THE Commercial Real Estate Blog

Traditional Leasing Activity Is Different Again this Year

For years, traditional leasing activity in commercial properties followed a similar pattern: strong activity from mid-January through mid-April; a slowdown around tax time, followed by strong sales in May and June. By the Fourth of July weekend, business began its summer decline, which continued through mid-September, when business grew again until Thanksgiving and then entered a year-end decline in December.

 

Last year was an exception. After a weak first quarter, leasing and sales activity picked up, with sold gains through the summer. It weakened slightly in September only to see very strong activity in November and December.

 

Most observers thought that the real estate market was catching up to an economy that had come out of a recession. Typically, commercial property sees a positive gain 12-18 months after the economy leaves a recession. However, a similar pattern has been occurring in 2005. Most commercial brokerage companies across the country reported less than normal sales and leasing activity in the first quarter in all three sectors—office, retail, and industrial—but very strong second-quarter activity. Based on a poll of commercial firms, most expect a strong third quarter—the traditional slow summer months.

 

What has happened to change the long-standing cycle? Several factors may be involved. First, many large tenants saw that rental rates were beginning to climb by the end of the third quarter of 2004. Many believe that the reason for such strong 2004 fourth-quarter activity was that these firms made deals earlier than they traditionally did to secure better rental rate terms. This took a large chunk of deals that would have closed in the first quarter, and therefore created a slow start to the new year.

 

Another possible reason is that new technology tools such as CoStar and Loopnet have quickened the broker’s ability to provide necessary research and to streamline the initial tour process. This has allowed both tenants and brokers to tighten timelines when securing new space to less than six months from start to finish. Tenants looking to move by year end can now secure a space in the summer rather than in January or February to meet their move dates.

 

Tenants and brokers need to gauge if this trend will continue. Often the best deals arise in the traditional slow months of August and December. In the near future, February and September may become the best deal-making months.

How Higher Oil Prices could Effect Real Estate

With oil prices heading past $3.00 a gallon could such high prices create a fundamental change in where we live and do business.  I believe that a major shift could in fact occur in favor of cities and against the suburbs. This could create major pricing increases in terms of residential and commercial markets making urban markets much more attractive for long term investment while suburban markets most less desirable.

 

Cities that have a strong central downtown financial district with good mass transit could see the biggest boom. San Francisco for instance has seen their residential market gain over 25% in the last year. Its commercial market is almost as strong. Seattle another city with a strong downtown has seen increases in the high teens in both its residential and commercial sectors.   Cities such as Philadelphia that has experienced a fairly dramatic exodus out of its city over the last ten years has seen for the first time an increase in its population as well as over a 20% gain in its residential property values this year.

 

Most reasonably priced suburbs are being built further and further away from major downtown cities. These large track home developments are occurring in most cases without a similar expansion of existing freeways or mass transportation alternatives. This will create more congestive freeways along with a much higher price to get to and from their work because of gas increases. The less expensive home may become far less attractive if gas costs create too small of a difference to make it worthwhile to commute long distances every day.

 

Commercial properties in large urban markets should also fair much better than its suburban property counterparts. Suburban properties rely in almost all cases on the automobile to get workers to and from its locations. Even the lunch hour drive to a favorite restaurant instead of eating at the same local building deli may have to stop to save money on gas.

 

With a tank of gas heading to $50.00 this shift could come sooner than later all of which could cause major inflation pressure on homes, offices, employment costs cities while the suburbs could see a serious downturn in both values and services.  Hans Hansson. 8/22/05

SF Vacancy Reports

week of August 8th, 2005 Download SUBAug8.pdf Download VRAug8.pdf

Cash not Care

SF Supervisor Daly doesnt seem to care that his huge $64 million extraction from SOMA developers might be viewed as PAY TO PLAY...

Its a Jungle Out there

National Real Estate Investor Cover Story:
“Investors are all over the board on prices,” says Ray Torto, principal and chief strategist at Boston-based Torto Wheaton Research. “There are some deals we hear about that make us shake our heads.”  Amen brother.  Our necks are sore from shaking our heads so much.  Subscribe to the print edition of NRE Investor- its FREE and full of good well thought out articles.

Last Time Smart Money SOLD in '05...

(1906 San Francisco Earthquake and Fire)

Earthquakes, Interest Rates, terrorism, Chinese Yuan... external events can dramatically impact real estate market cycles.  The "froth" as the Fed would say is getting a bit rich in the currnet market for SF commercial real estate. We are seeing prices that defy basic financial fundamentals. We are seeing  Negative leverage on investment properties and high multiples on "owner / user" (businesses that buy a property and use it to operate their business) since credit is readily available for profitable businesses.  We aren't certain what event will trigger the correction, hopefully not a shaker like in 1905.  But fundamentally, we believe prices are unsustainable, so be "Smart Money" this time- SELL !

Great Block, Small Office Space

Just discovered this great little building off Union Square.  Asking Rent $1.50 psf/month...

Should you LEASE instead of BUY??

A recent client- a long time SF business who owns their 5,000 sq ft. bldg was looking to expand into a larger building.  We assessed their current needs and plans for growth and determined they needed at least 8,000 sq. ft.  Although they could easily afford a $3-$4 million building, the pickings were slim.  We advised this client to Lease office space until the For Sale market gets more rational.  We found a great deal in SOMA on 8,200 sq. ft. - Below $18 Fully Serviced.