 6th in the country based on a study of commercial real estate spending across several categories.  There are several factors affecting Utah ranking among the best in the country.  Such as:

  • An influx of businesses from California that are choosing to relocate to Utah because of lower costs
  • The young educated workforce is attracting new companies to the state
  • The prudent development community in the state has not overbuilt to the extent of many other states which allows for new construction to start earlier as the economy rebounds

The article is worth reading as it relates to understanding the economic climate in the state and how it relates to commercial real estate investments.

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Commercial Real Estate Investing – Top 5 Due Diligence Items

May 21

Commercial real estate investing is full of opportunity but as with all opportunity comes risk.  One question I am often asked, especially by new investors is, “Other than the market risks, what are the other potential risks in buying commercial real estate?”  Most of these are first time investors  or 1031 exchange buyers coming out of family land or other family assets.  I thought that it might be helpful to create a list of the top 5 due diligence items need to be addressed to detour some easily avoidably but potentially costly pitfalls.

  1. Confirm the Square Footage –

    The majority of investors rely on the square footages included in the tenant’s leases assuming that the tenants did their due diligence.  However, that is not often the case.  It is important to either do a quick measurement yourself or hire an architect or an engineer to verify.  You want to make sure that you’re getting what you’re buying.

  2. Tenant Estoppel Certificates –

    A tenant estoppel certificate is a document signed by the tenant stating that the lease is still in effect, there are no material defects in the property that they are aware of, there are no side agreements with the landlord not shown in the written lease, and neither the landlord or tenant are in default along with several other items.  If you are financing the property, it is likely that your lender will require this anyway.  If not, this can be a lifesaver.  It is not unusual for a landlord to verbally give a tenant a break on rent during difficult times that is not reflected in the lease or maybe the landlord has not made a repair requested by the tenant.  The estoppel will flush these items out so that you know what you are buying.

  3. Environmental Assessments-This is an essential due diligence item in my mind.  The potential risk outweighs the minimal cost by too great of an amount.  For example, we were recently selling a piece of farm ground that had never been developed.  All assumed that the property was clean.  However, the environmental assessment showed that the farmer had buried a fuel tank on the property years before and it had leaked.  This would not have been uncovered without the report.  Later this year, I will be dedicating a full post to this topic.
  4. Careful Review of Property Operating Statements –

    A careful review of the property’s operating statements can uncover items not readily seen on a property’s surface.  For example, a historical review of the annual income can uncover periods of vacancy or tenant’s failure to pay rent.  There may be an explainable reason for this but it might be that the actual historical occupancy for the property is lower than the market.  On the expense side, it is not unusual for a property owner to understate actual expenses and write them off as unusual or particular to the way that he manages the property, especially in the repairs and maintenance category.  Are those expenses unusual or are these on-going repairs going to continue into the future and need to be built into your financial model.  Comparing those expenses to expenses of similar buildings in the market is also helpful to understand the full picture.

  5. Title Review –

    I cannot overstate the importance of a good title company.  Many investors glaze over when it comes to reading and understanding the title report.  However there should be an ample amount of time spent here reading through the easements, development agreements, etc that affect the property.  Many items are easily fixed prior to the acquisition that are very difficult once closing has occurred.  A good title company can help through this process.

There are obviously many other items that need to be addressed when buying a property but I hope that this list is helpful especially to new first time investors or 1031 exchange investors that are entering the commercial real estate arena for the first time.

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Construction Cost Update – May 14, 2012

May 14

Please click the following link for the May 2012 construction cost update from Bonneville Builders.  Even if you’re not considering building, evaluating a 1031 exchange or commercial real estate investment property from the perspective of replacement cost is an important metric.  I hope that you find it useful.

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Investing in Commercial Real Estate Ground Leases

May 7

 

As the commercial real estate market has experienced large swings in value in recent years, many clients have contemplated investing in long-term commercial real estate ground leases as an alternative strategy for their 1031 exchanges or for their portfolio currently sitting in cash.  As a response to some of the questions I’ve received, I have decided to discuss at length some of the talking points related to this type of investment.

First, let me define what I mean when I discuss investment in commercial real estate ground leases.  I am referring to purchasing “land” which is leased long-term to a tenant who has then constructed a building for their operations on the property. The types of tenants most often seen doing ground leases are banks, restaurants, and some single-tenant retail operations.  Some of the criteria to consider are as follows:

  • Remaining Term Left on Lease:  When considering investing in a ground lease, the remaining lease term is a key factor.  Ground leases typically range from 10 to 99 years depending on the tenant and the use.  Provided there are decent rental increases, a longer-term lease translates into greater security for the investor.  There are those occasions when a tenant is nearing the end of their current land lease and their lease rate is below market where a shorter term lease may be an advantage to a investor assuming that at the end of the lease the rate can be renegotiated increasing the overall yield.  This is a riskier strategy and does not fit for all investors.
  • Credit of the Tenant:  This is the age old question when buying all types of commercial real estate.  Is the tenant going to be able to pay the rent?  There is a much lower default rate on ground leases than traditional leases.  This is primarily because tenants are investing a lot of capital into their own building and they understand that if they default their building reverts to the landowner.  Defaults are rare except in the cases of overall bankruptcy and insolvency of the tenant.  Also, the ground lease market is dominated by larger companies with less credit risk.
  • Purchase Price as Compared to the Replacement Cost of the Building and the Underlying Land:  As I evaluate these deals, this is probably the most pertinent factor.  An investor is essentially buying land and needs to understand what the value of the land (without the lease) is and what the value of the building, if vacant, would be.  I’m not suggesting that it is not appropriate to pay higher than these values, especially when the credit of the tenant, and the length of the lease warrant it.  It is just important to evaluate this to know what your downside risk is especially when there is some concern about the tenant or the uniqueness of the improvements.
  • Is the Building an Asset or a Liability:  Most often times, the building is an asset to an investor. When the lease term ends, the investor ends up with the building that they can hopefully re-lease to another tenant at higher rents.  However, the type of building may limit that potential.  For example, several years ago many investors were buying properties leased to Sonic Drive-Inn restaurants.  The challenge with these were that the buildings were very small and unusable to other tenants.  Therefore, in the case of a default, the cost of demolition of the building became a liability to the investor.
  • Ease of Ownership:  One of the best advantages for most investors is the fact that there is little to no management responsibilities.  The tenants are typically responsible for all maintenance and expenses from fixing the toilets to paying the property taxes.  An investor’s work is typically limited to taking the rent check to the bank to be deposited.
  • Lack of Depreciation:  Since you are only acquiring the land, there is no tax advantage through depreciation.
  • Rental Increases and Related Risks:  Rental increases are important to consider for any commercial real estate investment but even more so for ground leases since the lease terms are typically longer.  This is even more of a concern in an inflationary market.  I have seen ground leases that have no increases for as long as 20 to 25 years.  Although the credit of the tenant is good, the purchasing power of those dollars becomes less and less every year and many investors are not happy with the investment towards the end.  When comparing potential investments with similar cap rates, the rental increases in the lease often become the determining factor.
  • Financing:  Financing can be very challenging for purchasing land leases.  They are most often cash deals.
  • Expected Returns in Today’s Market:  As with all commercial real estate investments, returns are all across the board.  Most often we see ground leases in the 4% to 7% range depending on the factors discussed above.  These seem low as compared to investment in buildings.  However, the risk is typically much less and the credit stronger.  Many investors compare buying ground leases to buying corporate bonds of the tenants.  For example, there are banks and retailers whose bonds are only paying 2% whereas you can buy a property ground leased to the same company for 25 to 50 years for a cap rate of 5%.

Hopefully this gives you some of the talking points to consider when buying ground leases.  Whether you are in a 1031 exchange or just looking for a place to put that cash sitting in your savings account, ground leases are an interesting alternative to consider.

 

 

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Capital Market Review – May 1, 2012

May 2

Please see the following link for the Capital Market Review for the month of May:

Capital Market Update 5-1-12

The Utah commercial real estate market continues to improve.  There has not been a significant amount of change from the previous update at the beginning of March.  Rates continue to be aggressive and more lenders are entering the market.  We are seeing many lenders considering longer amortization periods for quality projects.  We are also seeing many lenders competing for the “good” deals.  Lending is still difficult for projects that have a “thorn or two” on the rose, however things overall seem to continue to be improving in the capital markets.

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Utah Commercial Real Estate – Seller Financing Discussion

April 18

 

Over the past several years as financing has been more difficult we have seen many deals reach completion with the help of seller financing in the Utah commercial real estate market.  It has taken on many forms from the basic 1st position seller financed purchase, to a 2nd position to bridge the loan to value gap, to even more creative scenarios such as all inclusive trust deeds whereby existing financing is wrapped into the seller financed note.  We have seen some of these strategies used by large private investors and smaller 1031 exchange buyers alike.  With the lack of good 1031 exchange properties on the market, we have also seen sellers in some cases willing to sell only under a seller financed structure so that they can spread out their tax liability and make a better return than they perceive that they can make in other investments.  I am going to address the potential benefits of seller financing from both the perspective of the investor and the seller in a transaction:

Benefits to a Seller:

  • Opens the door to a wider pool of potential investors
  • Often times leads to a higher pricing structure
  • Potential tax savings due to timing of payments
  • Accelerated closings whereas you are not waiting on a 3rd party lender

Benefits to an Investor:

  • Usually less transaction costs (loan fees, legal fees, etc)
  • Potentially higher loan to values than traditional financing
  • Ability to close quickly in the case of 1031 exchange
  • Less annual reporting as compared to a traditional lender

With those points in mind, prior to proceeding with this type of a structure an investor and seller should consult with their tax advisor and legal counsel to make sure that the deal is right for them.  The biggest hurdle to many seller financed deals is the credit-worthiness of the investor.  A seller needs to complete a careful due diligence of the investor to determine its credit worthiness.  In many cases, a personal guarantee is warranted and sometimes even collateral on other assets is taken.

Oftentimes we see sellers rule out this potential structure too quickly. However, in many cases (but not all) it can make the deal more profitable for both parties.  It is a strategy that should be given due consideration as an acquisition or disposition is being considered.

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Utah Investment Snapshot – Q1 2012

April 16

 

We have just completed our analysis for the 1st quarter of 2012.  Please click the link below to see the Q1 Investment Snapshot for the Utah market:

A few of the highlights from the report are as follows:

  • Compared to Q1 2011, the total number of transactions is down but transaction volume is up.
  • Cap rates have remained relatively flat compared to 2011.

Please feel free to contact me for the full report or for information on Real Estate Investment.

Thanks, Brandon.

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JUST SOLD – CENTERVILLE POST OFFICE

April 2
  • Asking Price: $2,840,000
  • CAP Rate 7.50%
  • 11,860 SF
  • 100% Occupied

I am pleased to annouce the closing of the Centerville, Utah, United States Postal Service. The Post Office has been at this location since 1997 and is one of the highest producing Post Offices in the State of Utah. The annual was $213,000 and the initial 20 year lease comes up for renewal in June of 2017.  The Post Office has 2, 5 year options to renew their current lease term with the annual rent bumping to $300,000 for the first option and $310,000 for the second option.  Asking price on the property was $2,840,000 at a 7.5% cap rate.  Please contact for comparable details.

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Buying on Pro Forma Rent

March 27

 

Back in the peak of the commercial real estate market many investors bought properties with values underwritten by “pro forma” rents.  By “pro forma” rents I mean that properties were underwrittten based on projected lease rates, occupancy rates, and future increases as opposed to actual operating history of a property.  The obvious risk with this approach is that inaccurate assumptions can lead to dramatic swings in actual property performance.  To complicate matters, many lenders also underwrote deals based on these assumptions.  Many of these puffed assumptions added to the crash that we’ve experienced in recent years.

With the downturn in the commercial real estate investment market, investors and lenders alike were forced to “get real” with the way that they valued properties.  Properties values were derived based on actual operating history which was a tough pill to swallow for those properties experiencing high vacancies.  Essentially no value was being given to that square footage that was not leased.

It is amazing how short our memories are in this industry.  I have seen a resurgence in the last 12 months of properties being offered based on a “pro forma” basis.  The most typical scenario I see is that of a property with higher than market vacancy (say 20%) include rent for the vacant space as part of the net operating income and then taking out a less than market vacancy factor (say 5%) of that net operating income.

There are several factors that need to be addressed when analyzing properties presented by this approach.  Please keep in mind that I am addressing this from the standpoint of an investor looking for stabilized returns and not speculative upside deals.

  • Market vacancy – What is real market vacancy for the property?  How has this property performed relative to the market historically? It is important to understand what stabilized occupancy really is.
  • Costs to Obtain Pro Forma Occupancy – If pro forma occupancy is realistic, there will usually be a cost in the form of downtime, leasing commissions, and tenant improvements to reach pro forma occupancy that must be considered in the analysis.
  • Lease rate risk – Make sure that projected lease rates are reflective of current market conditions for comparable properties. It is too easy to say that lease rates “should” be higher when historically they have not been.  It is also important to underwrite in-place leases to determine where those leases will renew at.

Despite the uptick in the market in recent months I remain hesitant to recommend properties to clients that rely too heavily on future assumptions.  For the most part, I want to make sure that a property can perform to expectations based on actual operating history.  In those cases where pro forma analysis is relevant, it is necessary to fully understand the assumptions being made to avoid those equity losses that so many investors experienced in recent years.

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JUST SOLD – SKULL DEVELOPMENT INDUSTRIAL PARK

March 13
  • Multi-Tenant Industrial Park
  • 37,100 square feet
  • 13 tenants in 5 buildings
  • 3.28 acres
  • Sold – February 2012

The Skull Development Industrial Park was recently sold to a 1031 exchange investor from Michigan.  The project, located just off of I-15 in Centerville, Utah has maintained high occupancy for the past several years despite the downturn in the economy.  The park was 100% leased at the time of sale and sold near the asking price.

Additional comparable information available upon request.

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The Multi-Tenant Property Alternative

March 13

 

Over the past several years, the single-tenant property market has gained a lot of momentum.  It has for good reason.  There are many advantages such as ease of accounting, management, underwriting, and predictability of cash flow.   Many investors perceive that the risk is much lower with the typical long-term leases associated with the single-tenant market.

However, many investors who follow the single-tenant trend might be missing an opportunity that actually fits their investment objectives a little better.  Multi-tenant properties often times can provide higher returns and in many cases less risk than their single-tenant competitors.  Some of those advantages include:

  1. Lower Risk – The risk is spread out over many tenants rather than having it all concentrated in one.  For example, let’s consider an all-cash, 10% cap rate property.  If that property hits a rough patch and vacany increases to 20%, the investor is still making 8%.  On the other hand, on a single-tenant property, if the tenant has an issue or doesn’t renew at the end of its lease term the return evaporates completely.  This is exacerbated if the building is a unique building requiring extensive tenant improvements.
  2. Higher Returns – Because the trend right now is towards single-tenant properties, there is less competition in the multi-tenant market and often higher returns.  There are also few institutional buyers set up to acquire multi-tenant properties reducing the competition in this arena.
  3. Upside Potential – Lease terms are typically shorter on a multi-tenant property which allows for an opportunity to capture upside as lease rates increase.  Depending upon your opinion on the market and inflation in the coming years, this might be something to consider.  With a single-tenant property, lease rates are most often fixed.

With those advantages being stated, an investor also must mitigate those disadvantages associated with this type of investment which create those opportunities.  Those include more intensive management with more leases to administer, more responsibility for physical property maintenance, and tenant rollover.  These can typically be mitigated through competant 3rd party management but they are concerns nonetheless.

I am of the opinion that no one property type is best for all investors.  There are advantages to both single-tenant and multi-tenant properties considered here.  I do believe however, that there is wisdom in considering the alternative when the majority seems to be going one direction or the other.

 

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JUST SOLD – ROCK RUN MEDICAL

March 12
  • 12,192 SF – Medical Office Building
  • 100% Occupied
  • Closed in February of 2012

 

The Rock Run Medical Office Building was recently sold by our team to a family investment group out of Utah.  The property was a 100% leased medical office building in Roy, Utah. The property included strong Tenants, such as Wee Care Pediatrics, IASIS, Rock Run Physical Therapy and Price Orthodontics.  Comparable information available upon request

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Capital Market Review – March 1, 2012

March 5

With the volatility in the capital markets, I will be posting a monthly update on the current state of those markets.  The reports are provided by Metro Commercial Finance.  The link below contains a link to the Capital Market Report for the month of March.

A few of the highlights are as follows:

  • Lenders are slowly considering higher loans to value
  • Rates for quality projects remain in the low 5% range
  • We are starting to see availability of funds for development

The underlying theme is that capital is available for good projects and even for some more challenging projects depending upon buyer strength.  Underwriting remains stringent but deals are getting done and they are getting done at very attractive terms.

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Investors Seek Secondary & Tertiary Markets

February 27

 

As the commerical real estate market begins to recover, we are seeing an increase in acquistion activity among investors both institutional and private.  While the majority of investment activity in recent years has been in primary markets, many investors of late have been seeking better returns in secondary & tertiary markets.

It is hard to believe that there is already significant cap rate compression in many markets.  However there remain opportunities for smart money willing to consider markets that maybe haven’t been considered in the past.  Secondary markets typically have higher upside, less competition, and better returns.

There are a few factors that investors want to consider when looking at secondary markets.   Those include population growth, employment growth, financing availability and potential risk related to a local economy’s reliance on any one particular industry.

Utah is recognized as one of the strongest secondary markets in the country.  It maintains very strong historical population growth and employment growth.  Many companies look to the state as a place to do business because of its highly educated workforce as well as its relatively low cost of labor.  Because of these factors institutional investors, strong private investors as well as the smaller 1031 exchange buyers, have found strong rates of return relative to risk.

It is interesting to note that nearly half of the deals that I have been involved in have been with out-of-state buyers.   Utah definitely should be on investors radar as they are looking to place money.

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Notable Utah Transaction – Hobby Lobby – Logan

February 22

Each month I provide some information on a notable transaction that occured in the State of Utah.  This month I am highlighting the Hobby Lobby in Logan Utah.  A few of the highlights of this deal were:

  • Single Tenant
  • 9 years remaining on lease
  • 8.21% Cap Rate
  • 55,137 square feet
  • 3.86 acres

 

Please let me know if you would like additional information regarding this sale.

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Property Investment in Utah? See What the Rest of the Country is Saying.

January 30

As I talk with investors from around the country, many are looking at Utah for the first time.  These investors are weighing the stability of their property investment with the potential for growth.  While Utah has historically not seen the extreme pricing shifts that other markets in the country have, it has continued to provide strong, stabilized growth for those willing to place their money there.

Commercial real estate in Utah continues to outperform the national economy.  Utah boasts significantly lower unemployment and vacancy and has performed steadily through some turbulent times.  The national media has recognized Utah for its economic performance in recent years:

  • Utah Ranked #1 Best State for Business — Forbes Magazine (2010 & 2011)
  • Utah #1 Best Managed State  — Governing Magazine (2009)
  • Utah #1 Economic Dynamism — Kauffman Foundation (November 2010)
  • Utah #1 for Expected Economic Recovery & #1 for Economic Outlook — ALEC
  • Utah #1 Most Fiscally Fit State  — Forbes Magazine (2010)
  • Utah #2 Best Business State  — Polina Corporate, 2010 “Rebuilding American’s Economic Power”
  • Utah #3 “Most Competitive States” for Business — Beacon Hill Institute, 2010

In addition to these accolades Utah was recognized in the July/August issue of Business Facilities Magazine as one of the best overall states in this industry with #1 rankings for “Best Business Climate” and “Quality of Life” and top 10 ranking in several other categories.

I have provided a segment of the 2011 Forbes Article Below:

“Utah repeats this year as Forbes Best State for Business and Careers in our sixth annual look at the business climates of the 50 states. No state can match the consistent performance of Utah. It is the only state that ranks among the top 15 states in each of the six main categories we rate the states on.

Utah highlights include energy costs 31% below the national average and employment growth that has averaged 0.6% the past five years. Compare that to the U.S. as a whole where job growth has averaged negative 0.6% since 2005. Utah’s 5% corporate tax rate is well below western neighbors Arizona, Idaho and New Mexico. Utah ranks sixth in a new Tax Foundation study that looks at the tax burden on business in each state across different industries. As part of the ranking, we included the study which will be released to the public in the coming months.

Businesses are getting the message on Utah. Procter & Gamble, ITT, Home Depot and Boeing all announced expansions in Utah this year. The Goldman Sachs office in Salt Lake City is its second biggest in the Americas with more 1,000 employees and significant expansion expected over the next four years.

Technology companies particularly have had Utah on their radar as an affordable alternative to California with overall business costs in Utah 10% below the national average. Adobe Systems, eBay, Electronic Arts and Oracle have all expanded in Utah in recent years.

Companies are also attracted by Utah’s population growth which is one of the fastest in the country and provides a burgeoning workforce. “Utah has a young, dynamic economy with a vibrant high-tech sector,” says Mark Zandi, chief economist of Moody’s Analytics.

The Utah story is far from over. Job growth is projected to be 2.4% annually through 2015 according to Moody’s, sixth best in the country (for more states with strong job growth forecasts, see “The Best States for Jobs“).”

It is interesting to see many investors from around the country looking at Utah for the first time for property investment.  Many are adding Utah to their property investment horizon and many more are expected to in the coming years.  If you do not already own property in Utah it may be a place that you want to check out.

 

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Introduction to Utah Property Investors

January 16

I appreciate you taking the time to visit this Utah Property Investors.  The intent of the blog is to congregate all of the information that a property investor in commercial real estate would need to know in order to make educated decisions on acquiring or disposing of commercial real estate in Utah.

Over the coming year the blog will address the following topics:

  1. I will address a wide array of opportunities and issues facing property investment real estate across the nation with a specific focus on Utah
  2. Monthly and quarterly updates of capital markets, financing, construction cost fluctuations, & commercial real estate markets
  3. Highlight available and notable closed investment properties in Utah
  4. Note particular investor needs in the market for those needing to exit existing properties

I hope that you will use the information, insight, and ideas as a valuable resource in your business.

Highest Regards,

Brandon L. Wood, CCIM
President | Principal Broker

The Northwood Group

www.northwoodgrp.com
P: 801.593.5500
brandon@northwoodgrp.com
 

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Construction Cost Update

December 30

Quarterly, we receive construction cost estimates from Bonneville Builders. While it is difficult to make accurate estimates without an understanding of the specific project, it is helpful to have some ballpark figures to run as estimates, especially as you are looking at potential re-tenanting costs, etc. when considering a commercial real estate investment deal. Click on the link below for the table.  I hope that you find this helpful.

 

 

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