TEXAS' Q4 OFFICE PERFORMANCES VARY

SANTA ANA, CA (Grubb & Ellis) - The office markets in Dallas-Fort Worth and Houston struggled in fourth quarter 2009, while Austin and San Antonio showed some positive signs, according to Grubb & Ellis.

Dallas-Fort Worth ended 2009 with a total negative absorption of 941,499 sf, 265,402 sf of which was posted in the fourth quarter. Vacancy rose 30 basis points to 22.8 percent in the fourth quarter, its highest level in over four years. Overall asking rents declined $0.20 in the last quarter to $20.68 per sf across all property classes.

Houston posted 295,713 sf of negative absorption in fourth quarter 2009, bringing the annual absorption to negative 2.4 million sf. Overall vacancy increased 30 basis points to 16.4 percent and overall full-service asking rents decreased across all classes, falling $0.46 to $23.35.

The office market looked a bit better in Austin, where 129,885 sf of positive absorption was recorded in the fourth quarter. However, the capital still posted 189,280 sf of negative absorption for the year. Overall vacancy declined by 20 basis points to 20.7 percent during the quarter, but ended the year 190 points higher than last year, reaching a five-year peak. Class-A and -B rents fell $0.21 and $0.10 in the fourth quarter, respectively, bringing Class-A asking rents to $28.83 and Class-B asking rents to $21.17.

Positive postings continued in San Antonio's office leasing market, where fourth quarter 2009 wrapped up with 212,000 sf of positive absorption. However, the city's annual absorption remained in the red at negative 57,221 sf. Vacancy rates dropped 90 basis points to 18.2 percent during the fourth quarter, but so did overall asking rents, falling $0.17 to $21.43 per sf. Class-A asking rents were the only ones to increase, rising $0.07 to $25.02.  

This is not a new concept and many shopping centers and strip centers have been taking advantage of their surplus of parking lot area.  You can see the space at Radford Hills being developed for a Pizza Inn.  Even uses like ATM's and Water receptacles that take up a smaller footprint have been popping up for years.

You can expect to see more of this type of development by established businesses looking to raise cash with surplus property.

- Erik Johnson

Parking Spaces for Sale: No Carryout Allowed.

By Steve McLinden

Well, that may not be quite the way Home Depot and other big-box retailers are marketing their excess parking spaces. But market them they are.

At last fall's ICSC Southeast Conference, in Atlanta, Home Depot identified portions of parking lots up for sale at hundreds of its stores, including 25 of its 90 Georgia sites.

Given the slowdown in new store development, Home Depot is "trying to fully utilize assets to their highest and best uses to add value to the portfolio," said Mike LaFerle, Home Depot's vice president of real estate. Other big-box chains that own their acreage are likely to be doing the same, if they have not begun doing so already, sources say.

When many big-box stores were first being built, municipalities tended to err on the side of requiring too many spaces, to accommodate those rare peak-volume days, LaFerle says. "So at some Home Depot stores, we knew we had more parking than we needed and that some areas of our parking lots were underutilized."

Today many of the same municipalities realize those original requirements were excessive. "I think they are now receptive to adding additional retailers to those spaces to provide value, jobs and tax revenue," said LaFerle, who dubs the parking space sale a "carve-out" program.

With the right complementary use, the carving out of new pad sites on a Home Depot property should drive additional sales for the store, LaFerle says. Further, he says, the program has an aesthetic upside, because it will replace chronically underused, mostly barren asphalt with new uses and landscaping. Among the most likely candidates to buy these sites are fast-food and fast-casual restaurants, banks, drugstore chains, medical clinics and automotive businesses.

The typical Home Depot store encompasses about 12 acres, although that can vary from municipality to municipality, LaFerle says. Home Depot store real estate is valued at roughly $500,000 per acre, according to Colin McGranahan, an analyst at Bernstein Research.

Brian Glaser, who heads Weitzman's Dallas-Fort Worth commercial retail division, has over the years marketed several outparcels on big-box lots for owners. "I think we will see more and more of that with these super-large block players who own their own real estate," he said. "If you've got 600 spaces, there's no problem with carving out an outparcel and making some money."

Though the strategy seems destined to become a trend among big-box stores, it is really nothing new, says Al Williams, a principal of Excess Space Retail Services. "Kmart owned a lot of their real estate and was able to create shareholder value by selling off underutilized spaces years ago," he said. "On a macro level, it's a very effective strategy. In fact, it is the retailers' fiduciary responsibility to maximize their real estate. And in this case, this is a way of driving what we call sleeping revenue."

BJ's Wholesale Club, Costco, Kohl's, Lowe's Home Improvement, Shopko, Target and Wal-Mart are among those that could follow the same strategy, or which have already done so. Most of them have more parking space than they need, and some bought the excess for investment purposes, Al Williams says. When Target demolished its small-format store on Cooper Street in Arlington, Texas, a decade ago to build a superstore, it was able to reconfigure its ample parking lot to add a Corner Bakery and a few in-line spaces.

The sort of property sale Home Depot has in mind is more than just a short-term strategy, says Doug Stephens, president of Unionville, Ontario-based Retail Prophet Consulting. "I think it could be a harbinger of the end of suburban power centers as we know them," Stephens said. "Home Depot and other big-box players are at the end of a 20-year run fueled by baby boomers, and boomers are hitting the age where they are downsizing." The next generation, called Gen-X, is 15 percent smaller, he notes. "So even if Gen-X went absolutely crazy and did a credit run-up, they still couldn't replace them."

The changed economy sees a number of large retail chains experimenting with smaller-format stores. In Home Depot's case, "the heyday of home renovation is over, and the chain finds itself overinvested in massive store sites that won't be able to produce at previous levels, even in a recovery," Stephens said. "When you start selling your parking lot, it is an admission that you are never going to bring that parking lot back to those peak days." Indeed, last year Home Depot announced that it had scaled back expansion plans and would add only 1.5 percent in retail square footage annually for the next several years.

Some retailers who had not considered this space-selling strategy in the past are considering it now because it creates a reduced basis in the property, says Kirk Williams, associate director for retail services at Cushman & Wakefield. "It's not just the outparcel user who can benefit from this - the right complementary user can make the big box's sales jump as well," he said. "But the thing is making sure you choose the right one. It is all about trying to get the most out of what you have, and you have worked hard to create this destination, so why not?"

Some center owners Cushman & Wakefield represent say they are open to community events being held in their parking lots. "We have seen it in regional malls, why not in large parking lots? That's just another way to drive activity," Kirk Williams said. Moreover, it has not been uncommon for big-box stores to lease their excess spaces over the years for a variety of uses ranging from commuter park-and-rides, car shows, concerts, farmer's markets and the like, he says. Retail consultant David Livingston, who heads DJL Research, says he has seen parking lots used for overnight recreational-vehicle parking, outdoor roller-hockey league games and camps for migrant workers.

Anchors in regional malls typically do not have the same latitude to sell or lease their excess parking spaces, even if they own their lots, because most mall anchor restrictive-use agreements do not allow it, says Glaser.

Big-box retailers that have occupied the same space for many years are much more apt to start parceling off pieces of their lots than newer stores, says Glaser. "Early on, they wanted maximum visibility," he said. "Most of their customers are local and have followed the same path since the inception of the store, and they know where it is without having to see it from the street."

Home Depot's carve-out sale applies to stores in the U.S., Canada and Mexico. The chain owns about 90 percent of its roughly 2,200 stores and is actively seeking end users for its parking lots, rather than developers. Consequently, it is handling the sale in-house, says LaFerle. Inquiries are being directed to Chuck Coker, director of real estate for Home Depot's northern region.

This could give a boost to retail development if this action were to pass. 

- Erik

A Fannie Mae for retail centers?

A federally chartered, privately funded loan guarantee program could help turn capital spigots back on for retail real estate, observers speculate. Such a program could mimic the apartment-financing program Fannie Mae ran successfully for 20 years.

"Whatever its shortcomings in the single-family mortgage business, Fannie Mae has developed a highly effective program," wrote George Gellman, chairman of The Benchmark Group of Cos., in a white paper for ICSC.

Fannie Mae works like this: A developer goes to a Fannie Mae-designated underwriter, usually a bank, which then recommends an appropriate mortgage to Fannie Mae. Fannie Mae guarantees that mortgage for an annual insurance premium the developer pays. The underwriter agrees to guarantee a portion of the loan and receives its own commensurate insurance premium from the developer.

"From an applied economics perspective, everyone's interest is aligned," Gellman wrote. "Once the mortgage has a government guarantee, it can be easily sold to insurance companies, pension funds or Wall Street." New legislation, Gellman speculates, would direct a government agency, most likely the FDIC, to launch the program.

Retail fallout continues in 2010

- Erik Johnson

RETAILING TODAY

Foot Locker Inc. will close 117 stores this month, most of them Foot Locker and Lady Foot Locker units in the U.S. In all, the company, which operates 3,600 stores in 21 countries, will have shut 190 stores during the fiscal year ended Jan. 30.

STATE LAND PRICES, SALES FALL

SAN ANTONIO (San Antonio Express-News) - Land prices fell 5 percent statewide last year for the first time since the early 1990s, according to data from the Real Estate Center at Texas A&M University.

The decline marked the end of an appreciation run that peeked in 2008, when the median price per acre was $2,359, 330 percent more than the median price in 1994.

Charles Gilliland, research economist with the Real Estate Center, estimates prices dropped to around $2,141 per acre last year and thinks prices will continue dropping in 2010.

"The sellers are anticipating a ‘V'-shaped recovery and that happy days are going to be here again," Gilliland said. "The potential buyers are saying, ‘Why should I pay this today when I can pick it up cheaper next year?'"

The number of sales fell 37 percent in 2009, as did the size of rural parcels sold. At an average of 70 acres, that's the smallest amount per sale on record and a sign that buyers can't afford to commit to bigger tracts.

However, while demand for recreational and subdivision property development has declined, there is still interest in irrigated cropland.

Gilliland said that superior, well-maintained parcels of land are what sell now, since buyers have plenty of choices.

"Buyers haven't disappeared, but they are resisting the prices," said Gilliland.

With $390M available for BRAC construction contracts it is possilbe to see more cities in Texas receiving the jobs. 

- Erik

BIG YEAR FOR BRAC CONSTRUCTION

SAN ANTONIO (San Antonio Express-News) - The Defense Base Closure and Realignment Commission's (BRAC) Joint Program Management Office has awarded a $26.4 million contract to Minneapolis-based Mortenson Construction for a 168,000-sf administration building at Fort Sam Houston.

This is the first major BRAC-related construction contract in 2010, but the management office plans to award 23 more contracts worth nearly $390 million this year. BRAC construction has brought $2 billion in construction contracts to San Antonio since 2007.

The administration building will serve as the headquarters for the Army's Installation Management Command. The command will bring about 2,000 civilian and military jobs to San Antonio, all to be housed in the new building and four historic buildings that surround the future headquarters.

Contracts for a $700,000 parking lot and a $6.7 million instructional facility at Fort Sam Houston were also awarded this week.

BRAC construction is still expected to be completed in 2011, bringing about 8,500 civilian and military positions to the area.

The end of September will bring over 20 facilities on line at San Antonio's military installations and, with it, job openings.

Feds want to Control the banks the health care industry the auto industry... what's next?

- Erik

Stocks tumble as Obama takes on banks

By Jamie Chisholm, Global Markets Commentator.

Published: January 21 2010 08:24 | Last updated: January 21 2010 17:56

17:35 GMT. Stocks dropped sharply on Thursday as President Barack Obamasaid he intended to prevent deposit-taking banks from undertaking any proprietary trading.

The president said he wanted to end the mentality of "too big to fail" in financial markets. "If the banks want a fight, it's a fight I'm willing to have", he added.

The FTSE Global Banking index fell 2.3 per cent and the S&P 500 plunged 1.8 per cent as investors feared the proposal would batter investment banking earnings and signalled the administration was getting increasingly tough with Wall Street.

Shares in Goldman Sachs, the investment banking bellwether reversed an initial 2 per cent advance on stronger-than-forecast headline earnings, to fall more than 5 per cent.

Mohamed El-Erian, chief executive of Pimco, told the Financial Times: "Today's announcement is part of the broader phenomenon of de-risking banks, and moving the sector more towards the ‘utilities' end of the operating spectrum.

"This reflects post-crisis governments reaction to both systemic risk and political realities. It comes at a time of increasing structural inconsistencies in advanced economies, including the conflict between the de-risking banks and expecting them to lend more to the struggling real economy.

"After a liquidity and stimulus driven rally, stocks are starting to reflect the realities of structural imbalances in both the economy and the policy responses."

The Dow Jones fell 212 points, its fourth consecutive day of triple-digit moves. The volatility saw the Vix index, known as Wall Street's fear gauge, jump 13 per cent to move back above 21.0.

Investors rushed into the perceived haven of government bonds. The yield on 10-year US benchmark Treasuries reversed an early rise to drop 4 basis points to 3.61 per cent, with a worse than expected US weekly initial claims number and a disappointingly soft Philly Fed business survey providing further support.

The dollar initially lurched higher to fresh 15-month peaks as the President's plans were revealed. However, it swiftly fell back into losses as traders baulked at the belligerent tone of Mr Obama's remarks and the impact his proposals may have on US financial sector competitiveness. The buck was later flat at $1.4101 versus the euro and fell 0.8 per cent to Y90.52 against the yen.

Commodities fell back when the dollar rose, but retained most of those declines even as the buck later lost ground. This put further pressure on resources stocks, already weak on concerns that China would take measures to cool its booming economy following faster than expected growth at the end of last year.

Gold fell 1.1 per cent to $1,099. Oil dropped 1.4 per cent to $76.65. The RJ/CRB index, a benchmark commodities basket, lost 0.5 per cent.

Wall Street's slide infected European bourses. Banks on the continent and in London, many of which have US operations, tumbled in sympathy with their transatlantic peers, pushing both the FTSE Eurofirst 300 and the FTSE 100 down by 1.6 per cent.

● Trading in Asia had been mixed, after investors appeared to have come to terms, for the time being, with the need for the Chinese authorities to slow economic activity a touch by applying the brakes. It was better that China was taking action now, rather than later and harder, which could derail the global economy's main engine of growth, was the prevailing view.

"Markets have been spooked by the prospect of tighter Chinese policy, but we think that early, gradual moves should help China stay on a sustainable growth path," said RBC Capital Markets.

The FTSE Asia-Pacific index fell 0.4 per cent, reflecting a 2 per cent slump by the Hang Seng in Hong Kong, as investors in the territory continued to sell bank and property stocks with China exposure. Shanghai was up 0.2 per cent, however. TheNikkei in Tokyo rebounded 1.2 per cent as the yen weakened and tech stocks rallied.

According to the forecast we should see some deals on CMBS.  With the banks cutting loose some of the distressed properties to clean up portfolios means that we should have some bargains for investors with plenty of upside for very good capitalization.

- Erik Johnson

Capital Market Recovery Will Take Time, but Could Start in 2010

Lenders Should (Finally) Begin Writing Off Their Distressed Assets, Allowing for Deployment of Sidelined Capital

The start of 2010 comes with fresh hopes in the realty capital markets, despite the continued impact of persistent recessionary burdens such as weak demand, falling values and constricted lending, as indicated by a string of commercial real estate industry outlooks. 

After a turbulent 18-24 months since the market peaked, 2009 marked a year where transaction volume nearly came to a standstill. There is hope, though, that the economic uncertainty that has sidelined investors will recede resulting in more acquisition opportunities in the coming year as banks and financial institutions get around to cleaning up their balance sheets and move more aggressively to dispose of commercial real estate loans and financially distressed real estate assets, according to NAI Global's annual outlook. 

Grubb & Ellis in its annual outlook is predicting an increase in sales volume of 20% to 30% over 2009 levels. However, prices, already down 40% from their peak in October 2007, may decline another 10% to 20% in order to meet buyers' expectations. 

Property and Portfolio Research (PPR), is expecting an even bigger increase in transaction activity in 2010, fueled by increased distress on banks from loan delinquencies and "droves" of capital, led initially by foreign investors, expected to target major U.S. metro areas. In its recent "2010 Predictions" report, the CoStar subsidiary noted that, in the past year, banks were given and successfully used latitude in valuations and modifications. Along with the TARP injection, this latitude helped preclude a flood of distress and transactions. 

PPR expects that trend to partially reverse in 2010 due to an expected increase in traditional payment distress and continued bank closures. 

"Unlike loans with LTV issues, extensions are not the solution for those that cannot cover their payments, and many will be foreclosed upon and sold," according to the PPR report. "Delinquencies will continue to trend higher in 2010 as NOIs head lower." 

Overall, the fact that banks likely will begin writing off their losses on distressed assets in 2010 means that the capital accumulating on the sidelines will start being deployed, and highly leveraged buildings, many without the capital necessary to attract tenants, will transfer to new ownership, removing what was a major impediment to recovery in the investment market, according Grubb & Ellis. 

The hopes have been fueled by the federal government's financial industry stimulus money to prop up banks, financial support for the acquisition of some legacy assets and from the fed's continued support of low interest rates. In essence, the fed's action have created a "dual-personality" investment play, according to the Real Estate Capital Institute (RECI), a Chicago-based volunteer-based research organization that tracks realty rates data for debt and equity yields. Investors are seeking relief on legacy debt assets; while also trolling for fresh new debt and equity assets based on more attractively reset prices. 

"Due to government intervention, the concept of distressed selling and buying did not materialize anywhere in North America," said Mark E. Rose, chairman and CEO of Avison Young in Chicago. "The U.S. government put money into the major banks, which in turn extended every loan they could to avoid realizing losses. The Securities and Exchange Commission watched from the sidelines and allowed the impacted lenders to postpone the inevitable." 

"2010 is shaping up to be more of the same, but with a slightly positive bias," Rose said. "Fundamentals have firmed, decision makers are getting their sea legs back and the second half of 2010 should produce favorable comparisons to 2009. This, in turn, will drive the confidence we have been sorely missing and allow for activity to return to more normal levels." 

The hopes may be realized but only with some sacrifice and a rethinking of investment criteria. 

"Before recovery can occur in 2010, private markets must solve their own problems, even if that means capitulation; the bid and ask spreads need to narrow; and we must see job growth in North America," Rose added. 

John Oharenko, RECI's advisory board member, said he believes this year we'll be bouncing along the market bottom as values continue to slide, but at less dramatic levels than last year. 

"Some of the greatest investment opportunities lie ahead, especially for those buyers willing to sacrifice current return and rely upon overall market momentum to improve during the next three to five years," Oharenko said. 

Until the hopes for the new year begin to become reality, however, RECI suggests that investors will continue to be frustrated in that more funds exist than there are placement opportunities in which to sink their money. The main reason is that buyers still expect lower prices but sellers don't want to realize heavy losses unless it is forced upon them.

According to analysis by CoStar Group there seems to be a steady stream of private and public money flowing into investment funds. During the past year, public funds (mainly REITs) raised more than $25 billion of equity for income properties funds. And, more than 650 new funds and companies raised more than $65 billion last year for real estate acquisitions. Most of the money raised (almost half) was being targeted for debt investments; about 25% was being earmarked for traditional commercial real estate properties; and the remainder for other types of real estate, including residential development and construction funding. 

"Senior debt purchases are preferred by many investors who prefer to avoid untangling equity positions often plagued by multiple capital tiers including preferred and mezzanine funds," Oharenko told CoStar Group. "Multifamily continues to be the 'darling' of the income-property capital markets as the agencies [such as Fannie Mae and Freddie Mac] provide ample liquidity into this sector. Otherwise, commercial real estate property fundings are mostly focused on refinancing and workouts." 

"The short leases of multifamily would be a pretty good hedge against inflation, particularly if you had long-term fixed rate debt in place through Fannie and Freddie," said Dr. Peter Linneman, NAI Global chief economist and principal at Linneman Associates. "Multifamily held up better in the recession until the capital markets fell apart, and as they fell apart, multifamily production fell to the lowest level in the last 60 years. That will pick up, though more slowly [than single-family] because it's more capital market dependent." 

"The recession has been over for six months and job growth is just months away, but the fact remains it will be impossible to predict what will happen next," Linneman said. "With significant tax, health care and regulatory proposals still in the offing, there is little clarity as to the ultimate outcomes or costs. We're concerned with commercial mortgage delinquency rates as they have been on the rise and could keep the commercial real estate industry in neutral for several more months." 

Aaron Gruen, principal of Gruen Gruen & Associates, a Chicago-based economics, strategic marketing and land use/public policy analysis firm, told CoStar Group that: "Real estate market demand for many markets and uses can be expected to be weak over the next few years. Foreclosures are rapidly rising. Transactions/development was limited in 2009 but should increase in 2010. Core assets have already been repriced and some liquidity from balance sheet lenders is returning, but underwriting standards will be much higher and therefore highly leveraged transactions will be constrained." 

"Historically, real estate was viewed as an income-producing asset that provides an inflation hedge and is not correlated strongly with equity securities," Gruen said. "It may be the pension and other groups investing in real estate funds will find this historic role appealing and focus on backing groups using relatively low level of leverage and buying well located core assets perceived to have less risk in the short term and better long-term potential to produce long-term cash flows. These kinds of properties are priced lower than has been the case for at least five years. But those that do not need to sell will hold on to them." 

"Perhaps, given the stress and adjustments required, it will simply take some more time for sellers to become motivated and buyers to raise and place capital," Gruen continued. "After all, [the] Great Recession has permanently altered consumer, investment, and governmental behavior. Both public and private sector interests which influence land use and economic development need to reset their models and practices to work out projects and plans affected by the Great Recession and to respond to the opportunities the economic recovery will present. But this will take time and not be easy." 

Amarillo and San Angelo combined to receive $6.2M in Recovery Act Tax Credits based on their ability to create more jobs.

- Erik

TEXAS CLEAN ENERGY PROJECTS RECEIVE TAX CREDITS

WASHINGTON (U.S. Department of Energy) - President Obama has awarded $2.3 billion in Recovery Act Advanced Energy Manufacturing Tax Credits for 183 clean energy manufacturing projects across the United States, including eight in Texas.

Texas tax credits include:

• $2.7 million for Alstom Inc. and Subsidiaries' Amarillo wind towers,
• $495,510 for Cooper Power Systems LLC's Nacogdoches smart grid,
• $1.4 million for Johnson Plate & Tower Fabrication Inc.'s Canutillo wind towers,
• $3.5 million for Martifer-Hirschfeld Energy Systems LLC's San Angelo wind towers,
• $450,000 for Ringdale Inc.'s Georgetown production expansion project,
• $4.2 million for Roller Bearing Co. of America Inc.'s Houston wind turbines,
• $4.3 million for Siemens Energy Inc.'s Hutchinson wind towers, and
• $51.5 million for Texas Instruments Incorporated's Richardson buildings.

The investment tax credits, worth up to 30 percent of each planned project, will leverage private capital for a total investment of nearly $7.7 billion in high-tech manufacturing in the United States.

The projects were selected through a merit review process, and the companies chosen could create more than 17,000 jobs nationally in some of the fastest growing parts of the economy.

The best and newest retail properties in Abilene are the only commercial real estate offerings that come near the Austin fourth quarter avg rental rates at $25.43 for their office space.  Abilene office space for full service facilities top out around $14 annually.

- Erik

AUSTIN OFFICE RENTAL RATES MOVE SLIGHTLY

AUSTIN (Austin Business Journal) - Oxford Commercial Inc. reports that office vacancy increases and price declines in Austin slowed marketwide in fourth quarter 2009.

Downtown had a slight rise in rental rates from the third quarter, increasing from $36.35 to $36.72 per sf.

South central was the only other area with rate increases, moving from an average of $19.06 per sf to $20.16 per sf in the fourth quarter.

In the far northwest region of the city, rental rates fell slightly to $25.57 from $26.06. Northeast rates declined from $18.32 to $17.27 and from $21.85 to $21.68 in the northwest region.

Round Rock office rates fell to $22.35 from $22.50, and rates in the southeast and west also decreased.

The fourth quarter average rental rate across all markets was $25.43, down from $25.58.

Overall vacancy rates increased in five areas of Austin last month, including downtown, where rates hit 17.3 percent, down from 16 percent in third quarter 2009. The northwest region increased from 14.5 percent to 15.9 percent, and south central's vacancy went from 6.3 percent to 7.1 percent. The southeast's rate increased slightly from 32.4 percent to 32.87 percent, and southwest rates increased from 21.95 percent to 22.2 percent.

In all areas, fourth quarter vacancy averaged 22.3 percent, up from 21.95 percent in the previous quarter.