NAI Farbman Commercial Real Estate Deal
 

This Issue -- Thursday, May 5, 2005

Commercial Real Estate Deal - Michigan's Stubborn Economy

by Andy and David Farbman

The Federal Reserve Bank publishes its Beige Book, an account of economic conditions in all 12 Fed districts, eight times a year. The latest Beige Book report, published April 20, shows that the national economy is expanding from late February to early April 2005, but that overall economic activity lagged in Michigan. On the commercial real estate front, the Fed reported a decline in office vacancy rates in New York, Richmond, St. Louis, Minneapolis, and San Francisco. New construction was described as " robust" in Cleveland, Atlanta, St. Louis, Dallas and San Francisco, but slow in Richmond. The commercial real estate market in Michigan was described as "very slow."

While on the surface, the Fed data appears gloomy for those of us in the Midwest, the other side of the coin is that now is a good time to commit to longer-term leases in markets like Chicago, Detroit and Milwaukee. The window is closing on low interest rates and the steady vacancy rates described by the Fed will, in time, bounce back, thus buoying asking prices. Just as many financial analysts advocate buying stocks when the market is down, thus picking up solid stocks when they are "on sale," with a slow commercial real estate market in the upper Midwest, it's a good time to look for solid value at a lower price-per-square foot cost.


All the best,

Andy and David Farbman
 

Finance - Industrial Re-Use a Trend To Watch in 2005

Brownfields are heating up in 2005. The first quarter saw a number of rehabilitation projects get off the ground in southeastern Michigan, thanks to innovative financing tools offered by the State of Michigan.

  • Strathmore Development Company is taking advantage of a $4.5 million tax credit to turn 6.4 acres of contaminated property in Ann Arbor's historic Lower Town district into a mix of commercial, residential and retail properties. The site was formerly retail and industrial uses. Total investment in the Lower Town development is approximately $92 million.
  • Detroit Diesel and Freightliner Group are investing $275 million to turn a 65-year old Redford Township manufacturing plant into a modern manufacturing mall. The plan calls for the demolition of antiquated buildings and construction of new ones. The company, part of DaimlerChrysler AG, received $13 million in brownfield redevelopment incentives to defray some of the development costs.

"Brownfield redevelopment offers a way to put unproductive, environmentally contaminated land parcels back into use with financing tools that defray higher-than-average redevelopment costs," said Andy Gutman of NAI Farbman. "Brownfield tax credits are an attractive way to finance projects in older, heavily-saturated communities. In fact, in many older communities, greenfields no longer exist, so brownfield redevelopment is the only way to get into the market."
 

Outlook - Much Hand-Wringing at CRE Conference

Real estate experts expressed a nervous mood at the mid-year meeting of the Counselors of Real Estate in Chicago, according to reports in The Wall Street Journal. Referring to too much liquidity in the world economy, real estate honcho Sam Zell said that income derived from real estate investments is destined to decline in the years ahead, leading him to advocate a buy-and-hold philosophy in proven markets. Co-panelist and rival Tony Downs, of the Brookings Institution, argued that interest rates or a Wall Street rally could drastically alter the real estate picture to the detriment of many investors. "What both Zell and Downs are saying is now really is not a good time to be out there investing heavily in speculative markets," said Andy Farbman of NAI Farbman. "It's definitely a time to be prudent by sticking to proven markets and mitigating as much risk as possible."
 

Employment Indicators - Jobs Picture Improving

Markets throughout the country are adding jobs, according to PNC Real Estate Finance. There are 3.1 million more jobs nationally than there were 22 months ago, but job growth has been "chunky," with strong gains in one month followed by weaker gains the next. Total payroll for the nation has finally surpassed in January what it was in March 2001. The Washington DC/Northern Virginia, Phoenix and Las Vegas markets saw the nation's strongest job growth. Locally, job growth has been negative in the Detroit metro area as a whole up to now, but a recent report from the University of Michigan points to modest growth in Oakland County in the months and years to come.
 

Office Market - Continued Strength in Office Segment

In our last report, we spoke of an "Office Renaissance." Subsequent developments seem to have vindicated our optimistic stance in this sector. The latest market research from PNC Real Estate Finance points to continued growth in the national office marketplace, with increased demand, a drop in vacancy rates, as well as stable and low rates of new office construction. Strength in the office segment is not necessarily leading to higher rents for landlords. According to PNC, rents appear to have flatlined nationally at an average of $20 per square foot. Central business districts seemed to fare the best, with strong-CBD markets like New York, Chicago, San Francisco and Boston making up four of the top five markets in terms of transactions. "Strong office markets command a premium," said Michael Kalil of NAI Farbman. "It may be appropriate for certain clients to look for space in marquee markets like Midtown Manhattan or the Loop in Chicago, but others may opt for something more affordable in suburban or second-tier markets."
 

Income - Keeping Tenants Engaged: It's All About Service

In spite of promising national news on the jobs and office fronts, we are not out of the woods in all markets. In many parts of the country, including Detroit, landlords do not have much leverage. To make the grade in an environment such as this, service can make all the difference. Higher-quality property management can keep tenants from walking across the street to save a few dollars. Doing the basics right: offering high-quality and dependable cleaning, maintenance and landscaping services, responding to maintenance issues in a timely manner, and dropping in from time to time for some face time with tenants to hear what's on their mind. Concierge service and other extras is a way to differentiate oneself in a highly competitive market as well. "Good property management is key to keeping tenants," said David Farbman of NAI Farbman. "Many high-quality office buildings are largely vacant simply because tenants are quickly frustrated by a lack of adequate services."
 

Global Trade - Slovakia Hailed as Golden Opportunity

With Slovakia's ascension to the European Union in 2004, development is accelerating in this former communist state. Already a new €700 million Peugeot auto factory is nearing completion in Trnava, Slovakia, 30 miles from the Slovak capital, Bratislava. The plant will employ 3,500 and will have an annual capacity of 300,000 units. A plentiful supply of skilled, educated, low-cost labor in Slovakia, along with the stability of full membership in the E.U, is enticing many foreign auto firms to invest. Other automakers, including Ford Motor Company are investing in Slovakia, thus transforming the nation into a modern automotive powerhouse. "The Western monopoly on the auto industry is fading when it comes to auto manufacturing," said David Farbman of NAI Farbman. "While places like Detroit, Tokyo, Turin and Stuttgart will continue to be command-and-control centers for the global auto industry, manufacturing is moving to lower-cost environments, such as Eastern Europe."
 

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