Is sub-metering dead in Seattle?

The City is sending letters to landlords telling them that the City will no longer open new accounts for tenants for water, sewer, and garbage. I think this could have a significant impact on the “not my problem” utility costs issue going forward. This causes me to consider all kinds of corollary issues but let’s focus on just this simple one for now.
My understanding of this letter (attached) is that if a landlord has sub-meters for tenant water consumption and the current tenant vacates the next tenant will not be able to get the meter billing into their name and responsibility. So the options for the landlord are to pay the entire water bill themselves and incorporate it into the rent (as still probably 60% of Seattle Landlords do), or bill the tenants an additional amount that is imprecise, or read each meter each month and do the math and bill each tenant their appropriate amount, effectively making the landlord a utility provider. This sounds like a suddenly ripe opportunity for some enterprising legal minds to make hay with.

On the bright side, if you were one of those landlords jealous of your peers with tenant paid utilities you may now be glad you didn’t spend the money to sub-meter and will now be renting for truly comparable figures with everyone being forced to have their rents be all-inclusive.

A further thought on this is to wonder how this will affect consumption but who has the time to theorize on that topic all day when there are now all these tenant bills to create.

Still a Divided Market

The real estate market is more complicated than it would appear from reading the papers. There are things that are selling, and selling quickly. There are other properties that are hanging around, some without even being shown. This has been true for a while now, but it's not what people expect in a so-called "buyer's market" (read "bad real estate market").

In more traditional renditions of a buyer's market, there are not enough buyers, and so they can bid low on properties, and sellers will have to take low offers if they want to sell. It tends to be true across all segments of the market, from starter homes to mansions. In a seller's market, the opposite occurs: People who want to get a property need to move quickly and bid high, or they will lose to other, more motivated buyers.

This market has aspects of both. Many people have listed their properties a long time ago, and those places have been sitting around. They are often overlooked by agents and buyers, as they can be considered as tired, and usually as overpriced. Other places come on, attract attention right away, and sell quickly, sometimes with multiple offers. What's the difference? Sometimes it's location, or staging, or size. Sometimes there's just a buyer who needs what a seller is selling, and needs it right away. More often, however, it's perceived value. The market--that amorphous body of economic value judgment--rates the property as a good value, and that sparks interest.

All of this makes it difficult to price properties. However, the possibility of multiple bids and early interest means that it's hard to underprice in today's market, as buyers will bid the price up to where it can/should be. It's easy, unfortunately, to overprice. Many sellers look at what's on the market at the time, and place their home in the range that they feel it belongs, without distinguishing between the overpriced inventory and the value properties that are getting all the interest. And that's a big mistake. Look at what's sold, and do it with a clear eye. Then listen to your real estate agent, and get your property into the sold column. Then you can become a buyer, and use all that knowledge to get a great value!

CRE Finance Council Recap - Optimism and Cash!

A colleague of ours in CBRE's Debt & Equity Finance group, Jason Brown, does a great job at sharing information on the debt markets with those of us in investment sales. Most recently, he provided a summary from the CRE Finance Council meeting assembled from him and his colleagues in DEF.

Interesting of note for us at the Insider is that the mood seems to support lending in the rust belt states like Ohio on just stabilized deals. Well, we can definitely attest to that. Separately, retail seems to be leading the pack on property type, but we would expect to see a big swing towards office and industrial this year. This is probably particularly true in secondary markets where STNL and grocery-anchored retail have been the most sought after assets in the last couple years. But enough of our commentary - on to the experts.

Several of the Debt & Equity Finance team members attended the semi-annual CRE Finance Council conference. I thought I would pass along the feedback received on the state of the credit markets, especially the CMBS/conduit market which has been making a comeback.

General CREFC Feedback

• Mood of the conference was pretty optimistic as there is A LOT of liquidity in the CRE space. Not enough product to go around to satisfy all the piggies at the trough.
• Recent blow out of spreads put a damper on some of the mood as there is very little risk tolerance for losing money as some of these institutions get back into this business. 
• All the regulatory uncertainty is definitely having an impact on the industry. Nobody knows for sure what the rules of the road will be. Eg; risk retention, capital allocations in general, B Buyers not controlling the special servicer, ability to monetize the IO strip, requirement of B Buyers to hold their investments for 5 plus years, etc. Stay tuned. 
• Depending on how the regulatory framework evolves, we will have better clarity on whether the non-bank owned Conduits can thrive. Most think the big commercial and I-Banks will be the major players when the dust settles, but this is not a certainty. 
• 2011 issuance levels will probably be in the $40 to 50 B range. Very few are predicting more will get done this year. 
• Not enough B Buyers in market now. Only 5 or so real buyers per some experts. Consensus is that buyers will emerge once the rules are set and yields are high enough.

Producer Feedback

Product/What kind of deals are Conduits winning?

• Life Cos and GSEs winning the better product at reasonable leverage 
• Conduits winning the higher LTV loans 
• Go to Conduits for cash out refis 
• They will go to secondary and tertiary markets ( $85M office bldg loan in Tulsa). Leverage goes down and structure goes up as the markets get smaller. 
• Will lend in rust belt states of MI, IN and OH on stabilized deals 
• Issuance YTD in 2011 heavily weighted to retail – approx 40% 
• Conduits tough on acquisitions. Too much interest rate and execution certainty risk. 
• Winning proceeds driven refis

 Comparing CMBS 2.0 Underwriting to version 1.0 

• Similar to 1.0 back in 2003. Nothing crazy. More thoughtful, visiting the real estate and understanding the market and the deal 
• Can only get basic structural constructs waived on very low LTV deals 
• No benefit for short amortization structures. In fact it may cut proceeds due to higher constant and lower cash flows 
• All underwriting to debt yields in 8 to 12% range depending on product, market, LTV, etc. Lowest for MF deals. 
• Can get 75% LTV on most product if cash flow is there 
• Some quoting 80%. Can get higher in capital stack by Conduit making a high leverage loan and securitizing the Sr Loan and stripping off a Mezz piece 
• All underwriting income in place. Very little creativity.

 CMBS Process 

• Not much fun. Expensive and cumbersome. Don’t expect your client to pat you on the back at closing. 
• Slower, more thorough, and more reliable 
• Better at setting expectations at the outset 
• Real issues with spread volatility and holding spread and then proceeds 
• Some Conduits marketing an ERL execution, but latest language is full of outs for the Lender. ERL Agreement completely one-sided. Be very careful here. 

 CMBS Legal Structure/Loan Docs

• Lock box required and can be an issue 
• Legal fees get high in a hurry. Min of $25,000 
• Independent Directors required: one on loans less than $20M and two on bigger deals 
• Tough but fair. More absolutes and fewer trade-offs 
• Carve-outs are a big issue. Some reaching for more backdoors to recourse. Need very close attention and negotiation, if possible. 
• Not much room for negotiation of loan docs. 
• Non-consolidation opinions required. 

e-Resources For Advertising Your Rental Property

In this age, there are more advertising options than ever.

As most people find rental properties online, having a dedicated webpage for a rental property is a great way to catch those online seekers. A simple page stating the address, property description, photos and contact information is exactly what will help bring people to you. Add more pages to your site to add interest, and show different unit types and neighborhood attractions. This will reduce your future renters’ search time, and give you a quick way to show exactly what is available and how great your property is.

Another tool is Twitter. Twitter is a constant feed of live information from many sources, and you choose your network. It’s a great way to show your property has a pulse and is desirable, bringing people into the world of your building. Use Twitter to post or ‘tweet’ any vacancies, announce neighborhood gatherings, markets and festivals, road closures. Be aware though, that all posts are public unless you choose to ‘protect your tweets’. Protecting them only allows those ‘followers’ (eg. your tenants) to see your tweets. If you are sharing building information this might be a good idea.

Google Maps has a way you can list your business (or property) for free. You may have noticed when looking at them that you can see business names and neighborhood features on the map. You can get yours on the map by setting up a business listing with Google. You will also have a chance to set up a Google Places account which is like an online phonebook ad; all your property’s contact information and reviews, plus a link to Twitter, photos you upload – anything to help market your property. Google can also keep track of your search traffic and how many times people click on your map listing (and/or website)! Simply go to www.google.com/placesforbusiness to get started and set up your account.

These resources can cut your advertising time in half, and make your life easier when vacancies happen. The more time you can spend on your building (and not in the office) the better.

Leading RE

We belong, as many independent real estate firms do, to a network of similar professionals. In our case, it's call Leading RE. When its member firms combine their sales, Leading RE outsells any of the national networks, and its reach extends around the globe. I just spent some time on the website, and the tools available to us far exceed what could be obtained in the pre-web days.

What's the advantage to consumers? For one thing, we can refer people from New Haven to anywhere around the world, and ensure that they receive service at a high level. It's the difference between walking in the door of any professional establishment and having the name of a good person at the other end of the phone. Also, it allows us to coordinate the services on both ends of a move. We can use trusted colleagues in another location, and count on them to keep us informed about what's happening with the purchase or sale in their area. Sometimes that involves bridge loans or changes in moving dates, and it helps to have everyone in the loop.

These things are helpful for agents as well, obviously, but it is their ability to take advantage of the accumulated knowledge base of others in the field that is most useful. Sometimes you just need to avoid reinventing the wheel! In fact, we belong to a much smaller group of large independents, The Leadership Council, about which I've written before. We just started a joint site to post training, advertising, marketing, and various documents which would be interesting for the group to see.

It took a very long time to get our very fractionalized industry to the point where it could share more than basic rules of conduct in common. But it's been worth the wait!

Northeast Ohio Market Snap Shot | Summer 2011

What a difference a year makes. Total U.S. investment transaction volume was up by 120% in 2010, compared to the same period in 2009, and overall cap rates were down 30 basis points (bps) to 7.4% according to Real Capital Analytics (RCA). This trend not only continued in 2011, but also sped up. Commercial property sales reached $44.2 billion through April, a 75% increase over the same period in 2010, at an average cap rate of 7.35%.

Continued investor demand for core assets in primary markets has been a significant factor to increased sales, but activity is increasing in secondary markets such as Northeast Ohio as well. We have seen a large uptick in activity over the last two quarters in properties offered for sale. Consequently, the trend in the secondary markets appears to be the reverse of the primary markets – new offerings are preceding sales. Since secondary markets generally present more risk and less growth, this trend makes sense as investors ease away from the primary markets as supply tightens.

Investors interested in Northeast Ohio are seeking safety or stability, or both. As a result, properties which attract the most interest include single-tenant, net-lease with long-term credit; grocery anchored shopping centers; medical office buildings near or on hospital campuses; senior housing; and sale-leasebacks. The amount of capital chasing these assets continues to increase, and the lack of supply in certain markets has created a “scarcity premium,” driving pricing to levels we have not seen since 2007, even here in Cleveland. This is combined with historically low interest rates and a return to more reasonable credit underwriting to drive the pace of property dispositions.

Owners of these properties should evaluate whether a possible sale now makes sense to take advantage of the scarcity premium. Low interest rates are also helping to stabilize cap rates for properties that may not necessarily fit into one of the “hot” property buckets. Either way, as we look out on the horizon, we see continued loosening of the capital markets and good opportunities for investors and owners alike.

The Ice Cream Comeback

Apparently the economy is not responding the way we all hoped a year ago. Business growth has slowed along with employment. It seems consumers are driving any recovery at all right now. This has limited new real estate projects to build-to-suits and renovations, especially in Northeast Ohio.

So when we saw the latest news headline that the ice cream business is booming and new facilities are being built, we thought what a great way to bring the economy back and hopefully commercial real estate with it. Considering it is like the tundra in northern Ohio 6 months out of the year, we may question this cool strategy, but hey, after the last few years, we're ready to try anything.

Is Madison, Wisconsin Leading the Way for Us?

As most of you know by now, I belong to a group of large independent real estate companies around the country. Some are in big cities, but most are in smaller cities (although bigger than New Haven or Hartford). For some reason, Madison, Wisconsin seems to be the most like our region. Dave Stark, the owner of Stark Real Estate there, and I have discussed this, and it's likely to have a lot to do with the employment base. They have both the state capitol in Madison, and the University of Wisconsin, and those are the two biggest employers. If you didn't know that before, you weren't watching the state workers picketing the Madison capitol!

Having a lot of non-profit and government workers in a region usually makes the employment situation steadier, as well as the use of commercial space. Universities and governmental bodies think in terms of decades, not months. Also, you don't often have the boom times that you would find in Silicon Valley, say, or Wall Street, or even a smaller place where a large manufacturer might open or expand a facility.

Therefore, I thought it was very good news last week when I received Stark's quarterly mailing. While they had the same horrible first quarter that seemed to prevail everywhere, the recent signs have been encouraging. They see lots of pending activity, and increased interest in real estate. I hope it gets here as fast as a big storm seems to do!

Las Vegas Real Estate Market

According to the latest report from RealtyTrac, 53% of all the homes sold in Nevada are in some stage of foreclosure. So what does that mean for the market aside from that it is a great time to be a home buyer?

One of the pillars for the national economy is real estate. For Nevada, it does effect the state economy but for the Las Vegas area, tourism also has a huge impact. Over the last six months, more and more people are coming back to Las Vegas for vacations. Don't believe it? Try renting a car on the weekend from any national chain. You may not get one if you don't reserve it ahead of time. Prices for luxury homes in Las Vegas have fallen drastically like most of the rest of the market.

These bank owned properties are frequently referred to as REOs still make up the bulk of the listings in Las Vegas and other areas of the country. Because of this Las Vegas new home builders are slowing down production but that isn't the case in some areas of the country. New home builders in Columbus Georgia are still building homes and production is speeding up. That isn't the norm in markets with high foreclosure rates like Nevada, Arizona and California.

RealtyTrac estimates that there is a three year supply of foreclosures in the Las Vegas real estate market. As to the impact REOs have on pricing, according to RealtyTrac you can expect a 35% price difference. This may have been the case initially, but with so many foreclosures in the valley you'll see the same pricing across the board.

Thank you for visiting my Las Vegas real estate blog. Check out our other news site for Las Vegas real estate news and other tidbits.

Local real estate investor offers unique perspective on investing in Cleveland

More from Paul Gabrail can be found at http://www.thecapitalistmanifesto.com/

More Reasons to Buy Now

The Wall Street Journal this morning had one of the most positive articles about the current real estate market that I've seen in a long time. They said that, if you take out foreclosures, the real estate prices are really off less than 1 percent from a year ago, suggesting that we are at the bottom of the market. In addition, mortgage rates are near a 50-year low, and the ratio of housing prices to income is over 20 percent better than the fifteen-year average. Although household formation rates have fallen recently, the aging of the baby boomers portends an uptick in home purchases and second home acquisitions over the next number of years. They even went on to say that most people still want to own homes, even discounting or ignoring the investment value, because of control over their environment and access to schools and other amenities. They predict that prices will start to climb soon.

All of this seems to indicate that now is the time to buy. It never pays to try to find the low point at its exact nadir. All indications say that we are now close to that point, and therefore buyers should be rushing out to buy. The article does talk about the new difficulties in qualifying for and obtaining mortgages, but there are many other people who simply aren't buying because they are worried about the future value of their investment. Do those people not worry about the stock market? The bond market? The value of art and antiques? In fact, do they sleep at all?

It seems clear that we need to continue to convince buyers that the time to act is soon. If not today, then later this week or month!