Cassidy Turley: Dayton office market showing signs of life, more improvement needed

dayton office

by Dan Rafter

The first quarter of 2014 ended on a positive note for the Dayton, Ohio, market, according to the latest research from Cassidy Turley.

And this happened despite the best efforts of the federal government to slow growth in the Dayton area.

As Cassidy Turley researchers said, the government shutdown hurt Dayton. That’s because the public sector accounts for 10 percent of all local wages here.

“Dayton was able to survive the government shutdown, which stunted its economic recovery toward the end of 2013,” said James Flick, vice president of research and marketing for Cassidy Turley, in a written statement. “Moving forward, the positive momentum being generated in the national economy, as well as the local manufacturing and logistics industries, will hopefully re-energize the local and regional economic recovery.”

Dayton also suffered from stalled job growth and higher unemployment than the national average, with the area’s unemployment rate standing at 7.2 percent at the end of the first quarter of 2014.

Still, there was some good news in the Dayton-area office market. The first quarter ended on a positive note with 11,333 square feet of positive absorption in this sector. This caused the office vacancy rate in Dayton to fall to 25.3 percent. That’s still too high, but it is an improvement.

The East submarket, with 88,771 square feet of net absorption, led the way during the first quarter. The strongest markets in terms of class-A rent growth were the East, where rents rose 1.6 percent, and the South, where they jumped 1.4 percent.

The average gross asking rental rate for the overall Dayton office market stood at $14.38 a square foot at the end of the first quarter. The class-A rental rate, though, grew 1.4 percent when compared to the fourth quarter of 2013, increasing from $18.14 a square foot to $18.40 a square foot.

Cassidy Turley researchers, though, predict continued improvement for this office market. The company pointed to the news that CareSource is leasing the entire 150,000-square-foot former Workflow One building at 200 E. Monument Ave. The company will move 200 employees to the CBD starting in August.

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Lee & Associates’ Courtney: The grocers, restaurants keep flocking to Indianapolis

Whole Foods has been one of the most active grocers in the Indianapolis area.

Whole Foods has been one of the most active grocers in the Indianapolis area.

by Dan Rafter

People like to eat, whether the economy is soaring or struggling. Just look at Indianapolis.

Grocers and restaurateurs are announcing new shops in the city on a seemingly daily basis. And both are providing a boost to Indianapolis’ rebounding retail market.

The best news? The brokers working in this city say that the retail resurgence in Indianapolis — and especially the boom in grocers and new restaurants — is far from a short-lived trend.

Scot Courtney

Scot Courtney

“There was, years ago, a concern that Indianapolis was overbuilt from a grocery standpoint. But that was a long time ago,” said Scot Courtney, president of the Indianapolis office of Lee & Associates. “Ten years have come and gone since that was the case. In real estate terms, that’s an eternity. Now we’re getting newer concepts in Indianapolis that have never been present in the city. They’re looking at it as a good opportunity to expand their brands and reach. And the people here are ready for it. They’re looking for something different and better.”

It makes sense for grocers and restaurateurs to target Indianapolis for new locations. The city today features a vibrant downtown, one that is attracting new residents who want to live an urban lifestyle in which they can walk to restaurants, entertainment, parks and public transportation.

At the same time, Indianapolis has bounced back nicely from the economic downturn, Courtney said.

“We were hit a little hard in the downturn because we have a lot of businesses tied to finance and real estate. But we have recovered really well,” Courtney said. “We have a diversified economy. That gets overplayed, but in our case it is true. Our job growth has picked up. We are getting back to where it was before 2008. We have a very healthy economy today. We also have a low cost of living. A lot of our success comes down to a high qualif of life at a low cost of living.”

Courtney said that grocers such as Whole Foods are looking at new locations today in Indianapolis. Fresh Thyme Farmers Market, a grocery startup based in Phoenix, plans to open three stories in Indianapolis this summer. Courtney also says that the Kroger grocery chain is an active one in the city and its suburbs.

The restaurant market here is just as active, Courtney said.

“I wouldn’t say it’s an explosion, but it’s as close to one as you can get,” Courtney said. “This is something that’s happened in the last five years. In the wake of the recession, restaurant activity was minimal. Now consumers are spending again. Now there is growth in almost every segment of the restaurant market. Fast-casual has especially been hot. But also local restaurant groups are expanding. Someone who has 30 to 40 different units, but mixed across several different restaurant types, is typical, too, of someone who is expanding in our area.”

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Omaha becoming the silicon prairie of the Midwest

omaha 2by Dan Rafter

The silicon prairie? For the brokers who work here, Omaha deserves that nickname.

And why not? Tech companies are increasingly calling the city and its surrounding communities home.

Jeffrey Wyatt, senior advisor at the Omaha office of Colliers International, says that the word has spread that Omaha is not only a tech-friendly community but that it is an exciting place to live and a safe place to raise a family.

“Things are more exciting in Omaha than they ever have been,” Wyatt said.

To help prove his point, Wyatt points to the growing number of tech-based companies that are setting up shop in Omaha. The Scott Technology Center has played an important role in this. The center, developed by the Suzanne and Walter Scott Foundation as an incubator for tech start-ups, now features 220,000 square feet of facilities.

There’s also the Mastercraft building, a former furniture factory that today is a creative center in North Downtown Omaha designed to support young companies, including those working in information technology and other high-tech fields.

Omaha is also attracting younger business people. Wyatt points to Creighton University’s Heider College of Business. About 80 percent of the students that attend this Omaha-based business college come from outside the city. And 60 percent of those graduates land their first jobs in Omaha, meaning that they aren’t fleeing the city after graduating.

“A lot of young professionals are saddled with a horrendous amount of debt. Why shouldn’t they start their careers in an area that is more affordable?” Wyatt said. “Omaha is a better place to live for these graduates. There is a better quality of life here. And there are plenty of fun things for people to do.”

It makes sense, too, for a growing number of tech start-ups to locate in the city, Wyatt said.

“Where would you rather start a tech company? In Silicon Valley where the office rents are incredibly high and no one can afford to buy a home?” he asked. “Or would you rather start one in Omaha, where office rents and housing are both affordable? They’re calling us the Silicon Prairie because so many people are starting to realize what a great place this is to start a new technology company.”

Wyatt doesn’t expect this trend to slow any time soon. Downtown Omaha continues to become a more vibrant place, and that is attracting a greater number of young people to the area’s new multi-family developments, he said.

“The overall culture of Omaha has changed in the last 10 to 15 years,” he said. “There has been a big shift to create a culture that is a little bit more welcoming to young professionals and the tech community.”

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Revving the engines: Improving investment sales in Michigan and the Midwest

Bill Bubniak

Bill Bubniak

Guest post by Bill Bubniak, senior vice president, director of investment sales, Farbman Group

In recent years, Midwest real estate—particularly Michigan real estate—has in many ways gone the way of the auto industry: the market is continuing to move in the right direction. When we look closer at the improving state of investment sales in Michigan—what things look like now and how they will remain for the balance of 2014 and beyond—that story of automotive recovery serves as a cohesive theme that ties the narrative structure of the story together.

To a large extent, that story is one of rediscovery. People are looking at Michigan with new eyes, and are rediscovering opportunities. In particular, those who have had trouble finding investment opportunities in other cities and those who are getting priced out of ultra-competitive markets, like Manhattan, are beginning to make moves in Michigan. There are new entrants into the market, and interest rates are still relatively low. This increased activity, combined with the ongoing good publicity that is being generated by the auto resurgence and the overall state economic recovery, is not just generating chatter—it is creating real momentum. It is important to note that this is not just hype—there is job creation, there is growth, and there is not a great deal of new construction. In many ways, it is the perfect storm for success with respect to investment sales.

All of these elements are coming together and are working to Michigan’s advantage. In fact, while it has long been considered a secondary state when it comes to real estate, Michigan is starting to be considered a “wise buy” from a national perspective. The good news is, lenders are following suit, and lending is picking up, too. But while the overall picture looks good, understanding the trajectory of Michigan’s real estate marketplace requires a more detailed look at how specific market segments are performing:

Apartment
Michigan has seen no real construction activity in the past decade, along with low population growth and a sluggish job market. Now however, with those population and employment indices picking up, and construction still slow, the result is an increasingly robust multifamily market with very aggressive cap rates. All in all, this is the strongest real estate segment in the state. At Farbman Group, we are seeing a 6 to 7 percent cap rate on stabilized deals, and up to the high single digits or perhaps a 10 percent cap on “turnaround” deals. While the lion’s share of the business is taking place in the usual hotbeds of Oakland, Wayne and Macomb Counties, select markets—like Grand Rapids, for example—are notably hot at the moment. There is very little space available in downtown Grand Rapids, and some noteworthy sales have seen competitive bidding that actually exceeds the asking price.

Industrial
It should come as no real surprise that industrial tends to go as the auto industry goes. Which is why many industrial brokers have smiles on their faces these days, and one of the big reasons why we are seeing so many transactions being done. In a sea of success stories for this segment, Auburn Hills stands out as one of the state’s hotter industrial markets. Again, the lack of new construction is contributing to this competitive dynamic, and vacancies are down across Southeast Michigan in particular. There is still quite a bit of older industrial product out there (with structural or functional concerns like sub-optimal ceiling heights and code issues) that is not doing as well comparatively, but even there, we are seeing activity beginning to tick up. Michigan is starting to see a bit more build-to-suit activity, but demand is so immediate and the need is so acute that many companies are demonstrating a willingness to take those lower ceiling heights or inferior geographic locations.

Retail
Retail market in particular is seeing a lot of first-time buyers in the state. Not infrequently, that population of buyers is also exploring options in other Midwest markets like Milwaukee, Cincinnati and Toledo. Overall, retail remains largely segmented, mirroring the national trends in that respect. With the continued encroachment of online sales into brick-and-mortar, and the trend toward retailers adopting smaller and more efficient formats, big box retailers are downsizing and reformatting. Consequently, retail formats that have been less impacted by those trends are performing the best: neighborhood strip centers and smaller, grocery-anchored centers are figuratively flying off the shelves, and demand is sky high. With power centers, buyers need to be smarter and more careful. You have to buy right and know your location, understanding both the area and the demand profile.

Office
As in much of the Midwest, office remains Michigan’s softest segment. Despite that comparatively lackluster performance, we are seeing some bright spots that did not exist a few years ago. There are pockets of opportunities, but you have to be a little more careful what you are buying. The Troy market, for example, is basically a microcosm of the larger state marketplace: a still-soft office market making a slow and incomplete recovery from the recession and the auto industry struggles. Like the rest of the state, Troy is also bucking up against some significant national trends: people working from home, cubicle sharing, etc. There is, however, still a fight for quality for class A-locations. One notable bright spot in Detroit is Dan Gilbert, who recently purchased One Woodward Avenue and the Dime Building. His confidence and investment is creating some demand and interest from others—both from inside and outside of the state.

Future prospects
Aside from Chicago, many of the same factors at play in Michigan are also influencing the markets to some extent across the Midwest. Investors who are running out of prime opportunities in A-states or cities are rediscovering the potential in places like Wisconsin and Ohio. Michigan has something most of those other markets do not have, however: a compelling story of a dramatic turnaround. Institutional buyers are recognizing opportunity in Michigan, and investors who used to think it was not “fashionable” to own something in Michigan have come full circle. In short, Michigan is “cool” once again. Some of this is the result of national trends as well, of course, but Michigan is making a bigger leap than other states nationally—and there is tremendous up-side here compared to many other states. When you know you can buy quality for less, it is exciting.

Looking ahead, the near-term future remains bright. The cascade of interrelated positive factors bodes well: the auto industry’s strong performance, fewer troubled properties, more lenders lending in the state, more tenants in the market, light construction activity, and a generally improving economic outlook. One cautionary note to keep an eye on in 2015 and 2016 is the issue of troubled loans. Those closely tracking troubled loans will see that there are a large number of balloon notes in the Midwest coming due. If you combine that with the uncertainty as to where interest rates might be heading, the window of opportunity to sell might be somewhat limited. The year ahead looks good, but the crystal ball gets cloudier once we move into the New Year.

Posted in Detroit commercial real estate, industrial real estate, Michigan commercial real estate, multi-family, office, retail | Tagged , , , , , , , | Leave a comment

CRE Summit celebrates 25 years in Omaha

Jean Stothert, mayor of the city of Omaha, and Tom Fellman and Howard Kooper from Broadmoor attended this year’s CRE Summit.

Jean Stothert, mayor of the city of Omaha, and Tom Fellman and Howard Kooper from Broadmoor attended this year’s CRE Summit.

by Dan Rafter

For 25 years, the top minds in the commercial real estate business have gathered in Omaha for the Commercial Real Estate Workshop, better known by the acronym CREW. This year, though, marked a change for the group: CREW changed its name to the CRE Summit.

Jerry Slusky, principal of Omaha-based law firm Smith, Gardner, Slusky Law, says, the new name more accurately reflects this yearly event.

“Our surveys tell us that the professionals in this business have come to rely on this once-a-year event to provide them the tools they need to be successful in their businesses,” said Slusky. “Therefore, the word ‘summit’ seemed to be more appropriate.”

Bill Kristol was the keynote speaker at this year's event.

Bill Kristol was the keynote speaker at this year’s event.

This year’s event, held April 4 at the CenturyLink Center, again drew a crowd. This is not unusual: Attendance topped the 500 mark last year.

This year’s keynote speaker was Bill Kristol, the founder and editor of The Weekly Standard, contributor to ABC News and contributor to the news program This Week with George Stephanopoulos. Kristol spoke about the state of the national economy and the specific economic factors in the Midwest that will either hinder or help the commercial real estate industry.

For 25 years, the top minds in the commercial real estate business have gathered in Omaha for the Commercial Real Estate Workshop, better known by the acronym CREW. This year, though, marked a change for the group: CREW changed its name to the CRE Summit.

Jerry Slusky, principal of Omaha-based law firm Smith, Gardner, Slusky Law, says, the new name more accurately reflects this yearly event.

- See more at: http://www.rejournals.com/2014/04/05/cre-summit-celebrates-25-years-in-omaha/#sthash.50vFp2Pa.dpuf

For 25 years, the top minds in the commercial real estate business have gathered in Omaha for the Commercial Real Estate Workshop, better known by the acronym CREW. This year, though, marked a change for the group: CREW changed its name to the CRE Summit.

Jerry Slusky, principal of Omaha-based law firm Smith, Gardner, Slusky Law, says, the new name more accurately reflects this yearly event.

- See more at: http://www.rejournals.com/2014/04/05/cre-summit-celebrates-25-years-in-omaha/#sthash.50vFp2Pa.dpuf

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Friedman: Expect commercial lending to rise in 2014 and beyond

Friedman Integrated Real Estate Solutions expects commercial lending to rise this year and in the future.

Friedman Integrated Real Estate Solutions expects commercial lending to rise this year and in the future.

By Dan Rafter

Optimistic. That’s what officials at Farmington Hills, Mich.-based Friedman Integrated Real Estate Solutions are about the future of commercial real estate lending.

Developers should find it easier today — and in the future — to acquire the financing they need to build new retail centers, expand existing office buildings or build new spec industrial buildings.

“It is an excellent time to be a borrower,” said David Friedman, president and chief executive officer of the company. “With interest rates at historic lows and CRE loans at an all-time high, investors should take advantage of the opportunities available to them across diverse property types.”

Friedman points to a recent report by CoStar.com saying that CRE loans soared in the fourth quarter of 2013, with originations for commercial bank portfolios increasing by 54 percent from the same quarter last year.

Friedman said that the office and multi-family markets are especially poised for growth in 2014 and beyond. The CoStar Group’s list of 2014 outlooks from industry leaders pointed to both of these markets as ones to watch.

What’s spurring this upward trend in CRE lending? Friedman cited the near-record-low interest rates. Janet Yellen, chairwoman of the Federal Reserve, has said — recently at a speech before the National Interagency Community Reinvestment Conference — that the Fed plans to keep these rates low, something that can only be good for CRE lending. Yellen told the conference that the Fed’s goal is to make it less expensive for businesses to build, expand and hire.

In Friedman’s home market of Detroit, banks have re-entered the CRE lending business in solid numbers. Friedman points to a Jan. 26 Crain’s Detroit Business report saying that Flagstar Bancorp Inc., the largest bank headquartered in Michigan, saw commercial lending jump by $150 million to $386 million in the first nine months of 2013. The same story reported that the Bank of Ann Arbor grew its commercial loan portfolio by $54.6 million or about 12 percent in 2013.

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Back to the city: The re-urbanization movement brings opportunities

Aaron Lanski

Aaron Lanski

By Aaron Lanski, Managing Director, Chicago office of BMO Harris Bank

Over the past few years, economic and demographic trends have led to what’s known as reurbanization—the movement of residents from the suburbs back to urban areas. Because much of this activity involves developing communities that had previously been neglected, it’s providing opportunities for commercial real estate firms.

Since the 1920s, the suburban population growth rate had consistently outpaced big cities. Residents were attracted to the idea of safer, quieter communities, getting more real estate for their money and access to better school systems for their children. Since 2011, however, the annual growth rate of cities has surpassed the suburbs, according to U.S. Census Bureau data.

Several factors are at play here, including the recent recession and housing crisis. With steep declines in housing values, homeowners are seeking property with more stable prices. High fuel costs are also a factor in homeowners looking to downsize, while high gasoline costs have workers looking to live closer to their jobs and retail centers.

As for demographic trends, some baby boomer retirees are downsizing and moving to cities to be closer to retail and cultural amenities. Meanwhile, younger home buyers prefer urban locations over moving to the suburbs.

Opportunities spawn more opportunities

All of these factors are driving the development of multi-family housing units. Adaptive reuse is becoming a popular tactic in multi-family housing development, as city governments look to revitalize long-neglected areas. And once multi-family units have been built, that drives opportunities for retail development. Retailers are typically attracted to urban sites because they provide more predictability because of their known population densities and traffic patterns.

“It seems that retailers are more open to urban sites, and we are focused on looking at great urban sites that work for retail,” says Howard Paster, president of Paster Enterprises, a St. Paul, Minn.-based retail shopping center developer. “With the projected population increases for Minneapolis, St. Paul and the first-ring suburbs, retailers are taking notice of this shift.”

Mass-transit development represents another opportunity for commercial real estate firms. Because younger urban residents are less likely to own a car, public-transit options become critical and, in turn, encourage further urban development. In the Twin Cities (Minneapolis and St. Paul), for example, a new light-rail system connecting the two central business districts will be completed this year. The project has already helped support adaptive reuse projects—in which old office buildings have been converted into rental apartments—along the light-rail line and in both downtown areas.

Rewards vs. risks

When the economy is strong, there’s plenty of demand for luxury multi-family units with top-shelf amenities. But as my colleague Mark Midtdahl points out, it’s difficult to forecast whether there will be enough ongoing demand to support the higher rents of these developments. Similarly, over-development is another concern.

Midtdahl also notes that there’s sometimes a disconnect between the city’s goals and requirements versus what the market will bear. Developers, he says, have to find a way to balance the city’s needs and what makes sense for the project from a market standpoint.

Also, reurbanization projects often include development of former industrial properties that may require environmental cleanup. This, in turn, could necessitate additional due diligence and higher contingencies within the budget for unexpected project costs. Such challenges underscore why it’s important to work with partners who are experienced in reurbanization projects.

“I think the biggest challenge in reurbanization projects are the unforeseen costs,” says Tony Kuechle, project manager at Sherman Associates, a Minneapolis-based commercial real estate firm that specializes in urban redevelopment. “I also believe that experience is the only way to navigate these challenges. You gain the knowledge to identify and test for anticipated issues—environmental, structural, entitlement, and so forth. You also know to carry that extra contingency.”

As more people reverse course and choose large cities over the suburbs, commercial real estate firms will find plenty of opportunities. The trick is in navigating the risks and costs involved.

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