Transtar’s Weblog

I’ve spent time over the last several weeks reading through various reports provided by research firms on the fate of commercial real estate in 2008 and beyond. Most are very thorough and provide exceptionally detailed data on each asset class (Retail, Industrial, Multi-Family, Office, Land) as well as the anticipated growth of each of these asset class’ within the top geographic submarkets in this great country. Although quite informative, they take time to read and can be repetitive. In this post, I provide a brief summary of a Cliff Notes version of a very well written report. The report, Emerging Trends in Real Estate, 2008, was written by the Urban Land Institute and PricewaterhouseCoopers in late 2007.

Below you will find a few golden nuggets I gleaned from their report and would like to pass on to you:

The economy will dictate the returns, on whole, of commercial real estate in 2008. Jobs fill Commercial Real Estate as families fill homes. Of all the U.S. markets, major metropolitan Western cities will fair best in any economic condition. Seattle, San Francisco, Los Angeles, San Diego and Denver are considered to be 24/7 “Global Gateways” for the business trade and the population growth that these cities draw. These cities were among the top 10 most desirable markets to buy into according to the Emerging Trends survey.

The hottest asset classes within those key markets for 2008 include Multi-family housing and Industrial warehousing. Investors can’t get enough of them. Look for class B and C apartments that can be improved to attract higher than market rents from former homeowners being foreclosed back into the rental pool. They will also be less risky than Class A product in cities with a strong shadow rental market of high end condos and single family homes—like Las Vegas and Phoenix.

Be careful playing in 2^nd and 3^rd tier geographic markets as investor flight to quality leave these cities with fewer dollars chasing deals. Good for the buyer; but don’t leave yourself vulnerable to asset depreciation buying into cities tied to the economic strength of one employer or industry. Cities heavy in technology and education, such as San Jose and Austin, have higher prospects among the group.

The survey points toward avoiding rustbelt cities and has Detroit, Cleveland, Pittsburgh, Cincinnati and Columbus having the lowest prospects of improvement and highest risks associated with investment among those surveyed. If you have to be East of the Rockies, then NY,NY is the place to be—but we knew that already anyway…

Housing?—Fugidaboutit! More than $500 billion in Variable Rate Resets are scheduled for 2008—more than twice the amount last year. Foreclosures should be washed out by mid-’09 with the market coming back into balance then.

There’s the nickel tour of the report. Should you like to read it in its entirety, you may purchase it for less than $63 by following this link—–

http://www.uli.org/AM/Template.cfm?Section=bookstore&Template=Ecommerce/ProductDisplay.cfm&Productid=1681

You can contact Kevin at (949) 760-4014 or email kburger@transtar.com.

USA Today : September 26, 2007

Below is a commentary by Dick Miller:

What is happening in today’s real estate investment market? I get that question from my investors every week. The headlines in the newspapers give facts, but where are we heading? In a meeting this morning, I used the following analogy to explain the supply/demand curve that I see cresting in Southern California.

Consider a person that brings in an investor to buy an existing doughnut shop. He gets to keep everything over $1.00 per doughnut and business is booming. He keeps raising prices and people pay the increases. Each day, he runs out of doughnuts after the 100 he cooked are gone. Doughnutless unhappy customers come back the next day earlier than before and willing to pay a little more to receive one. Then, Oprah does a special on trans fats. Millions tune in and hear about the horrors of what doughnuts can do to a body.

The next day, the doughnut shop only sells 50 doughnuts. People still pay the $1.75 that they had become used to, but there are 50 unsold doughnuts at the end of the day. This happens day after day and the baker keeps making 100 per day (since that is his contract with his investor). Some customers come in and try to bargain. “Doughnuts used to cost $1.00 and you have so many to sell. Will you sell me one for $1.00.” The answer is NO, because if the shop-owner sold a doughnut for $1.00, he will make no money due to his contract with his investor.

After a time, there is a four year supply of doughnuts in the shop. Customers trickle in, but they increasingly are waiting for the price to come down. They don’t care about the shop owner or the investor partner. They will do without a doughnut until the price either comes down, or Oprah says that they are safe to eat. Then one day, the investor comes into the doughnut store. He demands a return on his money and all the owner has to offer is a truckload of unsold doughnuts. The investor takes them back to his office.

What do you think will happen next? Here’s a hint… the investor will not eat all the doughnuts. He will sell them for whatever he can. Where are we today in this scenario? Well, the lenders of real estate are the “investor” in my analogy.

The investor is loading his doughnuts into his truck and the shop owner is still trying to sell doughnuts for $1.75. No one is buying them. So, here is what everyone in the investment real estate market is trying to figure out… what will doughnuts be selling for in a few months or a year from now? $1.75? $1.00? Less than $1.00?

I’ve been in investment real estate for over 20 years and I don’t have the answer because I don’t have a crystal ball. I am sure of one thing. Doughnuts are not worth $1.75 when no one is buying them! Buy a bagel for $.60 and put some frosting on it. There are other things investors can do with their money and they are doing it.

USA Today : September 26, 2007

The following stories were in yesterday’s USA Today. California has 8 of the 10 most expensive real estate markets in the country and sales have dropped 20-40%. Prices have not come down. Sounds like really expensive doughnuts to me. I want to buy them from the investor in bulk for $.90 per doughnut. In the next six to twelve months, I think they will be available. Now, I just have to reduce the trans-fat in my diet!