Previously, HUD did not allow properties less than three years old to be financed under 223(f) because of concerns about construction quality and latent defects. The waiver allows Arbor to begin looking at extending the favorable terms of the 223(f) program to owners of newer multifamily projects.

NOI/PROPERTY VALUE = CAP RATE

A common use of this analytic is to use the asking price of a property for its value and compare the resulting cap rate to those of similar properties the same area. Alternatively, the value of a property can be determined by NOI/Cap Rate, where the Cap Rate for similar properties is known.

Examples:
• $1,000,000 property with $100,000 in Annual NOI = Cap Rate of 10%
• $25,000 NOI with a 10% Cap Rate = $250,000 Purchase Price

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The seven keys are: Leverage, Liquidity, Marketability, Management, Return, Taxes and Risk. Understanding the fundamentals of these keys is the introduction to the process of understanding the metrics and analytics of real estate investment.

While no one has a crystal ball and can predict with absolute certainty what the future holds for any particular property or market, there are indicators which, if analyzed properly, can stack the deck in your favor. When doing market analysis for commercial investment real estate there are two types of data that will help you determine if the area you desire to invest in is ripe for gains and cashflow. The first is market data, which consists of things like the macro and micro economic environment, demographics, and lifestyle data. The second is property data which consists of things like location and useable square feet. Property data is discussed throughout the guide so I will not belabor those analytics here.

Macroeconomics deals with the pulse of the overall economy and includes things like inflation, unemployment, and industrial production. The macroeconomic conditions have a trickle down effect onto the local economy or microeconomics. Macroeconomic conditions are gauged by several indicators. These macroeconomic indicators track activity judged to be significant to economic performance, by quantifying the various factors of supply and demand. Indicators can be used to both explain and to forecast price movement. To explain market prices, variables are measured concurrently with that price and are assumed to have high correlation. To forecast market prices, data from each indicator are viewed in relation to past data/price correlations, to data from other indicators and to the business cycle. Depending on the phase of the business cycle, different economic indicators are more or less able to delineate the pertinent market forces. Forecasts are only as strong as the data used to make them. No matter how accurate the estimates may be, most fundamental data is based on data samples. In addition, these estimates are usually subject to constant revision. Indicators can also be categorized as Leading Indicators, Lagging Indicators, or Coincident Indicators depending on whether changes in the indicator series happen before, after, or at the same time as changes in the economy. These categorizations can even be different depending on the phase of the business cycle. For example, a series tracking the number of people unemployed is categorized as leading for economic peaks, lagging for economic lows, and unpredictable for economic turns. The series tracking corporate net cash flow, on the other hand, is categorized as leading for economic peaks, economic lows, and economic turns. Some of the best macroeconomic indicators for commercial real estate are:

Personal Consumption Expenditures and Core PCE

The Core PCE excludes the volatile food and energy components from a measure of price changes in consumer goods and services. It consists of the actual and imputed expenditures of households and includes data pertaining to durables, non-durables, and services. It is essentially a measure of goods and services targeted towards individuals and consumed by individuals. This report is the Fed’s favorite gauge on inflation.

Consumer Price Index (CPI)

The Consumer Price Index (CPI) is a measure of the average price level paid by urban consumers (80% of population) for a fixed basket of goods and services. It reports price changes in over 200 categories. The CPI also includes various user fees and taxes directly associated with the prices of specific goods and services.

Core Consumer Price Index (CPI)

The Consumer Price Index (CPI) is a measure of the average price level paid by urban consumers (80% of population) for a fixed basket of goods and services. It reports price changes in over 200 categories. The CPI also includes various user fees and taxes directly associated with the prices of specific goods and services.

Producer Price Index (PPI)

The Producer Price Index (PPI) is a measure of price changes in the manufacturing sector of the average price level for a fixed basket of capital and consumer goods paid by producers. It measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture, and electric utility industries for their output.

ISM Index

A national manufacturing index based on a survey of purchasing executives at roughly 300 industrial companies. Signals expansion when the PMI is above 50 and contraction when below. It gets reported the first business day of the month at 10 a.m. Eastern. Data for prior month. Nearly always moves markets. Extremely timely — and this is the king of all manufacturing indices. Considered the single best snapshot of the condition of the factory sector

Jobless Claims (Initial)

Initial jobless claims measure the number of people (non industry-specific) filing first-time claims for state unemployment insurance. This report provides a timely, but often misleading, indicator of the direction of the economy, with changes in claims potentially signaling changes in job growth. It is assumed the stronger the job market, the greater the spending power, the healthier the economy. Weekly claims are volatile and data can be skewed by holidays; therefore, many analysts track a four week moving average of data to get a better sense of the underlying trend in claims. It typically takes a sustained move of at least 30,000 in claims to signal a meaningful change in job growth. Unemployment claims can fall to such a low level that businesses have a tough time finding new workers. This puts wage pressures on the economy, leading to wage inflation, which is bad news for the stock and bond markets. If wage inflation threatens, it’s a good bet interest rates will rise and bond and stock prices will fall. This report is timely and occasionally moves the market. Although volatile and subject to big revisions, it is considered a good gauge of labor market conditions and an indicator of the employment report. The Initial Jobless Claims report is scheduled for release at 7:30 (CST) every Thursday by the Employment and Training Administration of the Department of Labor.

Productivity

The productivity and associated cost measures describe the relationship between real output and the labor and capital inputs involved in production. Productivity measures the growth of labor efficiency in producing the economy’s goods and services and is defined as the ratio of output to input. Unit labor costs reflect labor costs of producing each unit of output and provide information on emerging wage pressures. Both are followed as indicators of future inflationary trends. Output is represented by the Gross Product of business sectors, and input is represented by the corresponding labor hours. This report provides the best overall picture of the economy’s efficiency. But, because components of the index are published in other releases, the information is frequently anticipated and thus does not influence the markets to a great extent. Also, because the data is released quarterly, it is not as timely as other monthly indicators. The productivity report is scheduled for release at 7:30 (CST) one month after each quarter by the Bureau of Labor Statistics.

Retail Sales

The retail sales report is a measure of the total receipts of retail stores from samples representing all sizes and kinds of business in retail trade throughout the nation. It is the most timely indicator of broad consumer spending patterns and is adjusted for normal seasonal variation, holidays, and trading-day differences. Retail sales include durable and nondurable merchandise sold, and services and excise taxes incidental to the sale of merchandise. Excluded are sales taxes collected directly from the customer. It also excludes spending for services, a large component of consumer expenditures. Retail sales is a the first picture of consumer spending for a given month.

Unemployment Rate

Percentage of employable people actively seeking work, out of the total number of employable people; determined in a monthly survey by the Bureau of Labor Statistics

Demographic Information

Demographic information is objective data that is made up of facts and statistics about the local population. It describes the population age, sex, income, home value, and whether the residence is owned or residence. Demographic data is important because it is factual and easy to obtain.

Lifestyle characteristics are a little harder to pin down objectively. Lifestyle refers to some of the more intangible characteristics of a local economy. While these characteristics cannot be described with numbers, they may have a significant impact on population size which in turn influences the demand for commercial real estate. Lifestyle characteristic include:

Recreational Opportunity: An abundance or lack of recreational opportunities can affect a population size and subsequently demand.

Intellectual and educational opportunity: Areas with a number of colleges and universities tend to have more intellectual opportunities including lectures, enrichment courses, and social gatherings

Cultural Trends and Values: Some communities become popular and attract people following a trend like artists looking for a particular aesthetic.

The dynamics between supply and demand is a major factor in setting the prices of property and rents in the market. The availability of space in a market can be measured by vacancy and absorption. If vacancy rates are high, obviously the demand is low and so are the prices of properties and market rents are also driven down. If vacancy rates are low, the inverse is true. Increase in vacancy rates can be due to:

• New construction in response to a previous need in the market causing a stack up in inventory
• Economic Slowdown
• Loss of employment in an area
• Negative net migration patterns

In commercial real estate, absorption is the measure of the amount of inventory that becomes occupied during a specific time period-usually 1 year. Absorption of commercial real estate is typically reported in square feet. Therefore, absorption reflects the change in the vacancy rate over a certain time period. Absorption can be determined for a market or for a specific building. The formula is the same for both:

EOY Occupied Sqft-BOY Occupied Sqft= Absorption Sqft.

Real estate investors who are the best at projecting vacancy and absorption rates tend to be the most financially successful because they can forecast the net result of future supply and demand condition. Accurate vacancy and absorption forecasts can provide significant insight into market cycles and the future direction of market rents and prices.

]]> http://commericalrealty.wordpress.com/2008/11/12/understanding-the-market/feed/ 0 Steve Heideman commercial-real-estate-blueprint http://commericalrealty.wordpress.com/2008/11/08/tucson-market-pulse-q3-08/ http://commericalrealty.wordpress.com/2008/11/08/tucson-market-pulse-q3-08/#comments Sat, 08 Nov 2008 21:11:43 +0000 Steve Heideman http://commericalrealty.wordpress.com/?p=130 ]]>

SHOPPING CENTERS

A group of stores catering to a trade area that offers a variety of goods and/or services and on-site parking (the tenant “mix”):

• Super regional center—has three or more major department stores, is often enclosed (mall), is 750,000 to 1 million square feet, and draws from a large trade area of 12 miles or more.
• Regional center—has one or two department stores, a variety of smaller stores, and is larger than 300,000 square feet. It will draw from an eight-mile radius or more.
• Community center—usually has a supermarket, junior department store, and a variety store, is larger than 100,000 square feet, and draws from a three- to five-mile radius.
• Neighborhood center—is built around a supermarket and/or drugstore, provides convenience goods and services to a neighborhood, is 30,000–100,000 square feet, and draws from a one- to three-mile radius.
• Convenience center—is a small cluster of stores along a street, 5,000–40,000 square feet; trade area is the immediate neighborhood. May have a convenience market, laundromat, dry cleaner, etc.
• Specialty center—often has a theme, usually has no anchor tenant, and generally is local in influence. Examples might be home-improvement centers, gift shops, or auto service and sales.

FREESTANDING STORE

One commercial building meant to be occupied by a single user. It is typically found near major shopping centers on major routes, and fills a specific need in the area.
STRIP CENTER

A string of stores in a commercial area with no central leasing, management, or theme.

THINGS TO CONSIDER AS A BUYER/OWNER OF RETAIL:

• Physical condition of property—Is the price adjusted to reflect the condition of physical plant?
• Net income generated by leases—What is left after expenses of operation are paid?
• Occupancy level and tenant mix—Are there vacant (“dark”) spaces? Are tenants attracting shoppers?
• Stability of tenants—What is the turnover rate? How long have tenants occupied the center?
• Upside potential in income—Are rents under market? Do leases escalate to keep pace with inflation?
• Protection from large increases in operating expenses—Tenants share in expense increases; physical condition of center is good without deferred maintenance.
• Area growth patterns—Is area gaining or losing population? Will new competition emerge?

Finacing Options for Retail:

Our retail financing products support the acquisition, refinance, rehabilitation and construction of retail buildings. Through our nationwide network of over 100 lending institutions, we offer one of the most comprehensive retail product offerings around the nation. If you are looking for a loan for the acquisition, refinance or rehabilitation of your investment or owner occupied retail property that will actually close, then look no further.

FOR A LOAN QUOTE SEND US:

• Rent Roll
• Two Years Operating History
• Application
• Credit report

Industrial differs from other real estate types in the following ways:

• Height is third significant dimension.
• Utility is overriding factor.
• Little concern for the “public.”

Industrial is typically categorized by use. Usually they are:

HEAVY INDUSTRIAL

Manufacturing properties include the heavy industrial segment. Auto making, textiles, steel, chemicals, and food processing are typical uses of such properties. Typically zero to five percent of the property is used for office space.

LIGHT INDUSTRIAL

Production lines that assemble components produced elsewhere are based in light industrial/assembly facilities. Some light manufacturing requiring limited raw materials and physical changes to the materials also might be conducted in such facilities. Space devoted to offices usually is less than 10 percent.

OFFICE/WAREHOUSE

Broadly defined to include wide variations in markets across the country. Research and development office/warehouse properties can have lab facilities, offices, warehouse facilities, or personal services such as carpentry or machine repair. Typically, each property allows a variable combination of office and other uses. The percentage of office space ranges from 20 percent to 100 percent, depending on the market and individual needs of the user. Research and development office facilities are generally used in high-technology markets. In other markets you will find office/warehouses of smaller size, with multiple tenants.

WAREHOUSE

Generally the least intense industrial use, warehouse and distribution facilities often are located in the lowest-priced land in older parts of town or in suburban fringes. Typically, similar to light industrial/assembly property, office use is limited to management tasks for the distribution or warehouse facility, or about 15 percent of total space.

Industrial Loan Programs:

• Loan Sizes: Commercial -$1MM to $10M (loans < $1M case by case add .125 to rate)
• Commercial: Office, Retail, Light Industrial, Industrial, Flex & Warehouse buildings.
• Min credit score: 660
• Debt Coverage Ratio Commercial:
• Standard Multi Use DCR – 1.20x
• Medical Office DCR – 1.25x
• Unanchored Retail DCR – 1.35x

**Terms and pricing subject to change without
notice. All terms and conditions subject to
individual, state-specific rules and regulations.

FOR A LOAN QUOTE SEND US:

• Rent Roll
• Two Years Operating History
• Application
• Credit report

• Loan Sizes: Commercial -$1MM to $10M (loans < $1M case by case add .125 to rate)
• Commercial: Office, Retail, Light Industrial, Industrial, Flex & Warehouse buildings.
• Min credit score: 660
• Debt Coverage Ratio Commercial:
• Standard Multi Use DCR – 1.20x
• Medical Office DCR – 1.25x
• Unanchored Retail DCR – 1.35x

**Terms and pricing subject to change without
notice. All terms and conditions subject to
individual, state-specific rules and regulations.

FOR A LOAN QUOTE SEND US:

• Rent Roll
• Two Years Operating History
• Application
• Credit report

PROGRAM HIGHLIGHTS

• Up to 90% financing available
• Fully amortized loans; no call dates

USE OF FUNDS

• Purchase, construction or renovation of commercial
• Real estate and for owner-users
• Purchase of equipment
• Working capital and inventory
• Business acquisitions and start-ups
• Franchise fees
• Leasehold financing
• Refinancing of existing business debt

LOAN AMOUNTS

• Up to $2 million

TERMS

• Up to 25 years, depending on use of funds and repayment ability

INTEREST RATES

• Adjustable, based on qualifications, and up to 2.75% over WSJ prime

FEES

• One-time SBA guarantee fee
• Construction loans include separate fees
• Prepayment Penalty
• May prepay up to 25% during first 3 years without penalty. Prepayment above 25% in years 1, 2 and 3 has prepayment penalties of 5, 3 and 1%.

PREQUALIFICATION

• Prequalification service available at no cost to applicant