Commerical Real Estate Deal
 

This Issue -- Tuesday, May 2, 2006

Commercial Real Estate Deal - Last Chance to Hunt for Bargains

by Andy and David Farbman

According to a recent report in the Wall Street Journal, office vacancy rates are at their lowest level in five years. The office market has bounced back from several tough years. That's one sign of good economic conditions. But economics is all about tradeoffs. A good economy and lower office vacancy rates mean less leverage for tenants. When vacancy rates were high and landlords skittish, tenants could flex their muscle and negotiate lower rents, physical plant improvements and more or better amenities.

While strong economic performance is a national trend, the reality here in the Midwest is slightly different. Economic growth is uneven across the country, and so are vacancy rates. In the Midwest, especially in our home market of Detroit, vacancy rates reflect the slower rate of economic growth. According to the National Real Estate Index, office absorption and rental rates in both downtown Detroit and the suburbs are still trending downward. The bottom line is that tenants can still leverage rent concessions and other perks, but it's unclear how long before office vacancy rates in metro Detroit will begin edging back toward the national average. This may be the best time to take advantage of what may be a narrowing window of opportunity to shop around for bargains in the Great Lakes region.


All the best,

Andy and David Farbman
 

Property Values - Taking Trophy Value into Account

Is a Ferrari really worth $250,000? Only because it's a Ferrari. In the real estate world, certain trophy buildings command a price premium because of location, size, historical/cultural significance and other factors. Some trophy buildings can command prices of over $1,000 per square foot based on these factors, nearly four times the national average for CBD office buildings. "Competition for trophy properties in markets like New York, Boston and San Francisco is heating up," said Andy Farbman of NAI Farbman. "Overseas investors are looking to stake their claim in the United States real estate market, and these are the prizes they are after." Increasing property values for trophy buildings means higher potential returns for REIT investors as these properties turn over. REITs that own landmark trophy properties could enjoy significant share price increases. One recent example is Boston Properties (NYSE:BXP), which revealed that it is close to selling two of its Manhattan office towers for $2 billion.
 

Building Trends - Detroit Region Going Green

The Kresge Foundation's new headquarters building in Troy is one of the region's highest-profile green office building projects in recent years. The $14 million building is made from 27 percent recycled materials and includes a geothermal HVAC system, a living roof and super-insulated walls. The site incorporates a 19th century farmhouse, barn and silo. "For a region often associated with smokestacks and SUVs, the green building push is a positive," said David Farbman of NAI Farbman. In addition to the new Kresge Foundation headquarters, Ford Motor Company completely overhauled its historic Rouge Center complex in 2004, incorporating green building technologies, showing that a green manufacturing facility is indeed possible. "Green building, along with the concentration of high tech and advanced manufacturing expertise in metro Detroit, goes a long way toward showcasing the region as being on the cutting edge," said Farbman.
 

Economics - Commercial Real Estate Activity on the Rise

Economic activity across the nation is continuing to expand, according to the Federal Reserve Board's semi-annual Beige Book report. Consumer spending and capital investments on the part of businesses are on the rise, as is employment. Residential real estate has slowed, but commercial real estate activity is picking up. Philadelphia, Minneapolis and San Francisco reported a surge in new development projects. Office vacancy rates have fallen in Boston, Philadelphia, St. Louis, Minneapolis and San Francisco, but results were mixed in New York. On the finance side, the Fed reports that credit delinquencies are becoming more common in parts of Michigan dominated by the auto industry. "Continued economic growth is manifesting itself in a number of new developments across the nation," said Michael Kalil of NAI Farbman. "Even in our home market of Detroit, we are seeing activity such as the $8.5 million expansion of Behr America's North American HQ."
 

Detroit Region - Detroit Bets on Hospitality Growth

In spite of automotive troubles, development continues in metropolitan Detroit, particularly in the areas of luxury residential lofts, hospitality and restaurants. The big headline is the new 17-story, $765 million MGM Grand Detroit Casino, currently the largest development underway in Detroit. Detroit's two other casinos, Greektown and MotorCity, are also expanding, but MGM is spending more on it's permanent casino than its two competitors combined. "Nationally speaking, the economics of the hospitality business are strong, with travel back up to pre 9/11 levels and solid GDP growth pushing up hotel occupancy rates," said Andy Gutman of NAI Farbman. In fact, the U.S. Bureau of Economic Analysis estimates that U.S. tourism output grew faster than GDP in 2005. PricewaterhouseCoopers projects rising occupancy rates in 2006, as well as an estimated 127,700 new hotel room starts in 2006, compared to 80,000 in 2004. "While Michigan is in last place in terms of economic output among states, the rest of the nation is enjoying solid growth. A rise in discretionary spending in the rest of the United States could could be harnessed by the region's tourism sector," said Gutman. Other major hotel developments are still in the works, including the Book Cadillac and Fort Shelby rehabilitations, which just received guaranteed loans worth $36.7 million from the U.S. Department of Housing and Urban Development.
 

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