Real Estate and Financial - News & Trends

Industry faces changes

NEW YORK — With demographic trends driving real estate strategy, the real estate industry faces opportunities and challenges as a result of an aging global population, rapid urbanization and new migration patterns, according to Global Demographics 2008: Shaping Real Estate’s Future, a publication from the Urban Land Institute. 

Findings from the report include:

The aging of the world’s population is arguably the single most dramatic demographic trend today, with three key trends emerging:

• In 2006, almost 500 million people worldwide were 65 and older.
• By 2030, individuals 65 and older are projected to increase to 1 billion — equaling one out of every eight of the earth’s inhabitants.
• The most rapid increases in the 65-and-older population are occurring in developing countries, which will see a jump of 140% by 2030.

Real estate implications:

• Retirement housing is the primary real estate beneficiary of global aging, with the U.S. senior housing industry set to benefit from the opportunity to produce new products.
• Rapid consolidation of senior housing operators will result in more professional and cost-effective management.
• Investor interest will continue to grow because economic cycles have little effect on dementia and nursing care facilities.
• There is increased demand for affordable senior housing and senior housing options in ethnic communities.

As of 2007, 3.3 billion people — half of the world’s population — live in urban areas.  With that number expected to increase to 60 % by 2030, five key trends are emerging:

• One billion people live in slums, with 90% of this population occurring in developing countries.
• At least 133 million city dwellers in the developing world lack durable housing.
• 20% of urban dwellers in emerging nations are overcrowded, with more than three people per bedroom.
• Only two-thirds of the world’s urban population has access to tap water, with only 46 % having access in their homes.
• More than 25 % of the world’s urban population lacks adequate sanitation.

Real estate implications include:

• Investing in infrastructure — whether new or established — is essential to the viability of long-term commercial real estate projects.
• Privatization of infrastructure through public/private partnerships with investment funds are becoming increasingly important, with notable examples in the United States, Spain, and France.
• Better land use controls should be implemented to prevent high-density, informal communities from developing and reduce outward urban sprawl because both trends present difficulties to residents in terms of infrastructure, safety, and lifestyle.
• The workforce is growing and creating increased demand for housing and retail.
• In stagnant or shrinking populations, new construction must be viewed as replacement properties — even if that entails older building demolition to maintain vacancy rates — as has occurred in continental Europe.
• Emerging markets can leap from traditional, organic models to contemporary multi-use projects and residential communities if ground level infrastructure is established.
• The lack of mortgage availability in the emerging market is the greatest limitation on new development.

Over the past 45 years, global migration grew by more than 150% to 200 million, with three key trends emerging:

• Migration has shifted from the traditional south to north pattern to a flow between developing countries.
• International migration has diversified beyond male laborers to include qualified professionals, students and female workers.
• Increasingly, migrants gravitate towards large, urban areas.

Real estate implications include:

• Expatriate professionals demand international-quality real estate, especially in the emerging markets.
• Migrants at all economic levels generate housing and retail demands.
• Foreign nationals provide a mobile group of accomplished construction project managers, who move from market to market to develop both infrastructure and commercial real estate.
• The estimated $318 billion in global remittances from immigrants to their families support residential and retail developments in their countries of origin.
• Immigrants provide a strong construction labor market.

For more information, see www.deloitte.com

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ABI rises slightly

WASHINGTON, D.C. — After sinking to its lowest level ever in March, indicating a rapid slowdown in billings at U.S. architecture firms, the Architecture Billings Index (ABI) rose slightly in April, according to the American Institute of Architects (AIA).

As a leading economic indicator of construction activity, the ABI shows an approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the April ABI rating was 45.5, up from the historic low mark of 39.7 in March (any score above 50 indicates an increase in billings). The inquiries for new projects score was 53.9.

Key April ABI highlights include regional averages: South (46.6), Northeast (41.6), Midwest (41.6), West (37.7). In addition, the sector index breakdown is: institutional (50.4), mixed practice (45.2) commercial / industrial (39.3) multi-family residential (33.5). The project inquiries index is 53.9. For more information, see www.aia.org

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Commercial real estate dims

WASHINGTON, D.C. – Although fundamentals are sound, activity in commercial real estate markets is expected to ease in the months ahead, according to a forward-looking index for the commercial real estate sectors published by the National Association of Realtors® (NAR).

The Commercial Leading Indicator for Brokerage Activity edged down 0.7% to an index of 119.0 in the first quarter from a downwardly revised reading of 119.9 in the fourth quarter, and is 0.8% below the first quarter of 2007 when it stood at 120.0.

This is the third consecutive quarterly dip since reaching a record of 120.5 in the second quarter of 2007. Before that, the index showed generally positive expansion from the middle of 2003; NAR’s track of the index dates back to 1990.

The quarterly decline results from falling employment in the sectors requiring office space, rising first-time unemployment claims, a lower rate of return as measured by NCREIF (National Council of Real Estate Investment Fiduciaries), and a falling NAREIT (National Association of Real Estate Investment Trust) price index. In addition, there was a modest decline in industrial production.

Realtors® members who specialize in office and industrial properties indicate in a separate attitudinal survey2 that they anticipate a much lower level of business activity in the upcoming quarters. For more information, see www.realtor.org

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Standard assesses vapor intrusion

WEST CONSHOHOKEN, Penna. – Vapor intrusion from contaminated soil and groundwater into structures can potentially create significant liability and have a material impact on property value. Because of this, accurately determining whether a property has vapor intrusion issues is a concern for property owners, prospective purchasers and environmental professionals conducting due diligence.

ASTM International’s Committee E50 on Environmental Assessment has approved standard E 2600, Practice for Assessment of Vapor Intrusion into Structures on Property Involved in Real Estate Transactions, which provides guidance for vapor intrusion testing.

The evaluation process, as described in E 2600, consists of four tiers. The first two screening tiers assess the potential for a vapor intrusion issue to exist, so that properties with a low risk can be screened out quickly and inexpensively. The third tier provides for more site-specific and comprehensive investigations if the potential for vapor intrusion cannot reasonably be eliminated at the Tier 1/Tier 2 levels while Tier 4 addresses mitigation alternatives. ASTM International standards can be purchased at www.astm.org

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Trends in corporate real estate

ATLANTA – The new face of corporate real estate will encompass competition for a smaller labor pool, worker-centric location decisions, and an emphasis on sustainability, according to a recent study by CoreNet Global.

These factors will mean an increasingly complex job for the real estate executives – as well as an increasingly important one. Specifically, CoreNet notes that real estate executives are moving from tacticians to ‘balcony’ level functions. They increasingly support the business, not real estate, and come from non-RE-specific parts of the corporation.

For more information, see www2.corenetglobal.org

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Data centers increasing

SAN FRANCISCO – Digital Realty Trust, Inc., owner and manager of corporate and Internet gateway datacenters, anticipates a significant increase in the number of datacenter projects being planned by U.S. corporations during the coming 12 months.

Key findings from the research study include:

• 86% of respondents in the 2008 study will definitely/probably expand their number of datacenters in the next 12 months, indicating an active phase of datacenter development during the second half of 2008 and first half of 2009.
• 45% of respondents plan to expand in three or more locations. This is an increase of nearly 20% over 2007 indicating that the scope of datacenter projects have increased along with the number of projects.
• Planned square footage required for an average expansion site rose 50% from 10,000 sq.ft. in 2007 to 15,000 sq.ft. in 2008 - another indication that the scope of datacenter projects have increased significantly in the past year.

Other findings from the research study include:

• Power usage of datacenter centers continued to grow, with a 12% increase in average kW use per rack in 2008 over the 2007 metrics.
• A higher percentage of companies reported that they expect to need the support of a partner for their datacenter projects. That metric increased 10% in 2008 (from 52% to 57%). Only 26% of companies are planning a "do-it-yourself" approach to their datacenter projects.
• Disaster recovery and Sarbanes-Oxley requirements were cited most frequently as key drivers for datacenter expansions. Power requirements, new applications, more physical space, connectivity needs and cooling requirements were also as among the key drivers.

Among companies that are planning datacenter expansions:

• 83% plan to expand physical space;
• 77% plan to expand power capabilities; and
• 76% plan to expand cooling capabilities.

For more information, see investor.digitalrealtytrust.com

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OSCRE welcomes new member

WASHINGTON, D.C — The Open Standards Consortium for Real Estate (OSCRE), North America’s standards development organization for the real property supply chain announced IWMS software developer AMTdirect as a new Associate member.

Having recently received SAS 70 Type II certification for their data centers and internal controls for information technology practices that exceed industry standards, once again AMTdirect is taking a leading role in evolving the real property industry to higher state of operational excellence by joining forces with other OSCRE members to establish interoperable data exchange standards that enable users of the standard to greatly minimize manual data entry, data re-entry, data scrubbing and customized systems integration. For more information, see www.oscre.org

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Real estate investment drops

WASHINGTON, D.C. – Commercial real estate vacancies are trending up modestly, while investment has dropped sharply in the wake of the credit crunch, according to a study by the National Association of Realtors® (NAR).

Investment in commercial real estate during the first four months of 2008 was $48.2 billion, down 69.5% from $157.8 billion during the same period in 2007 when the credit markets were functioning normally; those totals do not include transactions valued at less than $5 million or investments in the hospitality sector.

Office Market

With a growth in inventory, office vacancy rates are projected to increase to 13.7% in the fourth quarter of this year from 12.5 % in the fourth quarter of 2007. As a result, annual rent growth in the office sector is expected to be 3.0 % this year, following an 8.0 % jump in 2007.

Estimates for the second quarter show vacancies rising sharply in Phoenix and West Palm Beach, Fla., to nearly 20%, double the levels of a year ago. Other central business districts in Florida have shown notable increases. The housing market downturn is having a spillover effect on commercial real estate in some local areas.
Net absorption of office space in 57 markets tracked, which includes the leasing of new space coming on the market as well as space in existing properties, is likely to total 31.3 million sq.ft. this year, about half of the 60.0 million absorbed in 2007.

Office building transaction volume has dropped significantly. In the first four months of 2008, a total of only $18.5 billion in office buildings traded hands, compared with $95.0 billion during the same timeframe in 2007. The greatest decline was in suburban markets.

Industrial Market

Warehouse demand has fallen because of the economic slowdown, although the demand for light manufacturing space has risen slightly. Even so, overall vacancy rates in the industrial sector are forecast to rise to 9.9 % in the fourth quarter of this year, up from 9.4% in the same period of 2007. Annual rent growth should be 1.2% by the end of the year, down from 3.6% in the fourth quarter of 2007.

Markets in the West and Florida have been most impacted by the economic slowdown. Industrial markets with rising availability include Orlando, Fla.; Phoenix; Tampa, Fla.; and West Palm Beach.

Net absorption of industrial space in 58 markets tracked is estimated at 68.8 million square feet this year, down from 158.3 million in 2007. Most of the new industrial completions have been built-to-suit, leaving many obsolete or nearly obsolete structures on the market.

Secondary markets have become most attractive to institutional investors and users. Industrial transaction volume during the first four months of 2008 was $8.5 billion, down from $11.9 billion in same period of 2007. The biggest slowdown is in the mid-Atlantic and the Midwest.

Retail Market

Retail spending has been hurt by high oil prices with consumers throttling back on their spending habits, even in the retailing hotbed of Southern California. Vacancy rates in the retail sector will probably edge up to 9.3% in the fourth quarter from 9.2% in the fourth quarter of 2007. Average retail rent is expected to rise 1.3% in 2008, compared with a 2.9% gain last year. Net absorption of retail space in 53 tracked markets is projected to grow to 18.2 million sq.ft. in 2008 from 12.9 million last year.

Retail transaction volume during the first four months of 2008 totaled $7.5 billion, significantly below the $27.7 billion in the same period last year. Markets like Cincinnati and Detroit have seen a 100% decline in investment activity so far this year. Only Sacramento, Calif., is showing a gain, up 47%.

Foreign buyers are focused on retail strip centers in Southern California, Chicago, the Northeast, and the Southeast. Even so, strip center transaction volume is down 77% from a year ago.

Multifamily Market

The apartment rental market – multifamily housing – could see less demand during the second half of the year as some first-time home buyers jump off the fence and into the market. Multifamily vacancy rates are likely to rise to 5.7% in the fourth quarter from 4.8% in the fourth quarter of 2007. Average rent is forecast to rise 4.0% in 2008, up from a 3.1% increase last year. Multifamily net absorption is seen at 219,900 units in 59 tracked metro areas this year, up from 230,900 in 2007.

Transaction volume in the multifamily market so far this year is only $13.7 billion, compared with $23.2 billion in the first four months of 2007. Even so, some markets have seen increasing sales including San Francisco; San Jose, Calif.; Tampa; Portland, Ore.; and Raleigh, N.C. For more information, see www.realtor.org

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