Theory vs. Facts

While I was at a building inspection yesterday, I took a call from an appraiser (always help the appraisers) who was asking about a sale we closed a few weeks ago in North Seattle at a 5.95 CAP. He was trying to figure out why the CAP rate was “so low”. I asked him where he is seeing higher real CAP rates and he actually couldn’t give me any decent examples. In other words, rather than basing an opinion on facts he was, like so many people are today, basing his opinion on theory. The problem is that he is an appraiser.

We just brought to market for a seller a portfolio of five buildings in the Fremont and Maple Leaf neighborhoods. Within a week, three of the buildings are firmly under contract with buyers paying at or very, very near the asking prices and we are working through offers on the other two now.

These properties are selling because they are in good areas, in good condition, and being offered at reasonable prices. By reasonable I don’t mean the high CAP rates that many people think is necessary to sell today but rather a reasonable price relative to the specific properties. Not one of these is near and certainly not above a 6 CAP and all are in the neighborhood of an 11 GRM. Good properties are rarely for sale today which is why we have such strong interest. There is not a shortage of buyers but a shortage of good inventory priced reasonably.

When these five properties close escrow, I expect more calls from more incredulous appraisers wondering what the story behind these “unusual” sales is. Nothing but normal business will be my answer.

Good buildings get good buyers who get good loans, all through good brokers today.

CPPI Increase - Read the Fine Print

The Moody's/REAL Commercial Property Price Indices (CPPI) is showing a 3.6% increase for May, which follows a 1.7% increase for April. On the surface, this seems like good news. Unfortunately, the details and Moody's disclaimer limits the optimism the uptick in the CPPI may create. As Moody's managing director says, the increases are "tempered by low transaction volumes, forecasts for slowing macroeconomic growth and the rising risk of a double dip recession." Wow, that's not so rosy.

Low transaction volume is for sure. May's increase is based on just 107 sales nationwide, per Moody. We don't think that is a statistically relevant number of transactions to highlight price swings in the market nationally. Beyond that, as the previous post points out, commercial real estate is a local phenomenon right now. We don't have access to the underlying Moody data, but we'd be willing to bet most of those sales were on the coasts and southeast (except Florida).

The included chart, from MIT's Center for Real Estate, shows the real story, if there is one. Prices plummeted very quickly and if anything, have managed to stop the free-fall in the last six months. That has been our sense of the market as well, both nationally and in Northeast Ohio.

But we may yet see prices fall and rise depending on any number of factors. For example, STNL properties with 12+ year term and a quality tenant may continue to see price contraction. We have seen this in the last several months on Walgreen's. Alternatively, it is still challenging to find buyers for multi-tenant office space in the Midwest and thus very difficult to even price assets.

Confusion Persists, as TrafficCourt Astutely Points Out

If you haven't read TrafficCourt, run by David Bodamer, you should put it on your to-read blog list. It's a great CRE blog that is part of Retail Traffic, the monthly news magazine. We here at Commercial Real Estate Insider haven't posted anything in about two weeks because, well, we just don't see much worth posting. News continues to be regurgitated but in different forms and with different messages - the recovery is on, the recovery is off; REITs are great, REITs are seeing their debt terms tightened; buyers are back, buyers are skeptical and underwrite conservatively. It is just maddening.

To this point, TrafficCourt has a great post on exactly this, addressing the mainstream media's inability to understand the market dynamics and its oversimplification of the situation for their readers. The bottom line, with which we agree, is that the market is fragmented between the good, bad, and really bad, and both opportunities and pitfalls exist in pockets scattered throughout the US - there is no singular "market." It's a bunch of little markets. From our perspective in Northeast Ohio, David is right-on, but probably understates the situation, with this:

We’re going to see continued pain in some places alongside recovery in others. It does very much appear, though, that a bottom in values has formed. But I don’t think anyone can say for certain what the contours or speed of recovery in values is going to look like. And it’s going to play out differently in different markets and in different property sectors.

We encourage you to read the whole post. If anything, someone who can successfully use the word "zeitgeist" in their post (which yes, we had to look up too) is worth reading to us.

Press Release: McQuaid Commercial Closes Bitter Lake 22-unit

July 6, 2010: McQuaid Commercial Real Estate closed the sale of the Arbor Heights Apartments, a 22-unit building located at 625 N. 130th Street in Seattle.

“This is a great example of the current marketplace where only truly good properties appropriately priced are selling while mediocre buildings are languishing on the market” Michael McQuaid, who represented the seller of Arbor Heights, said Tuesday.

The buyer for the property, Greg Deer, bought as the up-leg of a 1031 exchange with the sale proceeds from a string of duplex properties he recently sold on Beacon Hill in Seattle.

The seller, an LLC for a local unnamed owner who sold to re-deploy the equity into a new business venture, was pleased to be one of few sales this year.

The price of $2,300,000 worked out to a CAP rate of 6.21 and a GRM of 9.85.

MCQUAID Commercial Real Estate is located at 400 Roy street in lower Queen Anne. It is an open concept, boutique-style firm offering advising services and focuses on superior client representation.


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