Seattle Times article on November 29th

by David R. Black, CEO NAI Black

While the retail market in much of the country has taken a black eye, Spokane has faired far better.

Spokane County total sales dropped only 7.7% in the first quarter of 2009, compared to King County which dropped 15.3%. Rents, however, are all over the board and so are vacancy rates.

Most of the retail deals that are getting done are with medical or dental entities and restaurants. Most national retailers scaled back store openings for 2009-2010 and many are attempting to re-negotiate leases at lower rates, while extending their lease term.

A great example of retail prosperity in Spokane is the new North Town Square at the corner of Wellesley and Division, across from North Town Mall. This 71,000 square foot “Lifestyle Center” is anchored by the first Red Lobster in Spokane, a restaurant that is never lacking for patrons. North Town Square also has a Starbucks, Ulta Beauty, DSW shoes, STCU, Bajio Mexican Grill, Honey Baked Hams and Dress Barn.

Another outstanding project is Vandervert’s Village Centre Cinemas in the West Plains. Village Center, opening this month, is a 33,000 square foot, 10-screen theater complex just east of the city of Airway Heights. Vandervert also has plans to build a $7.2 million dollar hotel nearby.

There are areas of Spokane that remain very stable for retail. For example, the South Hill boasts a 1.38% vacancy rate and rents in the $20/SF NNN range for small shops.

We hope that in 2010, store sales for retailers will rebound, and retailing as well as brokers and developers of retail, can look to the future with optimism.

Investment real estate owners will be happier if they do this analysis
By Colin Conway
SPECIAL TO THE JOURNAL OF BUSINESS

The two primary goals of investment real estate owners should be to protect their assets and increase net operating income. If you plan to select a property-management company to help you achieve those goals, and to handle the day-to-day oversight of your property or properties, there are some questions that would be good for you to consider.
*What is your plan for the property? Whether you plan to hold your asset long term or to sell it within a couple of years might impact your choice of management companies. You might change your goal, of course, but talk to the prospective company about how it can help you reach your current objective. Prepping an asset for sale or managing it long term aren’t mutually exclusive. However, a strategy should be discussed and steps taken to ensure you have the best support for your plan. Managing day to day isn’t the same as managing with a vision.
*Does the size of the property-management company matter? I don’t believe the size of the company makes a difference in the quality of service. Small or large shops can provide quality management. However, if your current or future group of assets extends beyond the local geographical area, you might want to consider a larger company that has market coverage matching your portfolio.
*What is the specialty of your prospective management company? Each type of asset will have its specific needs, and not all companies specialize in the type of property you own. Some companies can provide a full-service menu of management services, but others might not. For example, a company might provide exceptional service in multifamily property management, but be outside of its area of expertise in handling a retail strip center. Ask for a list of similar properties that your prospective management company is currently overseeing and take a look at them.
*What level of involvement do you want? If you desire minimal involvement in decision making, make that clear to your prospective management company; similarly, if you want to be hands on, make that known as well. Decide early on how much involvement you want. Your management company should be able to tailor an arrangement that fits your preferences. This will help your relationship get off on the right foot and, hopefully, continue to build for years to come.
*How much decision-making power will you give the management company? Property managers make decisions daily to help support your goals. There usually is a cost to those decisions. You can limit or expand the property manager’s ability to respond by defining a maximum dollar amount per expenditure. Make sure to define this limit in the property-management agreement.
*How does the management company handle after-hours emergencies? Hiring a management company means you should get 24-hour coverage for your property. If your property manager goes on vacation, how does the response get covered? What happens on evenings, weekends, and holidays? Ask the prospective company how it responds to after-hours emergencies.
*Who will manage your asset? Before selecting a property-management company, find out who will be assigned to your property. You’ll work directly with a property manager, so take the time to interview that person. Don’t just look for technical knowledge, but find out if you like how that person responds to you and your concerns. If you like the company, but didn’t connect with its proposed property manager, ask if you can work with someone else. You’ll want to find someone you enjoy working with so you can build a long-term business relationship.
*Ask for references on the property manager as well. More than likely these references will be clients who are highly satisfied with the property manager, but take the time to talk to them, anyway. Find out why that particular client enjoys working with that manager. Researching references could provide you with insight such as how the manager responded to a real emergency situation, cut expenses, or increased occupancy.
Colin Conway is a commercial property manager and sales and leasing agent with NAI Black, of Spokane.

Researching references could provide you with some valuable insight.

The landscape of real estate investing has done a dramatic about face. Investment real estate goes through normal cycles of expansion and contraction like the rest of the economy but the cycle we are currently in has swung as far to one side of the equation as I have ever seen the market shift. Just a couple of years ago, a study by one the nation’s largest Commercial Real Estate companies determined that there were about twenty buyers for each investment property for sale in the United States. Today I am going to guess that there are twenty investment properties for sale for each investor in the market place!

So where have all the buyers gone? The first part of that answer is that many former buyers are out of the market due to tough new lending requirements by the banks, or in some cases a lack of any financing options for investment real estate purchases. If you are fortunate enough to meet the today’s credit requirements of the lenders, you need to be prepared to put 30% to 40% cash down to secure financing for investment real estate. These requirements have greatly reduced the pool of buyers active in the market place.

Secondly, investors’ return requirements have gone up. From talking with appraisers and real estate brokers, the consensus is that cap rates have gone up one hundred basis points or more over the last year and that number is still rising. I was in Seattle last week and what I heard was that cap rates for quality commercial investment properties are around 8%. Usually Spokane cap rates run one percent or more higher than those seen in the Seattle market. This would suggest cap rates here need to be 9% or more to attract buyers. Therefore, sellers, unless they are highly motivated to sell, will need to adjust their expectations and corresponding asking prices downward to attract buyers. It will probably take some time for most sellers to adjust to these new economics.

One segment of the real estate market that is quickly adjusting to the slow down in our economy is developers and investors who hold land with underlying debt. A lot of land has come on the market in the last six months and there is more coming. We are starting to see dramatic price adjustments from very motivated sellers who need to get relief from the debt on their land holdings. For those investors with cash and patience there will be some great land buying opportunities available this year.

I believe we are headed toward a new and healthier real estate investing paradigm. The shift will be slow and for some very painful but in the long run we are going to be ahead. So research the new financing options and sharpen your pencils. Real estate will continue to be a great investment for those of us who adjust to the changes before us.

Jeff K. Johnson SIOR CCIM
President

Capitalization rates reflect the degree of risk associated with an investment. Net operating income divided by the capitalization rate equals value.

Beginning in 2008, and carrying over into 2009, market conditions have led to a noticeable increase in capitalization rates. These trends are a function of increased risk perceived by investors and more stringent lending conditions implemented by financial institutions.
As will be shown on the following pages, based various sources, capitalization rates have increase from about 50 to 150 basis points during the past 12 to 15 months. The result is that property values have declined commensurately.
The upward trends in capitalization rates are evident from several different perspectives:

1. The most common method for analyzing capitalization rate from a financial position is the Band of Investment Analysis.

Also known as the mortgage equity analysis, this technique divides the net income between debt and equity positions. Available financing and required investor equity dividend rates are the components of this analysis. Current loan terms would be in a range of:

Mortgage Ratio: 65%
Amortization Period: 25 years
Mortgage Interest Rate: 6.5%
Mortgage Constant: 0.0810
Equity Dividend: 0.0800


These terms are used in the mortgage equity calculation, which is presented below:


BAND OF INVESTMENT TECHNIQUE
Component % X Rate = Weighted Average
Debt 65% X 0.0810 = .0527
Equity 35% X 0.0800 = .0280
.0807
Indicated Rate 8.1%


A year ago rates would have been more similar to:

Mortgage Ratio: 75%
Amortization Period: 25 years
Mortgage Interest Rate: 6.0%
Mortgage Constant: 0.0773
Equity Dividend: 0.0700


Using these terms in the mortgage equity calculation, the indicated capitalization rate is 50 basis points higher:


BAND OF INVESTMENT TECHNIQUE
Component % X Rate = Weighted Average
Debt 75% X 0.0773 = .0580
Equity 25% X 0.0700 = .0175
.0755
Indicated Rate 7.6%


This analysis shows that even a slight change in the interest rate, or loan to value ratio, places upward pressure on the capitalization rate.


2. Comments from brokers in late 2008 and early 2009 indicate rates have increased about 100 basis points in the past 12 months, meaning a property that once traded at a 7.0% cap rate would now sell for 8.0%.

One broker with Capital Pacific commented in March 2009 that rates for triple net leased real estate would likely be in a range of about 7.5 to 8.5%.

Another retail broker, Kevin Hemstreet, sold two triple net properties in August and September 2008 at cap rates of 6.6% and 6.9%, felt that cap rates would be between 7.75 and 8.0% today.


3. Korpacz Investor Survey, is a national survey of real estate investors and portfolio managers which shows a similar trend. The survey results pertaining to the National Net Lease market from the 1st Quarter 2009 are summarized below:

NATIONAL NET LEASE MARKET
Cap Rate Range Avg. Cap Rate
1st Quarter 2009 6.0 to 10.0% 8.58%
4th Quarter 2008 6.0 to 10.0% 7.85%
3rd Quarter 2008 6.0 to 10.0% 7.65%
2nd Quarter 2008 6.0 to 10.0% 7.63%
1st Quarter 2008 6.0 to 10.0% 7.63%
Source: Korpacz, 1st Quarter 2009 Investor Survey

This data reveals that average capitalization rates for the National Net Lease market have increased about 95 basis points over the past year.



4. Regional net lease sales also provide strong evidence of upward trends. Investor purchases of fast food restaurant buildings with triple net leases are charted below.


TRIPLE NET LEASE SALES (1/08 TO 1/09)

Sale Year Cap
Date Tenant City State NRA Built Sale Price PPSF Rate
1/22/08 Carl's Jr McMinnville OR 2,657 2007 $1,820,000 $685 6.0%
2/15/08 Izzy's Salem OR 5,154 1982 $1,750,000 $340 5.0%
3/3/08 Starbucks Syracuse UT 1,750 2007 $1,300,000 $743 6.2%
4/4/08 Applebee's Pasco WA 5,415 2005 $2,625,000 $485 6.9%
4/24/08 Jack in the Box Grants Pass OR 2,662 2006 $2,120,000 $796 6.2%
5/22/08 KFC/Taco Bell Port Angeles WA 3,200 1990 $1,335,000 $417 6.0%
6/3/08 Jack in the Box Vancouver WA 2,654 2007 $1,215,000 $458 5.6%
7/23/08 El Pollo Loco Vancouver WA 2,844 2008 $2,600,000 $914 6.7%
8/22/08 Jack in the Box Klamath Falls OR 3,000 2007 $2,400,000 $800 6.5%
9/23/08 Arby's Grants Pass OR 2,700 2008 $2,100,000 $778 7.1%
12/1/08 Shari's The Dalles OR 4,950 2008 $1,800,000 $364 7.7%
1/29/09 Taco Johns Kennewick WA 1,768 1981 $857,000 $485 7.3%
Source: PGP Valuation/Capital Pacific

On the following page, the above data is plotted into a regression analysis, which clearly shows the upward trend in cap rates.


Based on this data, as of about one year ago, capitalization rates were about 5.75% and today would be about 7.5%.

5. Impact on Value The relationship between capitalization rates and value is inverse and can be significant because capitalization rates are a highly sensitive input into the calculation of value. Therefore, a slight increase in capitalization rates can have a dramatic downward effect on value.

For example, if a property generating $100,000/year in NOI was purchased early 2008 at a 6.5% capitalization rate, the sale price would have been about $1,540,000 ($100,000 / 0.065). Today, at a capitalization rate of 7.5%, the value would be about $1,330,000 ($100,000 / 0.075). That suggests an erosion in value of $200,000, or about 13% ($210,000 / $1,540,000).

6. Looking ahead investors surveyed in the 1st Quarter 2009 Korpacz Investor Survey said they expect rates to increase another 50 basis points over the next 6 months. Again, these upward increases in cap rates are tied to economic conditions and more stringent lending requirements.

Reid Erickson
PGP Valuation Inc.
206.965.1106
Reid.Erickson@pgpinc.com

My friend Dick stopped by my house last week after work to chat. Dick shared with me that he had just negotiated a lease with a law firm to take space in an office building that he owned. As a part of the lease agreement, Dick was to provide the law firm with tenant improvements that were going to cost $63,000. With the current banking turmoil Dick was reluctant to sign the lease with the law firm until he knew that he could borrow the money for the tenant improvements. So with the lease in hand signed by the law firm, Dick went down to the local bank that he had done business with for many years to request a loan. After a review of Dick’s request the bank said that they would not be able to make him the loan. Dick was not happy about the situation to say the least.

Dick and I have been partners in real estate investments for almost thirty years, so I know Dick very well and know that he is bankable. Why would a local bank, without any current financial challenges, turn down a long term customer requesting a small tenant improvement loan? Dick said they did not even offer him any options. If the good customers of the banks can't get loans, who can? I was flabbergasted and suggested to Dick that he needed a new banker.

A couple of days later I received a phone call from Mark Cyrus, Business Development Officer in charge of SBA lending at Wells Fargo in Las Vegas. Mark was interested in sharing with our company the current benefits of the SBA loan program for small business owners who want to own real estate. As I mentioned in my last article, SBA loans are currently a great option for small business owners who need financing to purchase commercial real estate. I told Mark that we were up-to-date on the details of the SBA 504 and 7a loan programs. We just had Cliff Poffenroth and Joe Smith from Sterling Savings visit our office and give us an update on the current options available to owner-occupied commercial real estate purchasers under the SBA loan program and share with us Sterling's desire to make SBA loans.

What Mark Cyrus told me next really caught my attention. As he was sharing with me about Wells Fargo's SBA lending abilities he casually mentioned the SBA express loan program. Mark said the SBA express loan program provided loans as small as $25,000 that could be used for tenant improvements. So I asked Mark if a landlord could structure a lease so that a tenant could obtain an SBA program for their own tenant improvements? The answer is yes! So not only are SBA loans available for small business owners who want to own their own buildings, they are also available for small businesses that are leasing and need dollars for tenant improvements. This makes it advantageous for landlords to give tenants a reduced rent and have the tenants obtain their own tenant improvement financing through an SBA express loan.

So there are funds out there for tenant improvements! I will add a disclaimer here that I do not have all the details on the express loan program. Mark said the current interest rate for an SBA express loan is 5.5%. He also said the loan can be prepaid. Please give him a call if you would like more information on the SBA express loan program or other SBA loan programs. See below.

As an update to what I wrote last time the SBA is currently waiving some of the SBA loan fees to assist in stimulating the economy. We understand that the budget allowance for waiving fees will probably last until the end of this year, so do not wait around too long if you want to take advantage of this opportunity.

If you need more information on SBA financing, two lenders who specialize in these loans are:

Mark Cyrus of Wells Fargo Bank phone 702-952-7635

Cliff Poffenroth of Sterling Savings phone 509-363-8175

There has never been a better time to borrow money and buy a building for your business. Give us a call and we will be happy to guide you through the process of finding a building that fits your business’ needs!