Market Trends Online

December 2006

Seniors Housing Cap Rates
as of 6/30/06

Source: National Investment Center for the Seniors Housing and Care Center

Medical office buildings such as this 21,447-sf facility in Fullerton, Calif., are a growing subsector of new office construction.
Source: Voit Cos.

Office Construction to Rise
While a slowdown in office construction has helped the overall office market to recover, new demand is causing an increase in the number of office projects in development over the next two years, according to Marcus & Millichap. Seventy-five million sf of office space will be delivered in 2006, the first annual increase in six years, but it only adds 1.3 percent to the existing stock. Projected deliveries for 2007 and 2008 will add 91 million sf and 102 million sf respectively, with 13 million sf devoted to medical office space each year. A large portion of the additional office space is build-to-suit projects that are fully preleased.

Phoenix is expected to add 7.5 percent of its existing supply to the market in 2007, well above its previous highs of 4 percent to 5 percent, perhaps creating a temporary supply/demand shift. Riskier markets include Atlanta, with a 17 percent vacancy rate, which is adding 2.5 percent of its current stock, and Dallas, where vacancy hovers around 20 percent, which is adding 2 percent to its supply.

Capital Lease Funding, a real estate investment trust focusing on net lease properties, recently purchased five U.S. government office buildings in Alabama, Kansas, Texas, and Utah for more than $97 million.
Photo credit: CapLease

Net Lease Market Still Hot
Despite the slower economic engine at the end of 2006, the net lease real estate market remains hot, according to Capital Lease Funding. However, as of mid-August, the Boulder Group reported that more than $53 billion, an all-time record amount, of net lease properties were for sale. Cap Lease reports signing more than $200 million net lease transactions since September 2006 and expects to close the majority of the deals by the end of 2006. Cap Lease cites the capital markets as a primary source of funding for the net lease market, with CMBS and REIT issuances exceeding $1 trillion this year. “The capital markets, which are providing virtually an unlimited supply of funds to real estate investors, continue to be robust and dynamic with new financing vehicles such as collaterized debt obligations providing issuers attractive low-cost financing and considerable flexibility to manage their portfolios,” says the Cap Lease report.

Source: The Saint Consulting Group

Americans Still Wary of Development
Seventy-three percent of Americans still oppose new development in their communities and 70 percent would use taxes to maintain undeveloped spaces, according to the second annual Saint Index land-use study. However, there is good news for real estate developers: While opposition to new multifamily, retail, and office construction remains strong, fewer Americans oppose such projects in 2006 than in 2005

Midwest Industrial Snapshot
3Q06

Source: Staubach Co.

A growing number of Middle Eastern investors are purchasing U.S. class A properties such as New York’s Essex House hotel, bought by the royal family of Dubai in 2005.

Foreign Investment Survey
While foreign real estate investors still view the United States as a safe, stable haven for their money, allocations to U.S. acquisitions are declining as investors seek to diversify globally, says the Association of Foreign Investors in Real Estate. Other AFIRE findings include:

• London surpassed Washington, D.C., as the top global investment city for the first time since 2001.

• Foreign investors are most attracted to U.S. office properties and least attracted to apartments.

• The percentage of active Australian buyers of U.S. real estate jumped from 5.7 percent in 2004 to 40 percent in 2005, while the percentage of active German buyers fell from 90.6 percent to 49.2 percent.

• Middle Eastern investors account for 6.2 percent of foreign U.S. real estate buyers, up from less than 2 percent in 2004.

2007’s First Bestseller
Whether you’re talking to a client, colleague, employee, or your teenager, you know that glazed look that says “I’m standing here watching you talk.”

Why do some messages go in one ear and out the other? Made to Stick: Why Some Ideas Survive and Others Die presents five factors that help determine why some information –- such as urban legends and conspiracy theories -- circulate effortlessly while many of us struggle to get across the relevant details of a business transaction. Sticky messages present unexpected information, say authors (and brothers) Dan and Chip Heath. They use concrete examples and stories to get the point across. And they’re simple: they focus on one point, not a laundry list of details.

Of course, speakers may have to abandon their PowerPoint presentations in order to get their messages to stick. "Listening to someone talk about business with a PowerPoint presentation is kind of like listening to someone talk about tennis with a PowerPoint presentation,” says author Dan Heath. “It’s interesting, but it’s not that useful.” Business is about actions and behaviors, he continues. “So don't say, ‘a solid cash position is important for a company.’ Instead say, ‘Here's a cash flow statement, look at it, tell me what’s wrong and tell me what you would do to fix it.’ ”

Market Trends Online is written by Sara Drummond, senior editor of Commercial Investment Real Estate. Read CIRE’s print Nov.Dec.06 Market Trends column.