Don Tishman's Real Estate Development and Investing Solutions

Yesterday, President Obama presented his budget as A New Era of Responsibility- Renewing America’s Promise.  This  clearly states that the President was being serious when he promised change throughout his campaign. This is Barack Obama plan to make more equal the distribution of wealth in America because the in last 30 years he thinks we have seen a rapid increase in economic inequality.  The $3.55 trillion spending plan included broad goals and few details but outlined how Obama plans to finance more spending in health care, energy, and education while increasing taxes on the top 5 percent of taxpayers, the oil and gas industry, and hedge-fund managers, among others. In short: Bye-bye, Reaganomics. The 134-page budget “is unprecedented in size, breathtaking in scope and sure to have a major impact on millions of Americans,” declares USA Today. The Wall Street Journal(WSJ) notes that the spending plan ”marks a significant change in nearly 30 years of governing philosophy.”

The Washington Post(WP) declares that “Obama’s agenda seeks to foster a redistribution of wealth, with the government working to narrow the growing gap between rich and poor.” In order to achieve this, though, Obama “laid down controversial markers on almost every major issue facing the country,” notes the Los Angeles Times(LAT). The WSJ predicts that the spending plan “is likely to herald one of the fiercest political fights Washington has seen in years.” Republicans were quick to raise their objections yesterday, and in what was clearly a “worrisome sign for the president,” as the New York Times (NYT)puts it, Sen. Olympia Snow of Maine, one of the few Republicans who voted for the stimulus package, declared that while the president’s goals are “worthy” she lamented that the budget “falls woefully short” on fiscal restraint and reducing the deficit.

The budget made it clear that making changes doesn’t come cheap. This year’s deficit would reach $1.75 trillion, which amounts to more than 12 percent of the Gross National Product(GNP)  and is the highest level since 1945. During WWII, the deficit was twice the GNP. The administration says it will begin to trim the deficit, partly by reducing the costs of fighting the Iraq war but also “by assuming a rate of economic growth by 2010 that private forecasters and even some White House advisers consider overly rosy,” points out the NYT. The White House was quick to counter criticism saying that it plans to raise taxes during a recession by pointing out that none of the increases would take effect until 2011. Still, some economists think that might be too early and could hurt the economy. And while the administration insists it plans to halve the deficit by the end of Obama’s first term, analysts said the budget doesn’t contain a plan to keep bringing it down in the long run.

“Affluent Americans head the president’s list of losers,” declares the WSJ. The WP specifies that Obama plans on ”levying nearly $1 trillion in new taxes over the next decade on the nation’s highest earners,” which includes singles earning $200,000 and $250,000 for families. These Americans would see an increase in their income-tax rates, a reduction in the number of itemized deductions they can take, and higher taxes on their investments. Hedge-fund managers in particular would experience a big hit since their earnings would be taxed as income rather than capital gains, which means their tax rate could reach as high as 39.6 percent from the current 15 percent. Many corporations would also see an increase, particularly those used to deferring U.S. taxation on profits that are kept abroad. Oil and gas companies would also be particularly hard-hit since they would lose a number of tax breaks.”

The NYT, LAT, and WP all have written an analysis (the NYT has two!) of the budget that come down to one simple message: This is very ambitious and very risky. The LAT points out that during the campaign and the first weeks of his presidency, “Obama often staked out positions so general or nuanced that voters often inferred that he agreed with them even though he had not quite said so. … That stage of his presidency appears to be ending.” Obama has now made it clear he’s ready to spend his political capital on his priorities. By proposing such a large and complex program, Obama “is now gambling with his own future and the success of his presidency,” declares the WP. The NYT agrees, and calls the budget “a political gamble of the first order.” Few presidents have ever tried something of this scope, and pulling it off “will require not just a bold vision but also leadership of a kind he has not yet been required to demonstrate,” adds the WP. While it’s clear that “the Reagan paradigm of conservative governance has taken a beating,” does that mean the country is “ready for government activism of the size and scope he has proposed?”

 Past President George W. Bush did exactly the opposite adamantly opposing anything that would take anything from the very rich. Where is America during this prolonged recession on this issue? 

Now the millions who voted for Barack Obama for President will have a better idea of what change means to their victorious candidate, President Obama. Do you want a redistribution of wealth to you?  Is this what changes means to only those under 35 supporters? Or are these proposed changes  the voices of a strong reaction to past  administrations working to maintain the status quo by protecting the affluent against change? The radical right has been very outspoken in their support of a rigid social order and their strong negative reaction to anything that strives improve a middle class, poor persons or unpopular groups financial or political position. Will the Obama’s supporters be as adamant in  endorsing his radical proposals? 

When FDR was elected during the Great Depression, we were a two group society- the rich and everyone else. FDR’s greatest contribution to the US was the creation of a viable middle class. The right wing reactionaries forcibly opposed every FDR proposal for change.  In spite of media opposition, the Congress stood behind FDR and passed FDR’s program.  Then the US Supreme Court declared unconstitutional many of FDR’s programs.

Will the Democratic Congress fight to pass Obama’s program? In the past few years, it is crystal clear that the most important programs for members of Congress are their reelections. How supportive of Obama’s changes are the Democratic leadership in Congress? What will constituents tell members of  Congress about Obama’s proposed changes?  What change proposals will Congress support? If Congress supports Obama’s proposals will the conservatively controlled US Supreme declare the new laws unconstitutional?  Stay tuned to this daily soap opera- called “Will new wealth be redistributed to you?”

Thanks to Daniel Politi of Slate for great research and his material in today’s blog.

Yesterday, the Obama administration announced that over $500 Billion will be used to buy foreclosures and loans in default. This action will finally have the stimulus being applied to the first cause of this economic recession- the collapse of the housing market.  This should substantially reduce the inventory of homes on the market. This reduction of inventory is the only way that  will stabilize the housing market.  As the demand for housing increases and the supply continues to fall, prices of homes will also increase.

Nevertheless, the Dow-Jones Index declined today. Leaders in the decline were banks-Bank of America and CitiBank. Probably, this Obama program will not have much impact on the economy until investors actually see these homes coming off the market in significant numbers.

In some of the markets we are in, we have seen a sudden burst of sales. I hope this continues and spreads to other cities. 

I just read a report on the office market in the Twin cities, Minneapolis/St. Paul, where the predictions are for a decrease in office space.  The prediction in the Twin cities in based on the number of total jobs that  are expected to be lost times the % that represents office jobs lost to total jobs lost in 2008. Each lost office job is said to be a loss of 200 square feet of office space.  The rate of office job loss in the Twin cities is close to being the same as the national rate for the loss of office jobs. Thus, this is probably typical of office markets throughout the U.S.

On the residential side, the housing starts for the end of 2008 were lowest ever recorded since this statistics were kept.  According to a recent study by Merrill-Lynch, when the housing inventory is less than a 8 months supply, housing sales will be strong and prices will start to increase. The demand for housing is continuous, when nothing is built, the supply will dwindle. This combined with the Obama program I mentioned earlier, the inventory is declining and will continue to do so.  Some day the”wizards” of Wall Street will recognize this.

After pouring over the various office rents in selected American cities yesterday, today I looked at a the EGi London office rental survey for the same period, third quarter of 2008. EGi provides comprehensive and up-to-date coverage  for the central London office market, As you will recall the highest U.S. office rents are in New York City, averaging $63.39 per sf. While the second highest rent is in San Francisco at $37 per sf , still 71% lower than New York. The average U.S. office rent is $24,32 per sf.

In London’s west side, according to CRellis,  current office rents are $194.50 (the pound valued  @$1.50). This is 300% higher than New York.  In London’s central business area, the rents are lower, the average is about $94 per sf. Only 49% higher than NYC.

While in Hamburg and Vienna office rents are about $30 per sf. While in Prague and Budapest, office rents are approximately $28 per sf.

Here are some other rents higher than NYC. In Paris, the average office rent is $91.84 per sf. The highest rent on the continent is in Moscow at $128.48 per sf.. 

You know that age old real estate maxim about location, location, and location. Here is a new twist on this real estate axion: Germany is the world leader in solar and wind technology.  The expenditures for these two alternative energy types are higher in Germany than anywhere else. The population of Germany is about 82 Million. Recently a German company built a manufacturing plant in New Mexico for solar panels. Most of the panels will be used in Germany. Why did they build the plant in the U.S.? To take advantage of the tax breaks that the U.S. gives this type of manufacturing .

A recent study by Merrill-Lynch on U.S. real estate investment trusts (REIT) is very revealing about the total rates of return and the capitalization rates (cap rates) of different types of U.S. income producing REIT’s.

The dividend yield in the REIT sector this week stood at 8.4%. The historic total rates of return  comparing REIT’s to the The S&P 500 are:

                          2004        2005       2006        2007      2008      2009 YTD

REIT’S                 31.5%        12.1%     35.9%     -16.8%    -38%        -21%

THE S&P 500       10.9%         4.9%      15.8%       5.5%      -37%       -7.2%

  Now let’s break this down by category of REIT’s for total rates of return

                                           2008                last 3 years            last 5 years     

Net Lease                           -23.2%                -7%                        25%           

Diversified                           -29.7%                8%                          3%

office                                    -35,3               -29%                       -8%

apartments                            -43.5%             =44%                      -6%

self-storage                          -17.2%              -14%                       44%

Manufactured Housing           -16.9%             -14%                     -17%

Shopping centers                     -43%               -37%                     -1%

Malls                                         -54%                -47%                    -15%

Industrial                                   -66.5%             -59%                    -44%

Health Care                                -20.4%               5%                        25%

Hotels                                         -67.6%              -69%                   -49%

With this less than  spectacular perfromance, how do you explain these cap rates as of Feb. 2009?

total REIT’s- 9%

Apartments-                    8.62%

Shopping Centers-           9.39

  Regional Malls –               9.07%  

  Offices –                           9.07%  

  Industrial  -                     10.2%    

  Self Storage-                    8.91%  

Manufactured Housing     8.23%                  

           MY THOUGHTS-  In the last 5 years Self-storage had the best performance which is probably explains the 8.91% cap rate.  Then  why does the manufactured housing REIT’s have a lower cap rate? While the self storage REIT’s made a 44% RATE OF RETURN  over the last 5 years, the manufactured housing REIT’s rate of return for the same period was -17%. Maybe the REIT investors think that manufactured housing is the wave of the future. We have worked on a huge manufactured housing program in the 1970′s. We learned that the cost of transportation and the additional structure added for lifting the manufactured module cancelled any cost savings, Despite the urgings of the popular magazine Dwell for more manufactured housing, we feel that manufactured housing must first eliminate its serious design limitations before manufactured housing has a more universal appeal. Large homebuilding companies have reduced the cost of home building by onsite fabrication of their homes. 

The other REIT with a lower rate cap rate than Self-storage REIT’s is apartment REIT’s. Apartment REIT’s total rate of return for the last three years was -44%, and for the last five years was -6%. Since does not compare favorably with Self-storage REIT’s return, why the lower cap rate?  During the Great Depression the last thing folks abandoned were their apartments. With the great amount of foreclosures going on, I would suggest that this Depression thinking is back in vogue. 

Since Hotels and Industrial REIT’s have the worsted rates of return their cap rates are the highest. As you look into your crystal balls, what use do you think will perform best in the next five or ten years? 

I would like to hear what you think and why!!!!

Recently, CoStar released these rental and sales  figures for some U.S. Office Markets. These are annualized figures as of Sept 30th, 2008: 

                                                                  aver. office      aver. Sales 

city                           ratio SP/rent              rent per sf       Price per sf

National Average       10.53                             $  24.32                $256

New York                   11.88                                 63.39                 $753

San Francisco               9.32                                 37.02                 $345  

Washington, D.C.          8.78                                 34.54                 $325

Los Angeles                  9.95                                 31.77                 $316

Chicago                        8.55                                  24.29                 $213

Houston                       6.32                                  23.59                  $149

Boston                        10.15                                 23.26                   $236

Philadelphia                 5.54                                  22.03                   $122

Dallas                          6.80                                  20.75                    $141

Atlanta                         8.14                                  20.52                    $167

Although this survey says the average National cap rate for Offices is 7%, you can see that there is a wild variation between the returns to the investor between these cities.  It is clear why a friend of mine  has bought over 30 office buildings in Houston and has not bought in San Francisco, New York, or Los Angeles.

I remember after President Reagan changed the rapid write off of commercial buildings from only new buildings to all buildings, the market for commercial buildings went crazy. Investors were buying buildings only half occupied for a 4% cap rate.  When I asked a buyer, why he bought  an old building that had a negative cash flow for a 4% cap rate, he said the office market will soon fill up and his rents will double. Most of these purchases ended up owned by the RTC after the bank or savings and loan that made these loans went out of business.  

We may be seeing these same occurrence in cities where recent cap rates for office buildings have been low.   A few blogs ago, I wrote about surveys of office markets that predict that office use will drop significantly in the next 5 years.  Many predict that interest rates for commercial buildings will increase significantly in the next few years. If this prediction comes to pass, when interest rates exceed cap rates for office buildings, the value of these office buildings will zoom down. Generally, for a building to have a positive cash flow, the rate of return for the building must be higher than the interest rate of the loan. 

An example: The BS office building is bought for $10,000,000. the cap rate is 5.1%. Thus,  NOI is $510,000 per year. The buyer, Mr. BS, who is a big customer of the Bank, asks for a 75% loan for 25 years. The banks lending rate for office buildings is 8%. Since the annual debt service, $690,034 exceed the NOI, the Bank has to turn their big customer down.

At the same I saw the CoStar office survey, I saw another by Cushman-Wakefield, that listed 5.1% as the average cap rate for Central Business District Office buildings in the U.S.

Although President Obama has been an underdog many times, but most of the time he has overcame the odds and been a winner. After Barack Obama was elected to the Illinois Senate, he ran for Congress against an incumbent Afro-American Congressman and got slaughtered. Then Obama decided to run for the Democratic nomination for U.S. Senate, Blair Hull, a multi-millionaire financial executive, was the overwhelming favorite to win the Democratic nomination until the Chicago Tribune ran a story about Hull being involved in  domestic abuse some 9 years before.

From the  New York Times of April 1, 2007: “As the 2004 Senate primary neared, it was clear that it was a contest between two people: the millionaire liberal, Hull, who was leading in the polls, and Obama, who had built an impressive grass-roots campaign. About a month before the vote, The Chicago Tribune revealed, near the bottom of a long profile of Hull, that during a divorce proceeding, Hull’s second wife filed for an order of protection. In the following few days, the matter erupted into a full-fledged scandal that ended up destroying the Hull campaign and handing Obama an easy primary victory. The Tribune reporter who wrote the original piece later acknowledged in print that the Obama camp had ‘worked aggressively behind the scenes’ to push the story.”

After Obama won the Democratic primary, he faced Republican Jack Ryan, another multi-millionaire who had also made his fortune working for Goldman-Sachs. On June 25th, 2004 after the same Chicago Tribune revealed prior sealed records of Ryan’s divorce, Jack Ryan withdrew from the Senate race. Although Obama publicly stated that these records should not be used in the campaign, Ryan said Obama was a hypocrite since Obama was responsible for the records being revealed by emails.

 When U.S. Senator Barack Obama announced for the Democratic nomination for President, few people outside of Michelle Obama and his principal adviser,David Axelrod, a former Chicago Tribune reporter,  thought he could win the nomination. His principal opponent was a well thought of U.S. Senator who also happened to be the wife of a former President who was very popular with the rank and file of the Democratic Party. Despite Obama’s very successful fund raising efforts based on Gov. Howard Dean’s successful 2004 fund raising, Obama lost in the primaries of New York, Texas, California, Pennsylvania, Ohio and New Hampshire.  States he had to win in November to be President.

After a very hard fought campaign, Obama won the Democratic nomination. His Republican opponent was a well liked Republican, white, Protestant, U.S. Senator, who was also a war hero. Obama was never a member of the U.S. armed forces.  Regardless of personal prejudices, as the economy floundered, people were scared. Obama offered a change. Although Bush and McCain were bitter rivals in the 2000 Republican primaries, Obama was able to tie McCain to Bush’s policies. People were desperate for the end of the recession. Bush through his Sec. of Treasury, tried hard to end the recession. He gave billions to Wall Street, not realizing how arrogant and greedy these financial “experts” were. Obama carried New York, Pennsylvania, Ohio, California, New Hampshire and Florida in winning by more than 8,500,000 votes.

After FDR was elected in 1932 during  the Great Depression, the Republicans opposed all his programs. As a result, the Democrats controlled Congress for the next 40 years. As the economy falters, Obama has beseeched Congress to come to the aid of the millions of American families who are hurting. Every Republican in the House voted against the Stimulus bill. All but three Republicans in the Senate voted against the Stimulus bill. Now that the bill is in conference committee the three Republicans Senators who voted for the bill, are making new demands. 

This country needs a two party system. If the Stimulus bill does not accomplish what is essential to our survival, the Republicans will get the blame. This could end their party that barely survived Watergate. 

Obama has proven he is a tough fighter. He will not stop until U.S. families are winners. I can not believe that the party that created the biggest debt in U.S. history does not want the U.S. to prosper and their Grand Old Party to prosper as well. If the GOP is not careful, their self imposed death wish will be carried out.

A recent 2009 investor survey showed a real conflict of opinion in determining  the cause of the huge slowdown in commercial real estate sales in 2008 and the projected continuance of this in 2009. Owners of commercial real estate blamed the lack of availability of financing, while investors blames the failure of owners to discount their properties more. What is the true cause?

There are clearly examples of distressed properties trading at prices substantially below their recent peaks. These include busted developments, properties purchased with short term financing that could not be refinanced with long term debt, and highly leveraged properties acquired at peak prices. These are exceptions. The default rate of commercial real estate loans are less than 1%. There has been little financing available for commercial real estate.  Here is a press release of today that affirms this

“U.S. Treasury Secretary Timothy Geithner will in four days unveil the administration’s financial-recovery plan, aiming to shore up the nation’s banks and restart lending to households and businesses.

Geither will make a speech Feb. 9 in Washington, a Treasury official said. Hours later, President Barack Obama will hold a news conference that will also address the stimulus package Democratic leaders predict will win congressional approval.

Officials plan a combination of approaches for their overhaul of the $700 billion Troubled Asset Relief Program. Along with further injections of taxpayer funds into major financial firms, the strategy is likely to include guarantees for illiquid assets on banks’ balance sheets and possibly some form of a so-called bad bank that would purchase toxic investments, people familiar with the matter have said.

“We will have to do more, substantially more, to fix this crisis,” Geithner said yesterday at the White House. “This program will be directed at supporting the flows of credit that are essential for our economy to begin growing again.”

The cost and availability of capital remain top concerns for investors as illiquidity in capital markets continues to drag down investment real estate sales. The shutdown of commercial mortgage backed securities  (CMBS) has taken a huge chunk of capital off the table for borrowers. Investors are waiting for the CMBS market to return. They may have to wait a long time. 

Moody’s is finally reviewing the ratings of $302.6 billion in CMBS conduit and fusion transactions initially rated (stupidly high)by them  in the 2006-2008 period, which represents 52% of the outstanding rated US CMBS market. The two main criteria Moody’s is focusing on are stressed cap rates and property cash flows. As both metrics have been getting pounded lately, it is unavoidable that the whole sector will get downgraded by one or many notches very soon. Moody’s hopes to get the review done by the end of Q1.

Now Moody’s waking up to the fact that CMBS is in trouble is not news, the fact that they will finally do something about it and likely downgrade as much as $300 billion of commercial mortgage-backed securities is actually huge, as large numbers of mutual funds, CDOs, CMOs, CLOs and other alphabet soups who have CMBS paper in inventory, have credit rating criteria that prohibit holding CMBS below certain credit ratings. A downgrade (or expectation thereof) could provoke a massive selling of all CMBS securities that would shake the entire mortgage backed market.

 The vulture funds that are complaining that sellers have not reduced their selling prices enough will now get there opportunities. Remember that fashionable quote about ” a Crisis is an opportunity”. 

Today apartments are the most sought after investment real estate. As proof,their capitalization rates are the lowest of commercial real estate. At the other end of this spectrum are shopping centers and hotels. Shopping centers, as I alluded to in a previous blog, have about a 12% vacancy rate and major tenants are going broke in huge numbers. Investment real estate with little demand includes both malls and lifestyle centers. 

In this economy, hotel guest room demand has turned negative resulting in significant declines in occupancy and revenue.

 You think you have troubles. In the fourth quarter of 2008, 367 new hotels with 43,845 rooms opened. The New York Times had a story a few weeks ago about how deserted these spanking,new hotels are. Even though many are offering rates at less than half of the rack rates, they are  still deserted. It is not hard to understand why a there has been a record number of hotel projects cancellations and postponements. Hotel project announcements are at an all time low.  

We have recently gone over the changes in office concepts with predictions of a substantial reduction in office demand due to changes in lifestyle.  

Although apartments are sought after investments, I think that apartment design will radically change. In 1962, when we first developed our apartment business plan, we offered an amenity package that provided a better return on investment (ROI) than than the apartment itself.  The ROI for the apartment was about 8%, while the ROI for a swimming pool complex was about 80% if we had 200 units in the apartment complex. Today the amenity package has gone from the sublime to the ridiculous:Theaters. business centers, indoor basketball, etc. 

Now we feel that there is a great unfilled need for apartments. Our Gen Y residents want to be where the action is. That is a mixed use development that also includes entertainment, recreation, and shopping. This is not an isolated suburban location, but rather an urban scene.  To be near a major park will provide much of  the needed recreation.  To be near a site for concerts will provide entertainment. The apartment community needs only then to provide limited entertainment. 

Because these apartment developments are in urban areas, the land prices and the construction costs will be considerably higher than suburban locations. We are competing with these suburban locations, so our pricing has to be competitive-  not more than 15% to 20% higher rents.  How do we do this? We need much smaller units. In England and most of the world, the size of a 2 bedroom apartment is half of what it is here. Land costs are much higher in these places. In a typical American apartment design, rooms have only one use, bedrooms for sleeping etc., dining areas for eating, and living rooms for entertaining.

If you had a studio apartment with a Murphy bed ( A bed stored in a wall when not in use), now the room has at least two uses. All your needed storage could be in drawers and cabinets that are built into the walls. You might be able to reduce a 1,200 square foot 2 bedroom unit into 600 square feet in an urban location. Now- when you go out your front door,  you can walk to whatever you want to do. 

What is your take on this?

I just received the 2009 National Apartment report from Marcus & Millichap. Great insights to apartments in the next few years. I hope you find this as fascinating as I do.

This from the summary: 

“Apartment fundamentals have been the most stable of any property sector throughout the downturn. The exceptions are metro areas with large supply imbalances. Excess housing supply, in tandem with another year of job losses, will further exacerbate rising vacancies and falling rents in these markets. Meanwhile, supply-constrained markets with solid economic drivers during the past few years entered the downturn with low vacancy and are well positioned to weather the economic storm. The return of millions of households to the rental market after temporary homeownership, the emergence of echo-boomer renters and a significant drop in new supply pipelines will ultimately lead to several years of strong rent growth. The challenge will be getting through 2009, which will require exceptional tenant retention, aggressive marketing at the property level and an unwavering focus on operations.” 

Then an opportunity:

“Despite a major drop in sales activity from the peak, apartment properties are trading and being financed, thanks largely to agency lenders and still-active local and regional commercial banks. The current apartment transaction climate, defined by various degrees of price declines, should be distinguished from the sector’s long-term intrinsic value. Properties that must be sold in today’s environment clearly require discounting to clear the market. On the other hand, owners without a compelling need for an immediate sale, the majority of whom report healthy operations, are positioned to hang on through the downturn. More than ever, a fresh look at each property’s hold, refinance or sell strategy is warranted, given the recent market volatility. There will be increased buying opportunities and distressed assets, more than any time in recent history, but investors should not generalize the overall condition of the apartment market as distressed. “

The report ranked 43 apartment markets in both 2009 and 2008.  

Marcus & Millichap presented the 2009 edition of the National Apartment Index (NAI). The NAI is a snapshot analysis that ranks 43 apartment markets based on a series of 12 month forward-looking supply and demand indicators. Markets are ranked based on their cumulative weighted-average scores for various indicators, including forecast employment change, vacancy, construction, housing affordability and rents. Taking into account both the predicted level and degree of change over the forecast period, the index is designed to indicate relative supply and demand conditions at the mar- ket level. Users of the index are cautioned to keep a few important points in mind. First, the NAI is not designed to predict the performance of individual investments. A carefully chosen investment in the bottom ranked apartment market could easily outperform a poor choice in the top-ranked market. Second, the apartment index is geared toward a short-term time horizon. Third, a market’s ranking in the index can improve from one year to the next, even if its fundamentals are weakening. This is especially evident during shifts in the real estate cycle. For example, a number of markets that rose in the index will record modest vacancy increases this year, but the forecast vacancy rate in many of these areas remains well below the national average. It is also important to note that because the NAI is an ordinal index, differences in specific rankings should not be misinterpreted. For example, the top-ranked market in the index is not necessarily twice as good as the second-ranked market, nor is it 10 times better than the \10th-ranked market. 

In the 2009 National Apartment Index (NAI) the order for the first ten in 2009 are San Francisco, San Diego, Washington, D.C., Los Angeles, Seattle, Oakland, San Jose, Orange County, New York City, and Portland.

In the 2008 NAI, the order for the first ten are: San Francisco, Seattle, New York City, San Jose, Oakland, Los Angeles, Orange County, San Diego, Washington, D.C., and Portland.

From 2008 to 2009, there were some big changes, San Diego and Washington, D.C. jumped six rankings, while New York City dropped 3 rankings. In the list of 43 markets, some Florida cities were a disaster: West Palm Beach, Fl. dropped 15 positions, Tampa dropped 14, and Fort Lauderdale dropped 10 rankings. In Arizona, Phoenix dropped 12 positions , while Tucson dropped 13.  Milwaukee and Minneapolis each jumped 14 positions.  You can download this 60 page report at http://www.tcg-mm.com/marketresearch.aspx.

Financing

 Conduits, who were major multi-family lenders from 2004 to 2007,  are not making any commercial loans, this has had a very significant impact on capital flows into the investment market. Commercial banks and insurance companies have reduced their commercial loans. These lenders have increased their lending standards for commercial loans, despite that the default rate on commercial loans are less than 1%.  FNMA and Freddie Mac have about 36% of apartment loans. There delinquent apartment loans are less than 1%, compared to their single family loans which are a disaster.  

The % of home owners in this country has dropped adding 2.6 Million renter households.

Apartment rents in 2008 increased 1.8%. In 2009, rents are predicted to be flat. Vacancy rents in 2008 were 6.7%, in 2009 this is expected to rise to 7.7%.   

Rents are flat because of the 2,000,000 recent job losses and overbuilding in parts of the country.

In these difficult economic times, investors want a larger return. Cap rates for apartment sales are rising 50 to 150 points which translates to lower sales prices. 

Before we go to major design changes in Office design, a few additional comments on Retail. On Sunday, the New York Times had a story about Americans becoming disenchanted with Shopping Centers. The Times is a great paper, but even they are not perfect.  This story ignores the facts. For example, If you try to buy a new car, but you do not have the cash for the purchase price, and financing is not available, would you say that you do not buy this car because you do not like the  the brand you tried to buy. 

I just received a report from the International Council of Shopping Centers stating that 2008 shopping center sales in Europe had fallen dramatically from 2007 sales. The magazine Retailing Today just reported that two of the most successful retailers in 2008: Target and Best Buy are having major layoffs.  The problem is not with shopping centers but with the economic atmosphere  created  when we have 2,000,000 recent employment  layoffs. To intensify this horrid economic atmosphere,  another report states that several of the Fortune 100 corporations are predicting further layoffs of their  employees in 2009. Folks need disposal income to shop. With the uncertainty that many folks feel today about their financial futures, who knows what is disposable income?

OFFICE

A recent study by a Boston research group predicts that office demand will be off by 40% in the next five years.  Put simply, many employees do not use their offices five days a week. Because many are at their offices less than every day With this becoming more common, there is no need for a private office space for this person.  With all the new electronic devices constantly coming on the market,, you can do most anything at home that you can do at your office. This includes having access to servers and individual computers in various locations.  If you are merely using office space part time, others can this share the space with you.  If there are 10 employees in an office, and now these employees only share six offices instead of 10 individual office spaces , the required space can be reduced by 40%.   This means that the individual office layout needs will be drastically different.  These offices may require more electrical capacity.

 The Obama administration has pending legislation that will require all medical records to be electronically preserved and be electronically accessible.  Medical office buildings electrical circuits will have to be beefed up. A medical office buildings that provides the means to do this simply and inexpensively will have an advantage  over their competition in older medical buildings. This mandatory  electronic reporting  requirement will seeks to reduce  the health care givers administrative costs. 

Another change in design will have be efforts to reduce the pass through energy costs that tenants must pay. This can be alternative energy systems, delivering the heating and cooling in a different manner. under the floors, etc.   Accessibility to mass transit will reduce the users transportation costs.

A number of years ago when Los Angeles was planning their subway system, we were able to have a station included on our proposed site. With mass transportation being included in  transportation budget allocations, this can be a major consideration in site selection. 

What type of electrical devices do you think will be in use in the next 10 years?  It is important to find out as much as you can. You will have to equip your new building for the use of some of these devises to remain competitive.   In addition to mass transportation, how will users arrive at your building-bicycles, electrical cars, hydrogen cars, or maybe rocket ships? What should you make provisions for? What level of security should you offer? and how? Green buildings are consistently getting higher rents than their non-sustainable competitiors? What will you provide?  

There are changing times- you must consider the foregoing to be competitive with your competitors, but before this consideration- you will have to able to show these consumer friendly uses that you are going to provide to obtain debt financing  and equity investors. Nobody will provide capital to a building that is obsolete when built.