2012 Commercial Real Estate Forecast: Gradually Improving

Commercial real estate markets have been relatively flat this year, but improving fundamentals mean a more positive trend is expected in 2012, according to the National Association of Realtors.

Lawrence Yun, NAR chief economist, said there is little change in most of the commercial market sectors. “Vacancy rates are flat, leasing is soft and concessions continue to make it a tenant’s market,” he said. “However, with modest economic growth and job creation, the fundamentals for commercial real estate should gradually improve in the coming year.”

The commercial real estate market is expected to follow the general economy. “Vacancy rates are expected to trend lower and rents should rise modestly next year. In the multifamily market, which already has the tightest vacancy rates in any commercial sector, apartment rents will be rising at faster rates in most of the country next year. If new multifamily construction doesn’t ramp up, rent growth could potentially approach 7 percent over the next two years,” Yun said.

Looking at commercial vacancy rates from the fourth quarter of this year to the fourth quarter of 2012, NAR forecasts vacancies to decline 0.6 percentage point in the office sector, 0.4 point in industrial real estate, 0.8 point in the retail sector and 0.7 percentage point in the multifamily rental market.

The Society of Industrial and Office Realtors, in its SIOR Commercial Real Estate Index, an attitudinal survey of 231 local market experts,1 shows the broad industrial and office markets were relatively flat in the third quarter, in step with macroeconomic trends. The national economy continues to affect the sectors, with 92 percent of respondents reporting the economy is having a negative impact on their local market.

Even so, the SIOR index, measuring the impact of 10 variables, rose 0.6 percentage point to 55.5 in the third quarter, following a decline of 2.6 percentage points in the second quarter. In a split from the recent past, the industrial sector advanced while the office sector declined.

The SIOR index is notably below the level of 100 that represents a balanced marketplace, but had seen six consecutive quarterly improvements before the last two quarters. The last time the index reached the 100 level was in the third quarter of 2007.

Construction activity remains low, with 96 percent of respondents indicating that it is lower than normal; 88 percent said it is a buyers’ market in terms of development acquisitions. Prices are below construction costs in 83 percent of markets.

NAR’s latest COMMERCIAL REAL ESTATE OUTLOOK offers projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas were provided by REIS, Inc., a source of commercial real estate performance information.

Office Markets
Vacancy rates in the office sector are expected to fall from 16.7 percent in the current quarter to 16.1 percent in the fourth quarter of 2012.

The markets with the lowest office vacancy rates presently are Washington, D.C., with a vacancy rate of 9.3 percent; New York City, at 10.3 percent; and New Orleans, 12.8 percent. After rising 1.4 percent in 2011, office rents are forecast to increase another 1.7 percent next year. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, is projected to be 20.2 million square feet this year and 31.7 million in 2012.

Industrial Markets
Industrial vacancy rates are projected to decline from 12.3 percent in the fourth quarter of this year to 11.7 percent in the fourth quarter of 2012.

The areas with the lowest industrial vacancy rates currently are Los Angeles, with a vacancy rate of 5.2 percent; Orange County, Calif., 5.7 percent; and Miami at 8.4 percent.

Annual industrial rent should decline 0.5 percent this year before rising 1.8 percent in 2012. Net absorption of industrial space nationally should be 62.0 million square feet this year and 41.2 million in 2012.

Retail Markets
Retail vacancy rates are likely to decline from 12.6 percent in the current quarter to 11.8 percent in the fourth quarter of 2012.

Presently, markets with the lowest retail vacancy rates include San Francisco, 3.7 percent; Long Island, N.Y., and Northern New Jersey, each at 5.7 percent; and San Jose, Calif., at 6.0 percent.

Average retail rent is seen to decline 0.2 percent this year, and then rise 0.7 percent in 2012. Net absorption of retail space is seen at 1.2 million square feet this year and 13.5 million in 2012.

Multifamily Markets
The apartment rental market - multifamily housing - is expected to see vacancy rates drop from 5.0 percent in the fourth quarter to 4.3 percent in the fourth quarter of 2012; multifamily vacancy rates below 5 percent generally are considered a landlord’s market with demand justifying higher rents.

Areas with the lowest multifamily vacancy rates currently are Minneapolis, 2.4 percent; New York City, 2.7 percent; and Portland, Ore., at 2.8 percent.

Average apartment rent is projected to rise 2.5 percent this year and another 3.5 percent in 2012. Multifamily net absorption is likely to be 238,400 units this year and 126,600 in 2012.

Real Estate: Why Home Prices Won't Bottom Out

Watching the U.S. home market struggle to rebound is like listening to children in the back of a car. No, we're not there yet. The National Association of Realtors reported that ten real estate markets are "leading the nation toward a general recovery and stability of the housing sector," but myriad problems are going to weigh down the housing market for months to come.

The lingering malaise in the economy has triggered a new wave of defaults and foreclosures. After five straight quarterly drops, foreclosures nationwide shot up 14 percent from the second to third quarter this year, according to data released by Realtytrac, the foreclosure information service (see link.reuters.com/kaw94s), in October.

While RealtyTrac doesn't foresee that the latest foreclosure wave will equal the severity of the 2007-2010 pattern -- in which three million borrowers lost their homes -- it's going to slam on the brakes where areas are getting hit the hardest.

In theory, it should be a good time to buy a home. In the worst-hit areas, properties have lost more than half their value. Yet as the average 30-year mortgage rate has slipped below 4 percent, the combination of employment insecurity and unusually tight standards for lending are discouraging buyers en masse. Lenders are asking for extensive income verification and tax returns. One lender I contacted for refinancing even wanted me to get an accountant to certify that I wasn't lying to the IRS.

Here are some of the biggest roadblocks:

Even in bruised cities where price appreciation is evident, unemployment is still too high. Six out of 10 of the "top turnaround towns" listed by Realtor.com (see link.reuters.com/maw94s) for the third quarter had jobless rates above 10 percent. People can't buy homes if they're not working or soon to lose their jobs. Those cities, which include four of the largest cities in Florida, still have a long way to go to recover from the housing bust.

Although at a record low, the home mortgage rate may still be high relative to home prices. This may sound counterintuitive, but research from the Leuthold Group in their November newsletter shows that a "real" mortgage rate -- which factors in the falling market value of the home prices -- is 8 percent. Leuthold says that real cost of buying must include the 4 percent interest rate and the 3.9 percent average home prices decline over the past 12 months. That cost is still scaring away buyers.

The combination of unemployment, high housing inventory and foreclosures is hurting places where there wasn't an excessive price run-up. Realtor.com found that the largest year-over year median listing price decreases through October were in cities like Chicago, Detroit and Atlanta. This three-punch combination will continue to ravage markets where there's a sluggish economy

Possible solutions to the housing blockage range from the radical to the necessary. A group called Remortgage America (www.remortgageamerica.com/) is calling for the government to loan Americans mortgages at 1 percent to finance a new or existing residence.

Others would like to see Fannie Mae and Freddie Mac take the foreclosed homes they own and either auction them off or offer them in a huge fire sale.

The seized mortgage agencies account for up to one-third of foreclosed homes -- about 250,000. American taxpayers are pouring tens of billions into propping up these two wards of the state, which were taken over by the U.S. Treasury in late 2008. The Obama Administration has yet to announce what it wants to do with the companies. Will they be restructured, liquidated or privatized?

A third option, which may have the least impact on a battered market, is to offer foreclosed homes in rent-to-own deals. Prospective homeowners get a place to live under reasonable leases and can build equity toward a purchase.

It's estimated that some 3.4 million foreclosed homes will be on the books of banks and mortgage companies by the end of this year. As regulators, banks, mortgage companies and state attorneys general move sheepishly to unblock mortgage modifications, refinancings and resales, only one certainty prevails: The open market will not be able to properly price every property until all government restrictions are lifted on their sales and re-financing.

Bay Area Real Estate: Finally Some Good News!

SAN JOSE, Calif. (KGO) -- Here's the best news you've heard in years about Bay Area real estate. A new report offers not just a glimmer of hope in California's housing market, but predicts a roaring comeback over the next six years. We could be poised for a dramatic comeback.


ABC7 spoke with the California director of the Economic Forecast and he's predicating a rise in home prices is going to be the convergence of a number of factors. He is suggesting that more jobs, fewer distressed properties, and those historic low interest rates will all play a role in this turnaround.

The same panel of economists who warned the California housing bubble was going to burst is now predicting homes prices are ready to rebound. "I am absolute thrilled that we are finally coming out with something positive," said Cherie Colon from Windermere Real Estate.

UCLA economists are predicting a steady climb in the median price of existing California homes. The UCLA Anderson Forecast anticipates an 11.5 percent price jump next year. The forecast calls for another 10 percent increase in 2013 and a median price of nearly $440,000 by 2017 -- that would represent a 52 and a half percent increase over today's prices.

Mike Sibilia is president of the Santa Clara County Association of Realtors. He said, "52 percent by 2017 for median price, that is aggressive, but we've seen it before, and what I like is the steady growth is what I like to see."

The National Bureau of Economic Recovery says the recession ended in June 2009, but the foreclosure crisis and high unemployment have weighed heavily on any recovery. Now, Jean Haneke is seeing signs of life. She's looking to sell her home in Morgan Hill.

"There are houses that are closing in our area, there are good sales, we've seen statistics on it, and we're looking for that sort of thing as a seller," said Haneke.

Foreclosures still count for about one third of all home sales in California and bay Area prices are especially zip code driven, but the UCLA Anderson Forecast suggests as a whole, home prices have hit bottom.

"I think locally we have already seen the start of it in some markets, but also don't expect it all to come because there are still the statistics that show that we're probably not going to be at 2006 levels again for 10 years or more," said Colon.

While the UCLA economist predict double-digit increases in terms of home prices, they say that home sales will remain relatively flat, bouncing in the 3 to 5 percent range, with the most sales activity taking place between 2013 and 2015

How To Properly Evaluate a Real Estate Opportunity

Properly evaluating a real estate investment opportunity can sometimes be a tricky endeavor. There are many factors that can come into play, and it can be hard to focus in on the things that really matter. While I don’t propose to have a magical formula for finding great real estate investments, I do have over 15 years of experience investing in real estate, and have bought and sold hundreds of homes. Along the way, I’ve learned a thing or two about what makes a good investment, and a bad one. In this article, I plan to share some of these things I’ve learned with you. (My investing expertise is with rental homes in particular, so for the purposes of this article, I will focus in on that specific type of real estate investment.)

Look Beyond Yields
One of the biggest mistakes a real estate investor can make is to get so enamored with the yield a property appears to be netting, that they forget to look at all the other factors. Sure, high yields are great – that means they property is making more money. But, typically there is a reason why the yield is so high. After all, if the property was raking in a ton of cash for the owner, why sell it? If you look deeper, you can generally find out why. Some common reasons you might encounter are:

• The neighborhood is on the decline (think “Rust Belt”). There are a lot of negatives that come with this scenario, but the biggest ones to keep in mind are falling home and rental values. As people leave these neighborhoods, things get worse before they get better. People no longer want to live there, and finding tenants or buyers for the property can become nearly impossible. One number that can give you an idea of where a neighborhood is going is the proportion of rental homes to owner occupied homes. As the rate of rental homes in an area increases, typically this signals the area is on the decline. There is good reason why many lenders won’t lend in communities that exceed certain rental to owner occupant thresholds.

• The property is in disrepair. This one you can typically spot with a good home inspection, but not always. While legally the home owner is required to disclose any known defects with the house, that doesn’t always happen. If the home is a known fixer upper, just make sure you are prepared for what that means. If you are planning to rent out the home in its current state, make sure you fully understand the laws in your state. Typically landlords are required to maintain the home a “safe and livable condition”. Keeping a property in less than excellent move-in ready condition is also asking for poor quality tenants, and the various issues they can create. If you aren’t sure what exactly that means in your state, find out before you move forward on the deal. In addition, make sure to factor in that the home will most likely be vacant while you make the necessary repairs.

• The rental market is saturated. If an area has become, or will soon be, saturated with an abundance of rental properties, you can rest assured that rental rates will fall. The more options potential tenants have, the less they are going to be willing to pay - the law of supply and demand. Make sure to do your homework on this one. Before purchasing a rental property in a certain area, make sure you fully understand the supply coming on market, along with how many new tenants are coming into the area. If the supply outweighs the demand, make sure you take into account that rents will likely fall. Ideally you want to find an area that is exactly the opposite. Demand is increasing, but supply is flat or shrinking. I specifically look for this trait in areas I invest.

Yields can tell investors part of the story when it comes to evaluating real estate opportunities, but don’t get caught up solely in this one number. It is great if the property is cash flowing now, but make sure it is still going to be cash flowing a year down the road.

Exit Strategy
Speaking of looking down the road, properly evaluating a potential real estate investment opportunity must include planning your exit strategy. An exit strategy can be anything from holding the property and eventually passing it on to your children, to remodeling and selling it when the market rebounds in two years. There are lots of ways you can plan to exit a real estate investment, but the important thing is thinking them through at the beginning. If you choose to purchase a home in a neighborhood consisting mainly of renters, don’t expect to be able to sell it to an owner occupant down the road. Make sure you plan realistic exit strategies.

If there is one thing I can share from experience, is that investments don’t always go as planned. For this reason, I always make sure I have two realistic exit strategies before I move forward on a property. If for some reason Plan A doesn’t work out, I need to have a Plan B, and maybe even a Plan C. If you don’t think these through now, you are asking for trouble later on.

Investing in real estate can be an extremely rewarding experience, or it can be a dreadful one. Properly evaluating a potential real estate investment opportunity from the start will undoubtedly increase your odds for success. Don’t focus in on one factor – like yields – but rather look at the full picture. In addition, remember to plan out multiple exit strategies. Hopefully you only need Plan A, but if that doesn’t work out – which unfortunately tends to happen a lot – you’ll be glad you have another plan to fall back on.

Revamped mortgage program: Will homeowners be able to refinance?

President Obama flew to Las Vegas, ground zero of the housing crisis, to unveil a revamp of the Home Affordable Refinance Program.


With mortgage interest rates at near historic lows, millions of homeowners have refinanced to rates as low as 4 percent for a 30-year fixed-rate mortgage or 3 percent for a 10-year fixed-rate mortgage.However, millions of other homeowners are underwater with their mortgages (i.e., their mortgage balance is higher than the value of the home) and cannot refinance.

The original HARP program was designed to help borrowers up to 125 percent underwater (i.e., borrowers who have a first mortgage balance of up to 125 percent of the home's current value). It has been a colossal failure, having helped only 70,000 underwater homeowners take advantage of lower mortgage rates.


The new program eliminates the requirement of an appraisal in most cases. To qualify, homeowners must have been on time with their mortgage payments for at least the last six months and must not have missed more than one payment in the past year. Borrowers may not be in foreclosure or bankruptcy.

The good news for trouble real estate investors is that a second home or investment property may now qualify for a refinance. If it is an investment property, the building must have no more than four units. The property may be a single-family home, a condo or a co-op.

The existing mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009. The new HARP program will come in phases, starting with loan applications dated December 1, 2011 or after. For borrowers who are more than 125 percent underwater, the start date will be sometime in the first quarter of 2012.

The HARP program was originally set to expire in 2012. The new rules extend HARP through December 31, 2013. President Obama said the process would be streamlined in order to make it less onerous on borrowers.

Nevertheless, the devil is in the details. The four biggest mortgage companies -- Chase, Wells Fargo, Bank of America and CitiMortgage -- have agreed to participate, but that participation is voluntary and each of the banks has the right to make changes to the program. That could make it difficult for borrowers to understand what the program at their bank is and why it is different from what they've been hearing from other news sources.

HARP's aim has been to reduce the borrowers' monthly payment by providing a new loan at a lower interest rate, and it also may be used to replace an adjustable-rate or interest-only loan with a standard fixed interest rate loan. It does not usually cut the principal balance of the mortgage, something that borrowers have been asking for but that lenders have been reluctant to provide.

Until the software is rewritten and tested, until the rules are written and published, and until borrowers have gone through the system and successfully emerged, loan modification in hand, there's no telling exactly what this latest revision of HARP will do for the housing crisis, or the economy.