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Commercial Real Estate, Commercial Real Estate Index, Development, Economics, Industrial Real Estate, Industry News, Investment Real Estate, Medical Office, Multifamily, Office Real Estate, Property Management, Real Estate Trends, Twin Cities Real Estate

Minnesota Commercial Real Estate Outlook Shows More Signs of Optimism

Spring 2019 – Minnesota Commercial Real Estate Outlook Shows More Signs of Optimism for the Upcoming Two Years

The May 2019 University of St. Thomas / Minnesota Commercial Real Estate Survey is continuing to show to show changes in the sentiment of our panelists as they look out over the next two years. The biannual survey projects a two-year ahead outlook for Minnesota’s commercial real estate industry and forecasts potential opportunities and challenges affecting all commercial real estate sectors.

As was done with all sixteen of our previous surveys, the same group of 50 commercial real estate industry leaders involved in development, finance, and investment were polled regarding their expectations of near-term future commercial real estate activity. The decisions that these industry leaders are making today will determine what the CRE markets will look like two years from now.

Spring 2019 Results

Observations from May 2019 have recorded several notable changes in the panel’s expectations when compared to the previous survey conducted in Fall 2018. “There is still some concern that we are near the top of the cycle and that overbuilding and increased vacancies may occur in some product types and submarkets.” says Herb Tousley, Director of the Real Estate Programs at the University of St Thomas. “While our composite index for late 2021 remains slightly pessimistic, there are some bright spots worth noting. There is no expectation of a major downturn in the commercial real estate market in the Twin Cities within the next two years. The increase in online shopping, low interest rates, changes in housing trends and the continued redefinition of the office environment will remain major factors in the performance of commercial real estate in the coming two years.”

The panelists are very concerned about the expected increase in the cost of land and building materials and its expected impact on values and expected returns for developers and investors. There was a big change in the index for investor’s return expectations. It increased 9 points moving from a pessimistic level moving to slightly optimistic territory. This is a big change in sentiment since our last survey. It appears that our panel now expects interest rates to remain stable at current low rates. While our respondents are not expecting a major downturn, they are more somewhat concerned about where we are in the market cycle.

Index values greater than 50 represent a more optimistic view of the market over the next two years, with values of less than 50 indicating a more pessimistic view. More detailed information about each of the individual indices may be found below.

The individual indexes are detailed below:

Rent Expectations

The outlook for rental rates is essentially unchanged from our last survey. Market conditions expected in early 2021 are best described by the price for space (rental rates) and the supply of space (occupancy levels). The index for rental rates was 63 compared to 62 six months ago. This means the panel continues to be strongly optimistic in its expection of continued rent growth. The panel’s sentiment is that the economy will continue to grow and that business conditions will continue improve creating more competition for commercial space.

 Occupancy

The outlook for occupancy levels continues to be moderately pessimistic moving from 43 to a slightly less pessimistic 45. This indicates the panelist’s belief that occupancy levels and space absorption may not remain at current levels during the next two years. As a great deal of new product continues to be delivered, the panel is beginning to be concerned about the market’s ability to absorb the new space. This is especially noticeable in the multi-family and certain office and industrial segments. It is a continuation of a general trend that began 4 ½ years ago. Businesses expect to continue to grow but they are concentrating on reducing their cost of occupancy by doing more with less space.

Land Price Expectations

The rate of increase in land prices is expected to accelerate. The land price index has decreased (become more pessimistic) in the current survey moving from 46 last December to 40 this spring. Although, the lowest point for the index was recorded at 31 in the fall 2013 survey, a score of 40 for this index indicates increasing concern about the rapid rise of land prices. Since land prices are a major component of project costs, any increase has a great deal of impact. Higher land prices are a hindrance to new development, making it more difficult to obtain financing and adequate returns for investors.

Building Material Price Expectations

There is a continued expectation that increases in the price of building materials will continue to increase. The index for the price of building supplies remains strongly negative, moving from 26 in December 2018 to 32 in May 2019. The panel believes that commodity prices for lumber, concrete, steel and many of the other materials used in construction will continue to increase due to shortages and newly imposed tariffs. Since building materials are a major cost component of any development project any increases in prices will make it difficult to provide adequate returns on future developments.

Return on Investment Expectations

Our panel expects that investors return on investment expectations will remain constant. The index for investor’s return expectations made a big move, increasing from a pessimistic 42 to a slightly optimistic 51. This indicates that investors will be expecting to maintain their expected returns. The consensus among survey respondents indicates that investors will not be seeking higher returns in the next two years due to their expectation of stable interest rates. The panel’s concern remains about market fundamentals over the next two years. Investors will continue to seek out quality investments, but they will be much more diligent about how they price risk, evaluate projects and developer/sponsors when they evaluate potential return when considering their investment options.

Lending Expectations

Equity and loan to value requirements are not expected to increase. The index for the amount of equity required by lenders remained unchanged from our last survey at 41. That recorded level is somewhat pessimistic but, now that appears interest rates have moderated and are expected to stay that way, the panel’s belief that is even if interest rates were to increase moderately credit will still be available for good projects. However, they expect lenders will continue be more risk adverse by tightening their underwriting criteria in the coming two years.

 

 

 

 

 

Commercial Real Estate, Development, Economics, Investment Real Estate, Multifamily, Office Real Estate, Real Estate Trends, Retail Real Estate

AIA: Architecture Billings Index increases, Strongest Growth since 2007

In another sign of improvement in commercial real estate the Calculated Risk blog in a recent posting notes a continuing increase in the AIA Architecture Billings Index.  When architects get busier that usually indicates an increase in new construction is not far behind.

Arch. BillingsNote: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.

From AIA: Architecture Billings Index Continues to Improve at a Healthy Pace

With increasing demand for design services, the Architecture Billings Index (ABI) is continuing to strengthen. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the February ABI score was 54.9, up slightly from a mark of 54.2 in January. This score reflects a strong increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 64.8, higher than the reading of 63.2 the previous month – and its highest mark since January 2007.

Conditions have been strengthening in all regions and construction sectors for the last several months,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “Still, we also continue to hear a mix of business conditions in the marketplace as this hesitant recovery continues to unfold.”

• Regional averages: Northeast (56.7), Midwest (54.7), West (54.7), South (52.7)

• Sector index breakdown: multi-family residential (60.9), mixed practice (56.9), commercial / industrial (53.3), institutional (50.7)
emphasis added

This graph shows the Architecture Billings Index since 1996. The index was at 54.9 in February, up from 54.2 in January. Anything above 50 indicates expansion in demand for architects’ services.

Every building sector is now expanding and new project inquiries are strongly positive (highest since January 2007). Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

According to the AIA, there is an “approximate nine to twelve month lag time between architecture billings and construction spending” on non-residential construction.  This index has been positive for seven consecutive months and suggests some increase in CRE investment in the second half of 2013.

Commercial Real Estate, Real Estate Matters - Interview, Real Estate Programs, Uncategorized, UST Student Profile

Student Profile: Aileen Halligan

aileenhalliganAcademic researchers who study social, behavioral, and organizational psychology have spent the previous decade studying how people make judgement about people they meet. Some of these researchers believe that your brain, specifically the emotional centers, work incredibly fast to make snap judgements about people, a trait that was crucial in our species history, when ascertaining friend from foe was often a life threatening decision. The common phrases for these experiences are “gut feeling” and “a hunch”, and contradictory to the general belief that these emotions are irrational, scientists are increasingly discovering that they are actually the product of an incredibly complex system of sensory analysis, memory, and a syntax that follows a precise logical argument. This insight becomes all the more powerful when one begins to realize just how accurate that gut feeling is when the situation is appropriate.

Considering the opening paragraph of this interview, it is without surprise that Ms. Halligan makes a significant first impression, worthy of the pretense. Very confident, driven, intelligent, well spoken, and conscientious  are the gut feeling(s) I experienced when Ms. Halligan began answering my questions. Aileen’s career, education, and goals are all reflective of these traits, and it would appear a solid bet that her future holds plenty of successes.

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Commercial Real Estate, Development, Executive Insight Series, Industry News, Real Estate Trends, Residential Real Estate, Retail Real Estate

Executive Insight Series- Dennis Doyle

Dennis-Doyle“My life is lived from the inside out. My principle values, experience and leadership come from the inside, and guide my life on the outside. It’s an inside job. It seems that everyone is wired differently. Some of us want to make a lot of money, while others want to save the world and help people. You CAN do both! Everyone needs to figure it out. Work is a huge part of it. If you find the right work and path, life can be a real joy and blessing.”

Dennis Doyle, Executive Chairman of the Welsh Property Trust, started his career in real estate as an adolescent who spent his summers working construction for his neighbor, George Welsh. During that period, Mr. Doyle’s passion for construction and development grew exponentially, part of the credit, according to Mr. Doyle, belongs to his older brothers who forced him to work harder to keep up. He left real estate briefly to attend college on a football scholarship, with the intention of becoming a coach, however Mr. Doyle soon realized that this was not his true goal, and returned home to continue his career developing and constructing buildings. In 1977, Mr. Doyle and Mr. Welsh (same childhood neighbor) entered into a handshake agreement, that formed the Welsh Companies, and has shaped the last 30 years of Mr. Doyle’s life. Reflecting on this story, and on his subsequent career, Mr. Doyle lamented,  “I love being able to put my personal touch on buildings, and am very fortunate to have found my life’s passions and being able to continue working in this field.”

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Business Valuation, Commercial Real Estate, Development, Industry News, Real Estate Trends

News Brief: CoStar Study Wins Top Academic Honor from American Real Estate Society

$11,000,000,000,000

How does one comprehend the above figure? It is a very large number with many zero’s, in fact, it’s so large even a fancy BAII+ financial calculator has to express the number as a exponent of the 10th power (11 * e^12). The name for this sum can vary depending on which country you are in, and unfortunately since the US and Britain saw fit to simply swap the names around, a trillion is 10^12 in the US, and in old english it is considered a billion (a trillion in the old system is 10^18, or a quintillion in the US). Since the definition of this figure does little to aide in the quantification of this figure, it is necessary to use tangible comparisons. 11 trillion dollar bills stacked on top of each other would be 737,000 miles high, in relation the moon is approximately 240,000 miles. Besides the United States and the European Union, 11 trillion dollars surpasses the GDP of every other nation in the world (according to the CIA fact book).

The attempt at quantifying this figure was done in the hopes of imparting the sheer magnitude of this number as well as the mind-boggling size of it, constructing a model that represents data and economic factors that are able to compute the necessary macro and micro forces affecting this figure is simply amazing. This is precisely what researchers at CoStar did in their comprehensive study of the United States commercial real estate market, with their findings and analysis published in the Journal of Real Estate Portfolio Management (JREPM). While this is undoubtably a very exciting study, there has never been a comprehensive valuation of the entire countries real estate, the data collected is far from novel. Having the ability to quantify and value one of the largest asset classes in the world (the only one larger that comes to mind is the US stock exchange at 16 trillion) will allow investors, developers, the government, and anyone else involved in commercial real estate a powerful new model for analyzing the macro effects of economic shifts on the entirety of the asset class. In recognition for their outstanding work, the authors received the best paper of 2010 by The American Real Estate Society (ARES).

The press release from CoStar is below, including a link to read the paper as published in the JREPM.

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Commercial Real Estate, Development, Executive Insight Series, Industry News, Property Management, Real Estate Trends, Residential Real Estate, Retail Real Estate

Executive Insight Series: Boyd Stofer

Boyd Stofer - CEO Marquette Group

Boyd Stofer - CEO Marquette Group

“No one was doing anything, I mean no one was even talking about starting a new project. Sure I was scared, we paid too much for the building during the worst real estate market in my lifetime. However, we needed to play offense, someone had to make the first move, and it was us. That got a lot of attention, and we were able to get the building 90% leased before we started renovation, that’s just unheard of, and it worked to our benefit.”

The quotation above does a superb job in summing up the career, strategy, and philosophy of Boyd Stofer, president and CEO of the Marquette Real Estate Group. Over the past 32 years, Mr. Stofer has helped United Properties (Now part of the Marquette Group) grow into one of the most successful and profitable real estate development companies in the country. Attending a lecture from Mr. Stofer is somewhat like listening to a Harvard (one of his Ivy degrees) Economics professor give a semesters worth of lectures fast forwarded to a speed that condenses the information into one hour. During his talk it appeared as if he continued to talk as he inhaled, and didn’t miss a beat or misstate a figure as he outlined the micro and macro forces that are effecting the national commercial real estate market. His charisma stems directly from his incredible intelligence and ability to conceptualize and connect the vast set of variables that made up the contents of his talk, ending with the weaving of details to present the Marquette Group’s current standing and plans for the future. It’s no wonder that the Pohlad Family entrusts Mr. Stofer with a significant share of their fortune, as very few individuals can impart their razor sharp intellect and cunning in such a succinct and complete manor. It is highly unlikely that anyone in the room (full of real estate professionals, academics, and students) walked out questioning Mr. Stofer’s understanding of the real estate market, actually, it highly unlikely that anyone who meets him ever has doubtful thoughts.

Biography |

Mr. Stofer’s educational credentials mimics his career as nothing short of top tier. In 1971 he graduated from the Cornell School of Engineering, and followed it up with an MBA with Honors from Harvard. Immediately following his MBA program, Mr. Stofer was hired by Hines Interests, a national real estate development group based in Houston. After three years in Houston Mr. Stofer left and came to Minneapolis to join United Properties, then owned by the Hamm family. Since his hire, Mr. Stofer has led the companies development initiatives, and has amassed an amazing portfolio of work. In 1996 he was named president and CEO, since that time Mr. Stofer has grown and merged United Properties into what is now the Marquette Group. Today, the combined entities of the Marquette group employ over 1,000 people, has assets around $750M and services more than $40B worth of real estate loans. The current operational structure of the Marquette Group is the culmination of Mr. Stofer’s vision for a vertically integrated property firm that is unique in the services that it can provide. The vast array of real estate products that Marquette Group is far from novel, in fact it is probably the firms best financial hedge, in that the organization is prepared and capable of earning revenues in any market and any economic climate.

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Commercial Real Estate, Industry News, Property Management, Real Estate Trends, Residential Real Estate, Retail Real Estate, Uncategorized

Weekly Recap

A collection of the most important stories this week that are making headlines in the real estate industry

From the Chicago Tribune | Home improvement sales rebound- Lowe’s, the nations second largest home improvement retailer, is reporting a 15% increase in seasonal hiring, a sign that the home improvement business is stabilizing ahead of the greater real estate industry. This appears to be another strange aftereffect of the real estate crisis, with the article attributing the increase in home improvements to existing home owners opting to fix up their old homes, as opposed to buying a new home. Overall 1Q 2011 spending is expected to increase 9.1% to $125.1 billion.

From Calculated Risk | CoreLogic- House prices declined 2.7% in February, prices now 4.1% below 2009 lows- The bottom of the slide in housing prices is still being determined, as the most recent numbers from CoreLogic paint a dreary picture for potential home sellers. Overall, the mean selling price of homes across the country continues to plummet, with a decline of 6.7% in February 2011 compared to February 2010. However, as this blog and many other real estate analysts are pointing out, the news isn’t as grim when the market is properly quantified. Currently the percentage of distressed homes being sold is significantly higher than market averages, causing an overall decline in the mean home prices across the country. According to Mark Fleming, chief economist with CoreLogic.

“When you remove distressed properties from the equation, we’re seeing a significantly reduced pace of depreciation and greater stability in many markets.  Price declines are increasingly isolated to the distressed segment of thee market, mostly in the form of REO sales, as the stock of foreclosures is slowly cleared.”

CoreLogic has adjusted figures (which exclude the sale of distressed properties) showing a decline of .1% over the same period, which continues a trend towards stabilization and hopefully indicates positive gains in home owners equity moving forward. to read the entire report click here.

From the Star Tribune | Almost half of all March closed home sales in the Twin Cities were foreclosures- Relating to the previous article, the Star Tribune reports that 43% of home sales in March were distressed properties. This sent the median home price into a nosedive, dropping 15% to $140,000, however excluding distressed properties, the picture is a little brighter. Looking at previous March sales, without including 2010 (the new home owner tax credit created unusual demand), sales in March 2011 were up 6% and 15% for 2009 and 2008 respectively.

mallvacancy


From the Wall Street Journal | Malls face surge in vacancies- From a record low vacancy rate of 5.1% in 2005 to todays less rosy 9.1%, mall owners are facing increased pressure due to the changing shopping behavior of Americans, as well a loss of customers in the exurbs of America’s largest cities.  One segment that appears to be regaining traction is the upscale mall industry, that has reduced its nationwide vacancy to 7%, although this is still above what is considered healthy in the sector. As technology and connectivity spreads to more individuals, retailers will be forced to ask serious questions about their business models, and the need for massive retail space in as many locations as possible.



Development, Industry News, Property Management, Real Estate Trends, Retail Real Estate, Uncategorized

Real Estate Executive Insights: An Insider’s View of Commercial RE Investing

speaker_AndyDeckas “Never waste a crisis, they all have opportunity.”

 

It is a common occurrence during difficult times, and there is something very human about perceiving the current situation and lamenting that it is the worst or most extreme crisis in history. Although most of the time this can be chalked up to theatrics or over reaction after hearing Mr. Andy Deckas, President of Founders Properties,

Moody's CPPI -- Pre and Post Bubble

Moody's CPPI -- Pre and Post Bubble

speak about what happened in commercial real estate (CRE) over the past seven years, one can only hope that he is correct in his analysis that, at least for CRE, the market is moving forward and recovering from the difficulties of the last few years. Mr. Deckas gave a superb analysis of the root causes of CRE bubble, using a combination of personal narrative and hard data to support his claim, while being very specific in the way he defined the crisis in the context of the greater economy, and the world in general. His labeling of the fluctuations in CRE market, as the worst in history, based on the criteria of loss of equity, disruption of the industry, and systemic implications on the greater economy quantifies his claim, and despite the pitfalls of making such sweeping assertions, seems to be reasonable. Despite Mr. Deckas’s sober analysis of the recent state of the CRE market, his presentation had a positive tone that included optimism about current opportunities, as well as providing a recap of his fascinating career in the industry.

Resume | Mr. Deckas’s credentials as a commercial investor date back to beginning of the industry, when financial professionals were just realizing the value of securitizing CRE. Mr. Deckas earned his BA from Northwestern University, and planned on continuing his education by earning an MBA until he received an offer that he could not refuse. A personal connection encouraged Mr. Deckas to contact Tom Crawley, who was an executive at Heitman Financial. Mr. Crawley’s pitch was simple, come work for me, and in two years I promise you will learn more than you ever could about CRE in academia. Mr. Deckas agreed, and part of his initial responsibilities included working on raising the capital needed to construct the Mall of America. After nine years moving up through the ranks at Heitman, Mr. Deckas left the firm and moved to OPUS, which at the time  was one of the nations largest real estate developers. His first role at OPUS was creating and growing OPUS financing operation. At OPUS, Mr. Deckas moved the focus of there customer targeting from institutional investors, which were flush with capital but also with a highly bureaucratic structure that impeded flexibility, to high net worth, private equity. It was here that Mr. Deckas found an untapped niche of the market, linking investors eager to increase returns, with securities that offered high upside, with (at the time) minimal risk. Mr. Deckas’s final move brought him to Founders Properties, were he serves as the President of Operations.

The resume that Mr. Deckas possesses, especially the quick ascension to the c-suite in every firm he worked for, provides credibility for his opinions and the analysis of the situation on a macro level. Raising capital for funds in the $100M-$200M dollar range places Mr. Deckas in a unique echelon of individuals who were present in the board rooms and at the job sites of developments that represented the center of the looming decline of the industry

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Development, Industry News, Real Estate Trends, Upcoming UST Events, UST Program News

The Week: March 5-13

Here is an aggregated list of the most influential stories that are shaping the conversation about the real estate industry…

From the Mortgage Bankers AssociationMBA Weekly Application Survey – The MBA index of mortgage applications has risen at an adjusted rate of 15.5% over the week prior. Furthermore, the seasonally adjusted four-week moving average of the market index is up 2.7%.

HouseholdNetWorthQ42010.nfscale

Fed Household Net Worth - from Calculated Risk

From Calculated RiskQ4 Flow of Funds: Household Real Estate assets off $6.3 trillion from peak A telling statistic that shows the current total worth of American’s homes has fallen to levels comparable to vales after the dot-com bubble. Looking into the period before this extraordinary market period, the last time housing equity equaled a similar percentage of the total GDP, a measure that controls for inflation as well as other economic changes, was 1997.

From the Bigger Pockets Blog | Real Estate by the Numbers (March 5-13)- As noted in the last post, a report from Finance & Commerce, new foreclosure filings are down across the country, and new Mortgage applications are up. This combination is good news, signaling more Americans consider their financial prospects positive enough to buy a home, and on the flip-side, less Americans are losing their investments…

From the Economist | Bricks and Slaughter– A unique editorial from the Economist, that poses serious questions about the conventional wisdom surrounding the single largest investment most citizens in rich world countries make, their homes. Looking at the issue from the perspectives of debt financing; and the intertwined nature of the economy, mortgage prices + availability, and real estates prices the create an accelerating effect on a home buyers ROI, the editors argue that serious modifications are still needed before the market can truly stabilize.

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Development, Real Estate Trends

Real Estate Insights: Russ Nelson and the Triple Bottom Line

speaker_RussNelson “My brand is defined by my involvement in community organizations and the service + value adding work that I engage in to improve the community that I am a part of. Being involved has benefited me a great deal in my own career, both in making connections and preserving relationships, as well as encouraging the development of all members of the community. Giving back to the community is essential, its who I am and part of my values, I strive to add value to every board I’m on, as it is my responsibility to do so.”

On Tuesday evening Russ Nelson, Principal and President of Nelson, Tietz & Hoye, stopped by UST to share some of the wisdom he has accumulated over his 30+ year career in commercial real estate. Russ’s lecture took the format of a question and answer session, in which the audience asked Mr. Nelson questions ranging from market valuations to predictions about the Vikings future. Throughout the presentation several things were clear regarding Mr. Nelsons’s perspective and experience:

Thanks to ECO BROOKLYN INC. – Green Design/Build Firm for the image

Thanks to ECO BROOKLYN INC. – Green Design/Build Firm for the image

    1. Mr. Nelson thoroughly enjoys his job, and displays a fatherly pride when speaking about the projects his firm has worked on.
    2. Mr. Nelson is a big picture guy, he possess an uncanny grasp on the market forces that underly each of his transactions, and the trends that form the overall ethos of commercial real estate.
    3. As Thoreau so aptly put it, “To know that we know what we know, and that we do not know what we do not know, that is true knowledge.” Mr. Nelson has a keen awareness of the expertise of others and is quick to give credit to those who have helped him along the way.
    4. Mr. Nelson is an exemplar of the idea of the “triple bottom line”.
    5.Russ has an amazing amount of energy and is committed to the development of the community, as shown by his seat on the board of 10 community organizations.
    Mr. Nelson’s career and achievements span far beyond the world of corporate real estate, and his attitude towards business and its role in the community serves as a sign of optimism, in a time when many executives are more interested in personal wealth and the stock price of their firm only. His accomplishments are a testament to the idea that success can be measured across a broad range of categories, and by any audit method, he has enjoyed a great deal of professional and personal triumphs.