Credit Dislocation Hits Commercial Sector
Credit-market dislocation has impacted capitalization rates in the multifamily and office sectors, reports Reis Inc. Capitalization rates during late July and August dropped 30 basis points in the multifamily sector and 10 bp for office, according to Reis' latest report on credit market conditions. Late July into early August is when the commercial real estate investment market started feeling the full brunt of the credit market turbulence, in which lenders pulled back from the market, causing deals to be re-priced or cancelled altogether. The New York research firm further indicates that credit turbulence has caused a decline in investment activity and moderation in price appreciation.
San Fernando Valley Market Tightens
The industrial market has tightened in suburban Los Angeles' San Fernando Valley The region's vacancy rate remained steady at 2.9% at the end of 2006, despite more than 1.5 million sf of industrial space added to the area in the past year. At the end of 2006, average asking rents for industrial space in the region was $0.65/sf. However, the report expects the rates will continue to climb this year by as much as 8%.
Los Angeles Office Market Heating Up
The battle between supply and demand has turned up the heat on an already hot Los Angeles office investment market. Los Angeles has plenty of investors, but it's lacking in construction, developable land and property offerings. So far this year, properties are trading hands for an average of $337/sf, significantly higher than last year's total of $277/sf. Los Angeles' lack of office supply is not expected to improve anytime soon. Only 1.6 million sf of office space is under construction in the region.
L.A. Ranks 3rd Among Foreign Investors
Los Angeles ranked third among United States cities for foreign investment in commercial real estate, according to a survey from the Association of Foreign Investors in Real Estate. Los Angeles ranked behind New York and Washington, D.C., but was ahead of San Francisco and Seattle.
LA is Top Industrial Market for Landlords
Los Angeles County's industrial vacancy rate fell to 1.5% in Q4 of 2006, the lowest in the country. As a result, average industrial rents increased by nearly 9% to 60 cents/sf.
Prepayment Penalty Ruled Unenforceable
A federal court in Illinois has ruled that a prepayment penalty on a commercial mortgage was an unenforceable penalty, a decision that could have immense repercussions in the industry. The court determined that, in Illinois, the law of liquidated damages governs prepayment penalties. If those penalties are disproportionate to a reasonable estimate of actual losses, they may be deemed unenforceable. The court ruled, "a term fixing unreasonably large liquidated damages is unenforceable on public policy grounds as a penalty."
There's no exile on Main Street with urban village lifestyle centers
Shopping centers are evolving into "retail-laden town centers where visitors can do a lot more than just shop." Roughly 150 of these lifestyle centers are currently operating in the United States and their popularity has grown immensely in recent years. What exactly is a lifestyle center, you ask? Technically, it is defined as "an open-air shopping center that has a main street design." These urban shopping villages not only offer more entertainment offerings than a traditional mall, the village square atmosphere's emphasis on design and landscaping offers a sense of community. Entertainment options include an eclectic mix of upscale boutiques, restaurants, and theaters.
Hotel Occupancy Could Dip in 2007
Next year, Hotel occupancy is expected to grow at a 1.4 percent pace, but new supply is expected to increase by 2 percent next year, according to PKF Hospitality Research and Torto Wheaton Research. That would result in a dip in nationwide occupancy, following three straight years of growth. Hotel occupancy level is forecast to be a rather healthy 68 percent next year. While that's down slightly from the 68.4 percent projection for this year, it is well above the long-term average of 66.4 percent. And 24 out of 52 markets are expected to experience an increase in occupancy, despite the overall national decline.
CA Hotels Remain Popular Among Investors
California hotels remain a popular real estate investment, according to a survey by Atlas Hospitality Group. Investors spent $2.2 billion on 320 hotels last year, compared to $1.8 billion spent on 267 hotels in 2003. Several factors are driving up prices. The hospitality industry has been improving with the economy. Also, it's getting harder to build in desirable locations because hotel developers often are forced to compete with retail and condominium developers for sites. And construction costs are going up. Consequently, fewer hotels are being built.
Large Slug of Interest-Only Loans Coming Due
Rising mortgage rates could make it difficult for some loans originated at very low rates and with no amortization to refinance. Nearly $5 billion of non-amortizing loans with coupons of less than 5 percent come due this year, according to data from Realpoint. Another $10 billion comes due next year. Higher interest rates should be a sign that the economy has continued to improve, which would mean occupancies and rents would rise. But as Moody's pointed out, office buildings in some areas still have in-place rents that are higher than market rents. When leases in those buildings re-price, the properties will get hit with lower cash flow. |
