Category Archives: Market Trends & Indicators

Market trends, leading or lagging indicators. As it relates to industrial property.

Market Trends & Indicators

CMBS – Commercial Real Estate Mortgage Backed Securities

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The market for commercial mortgage-backed securities (CMBS) already is in the midst of repricing assets and setting new standards for future loan originations.  CMBS will come back as a significant lender for commercial real estate, but with new guidelines.

In the future, CMBS conduits are likely to make smaller loans than they did before and the debt will not be sliced up and repackaged in as many securitized bonds as the industry had seen during the past few years.  There will need to be more due diligence requirements for originators that are similar to what they have in the stock market.  Perhaps the originators will have to keep some interest in the loans they sell so they keep a stake in how it performs.

Availability of debt is a crucial factor in determining real estate pricing and capitalization rates.  With all else being equal, higher debt availability at lower rates implies increased investment activity, which in turn bids up prices of real estate assets and exerts downward pressure on capitalization.  Conversely, lower debt availability means lower asset prices and higher capitalization rates.  Additionally, less transaction volume and rising vacancies will contribute to reduced pricing of commercial real estate properties.

Market Trends & Indicators

SIOR Commercial Real Estate Index

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siorlogo4cThe Second Quarter 2008 SIOR Commercial Real Estate Index, compiled by the Society of Industrial and Office Realtors (SIOR) in association with the National Association of Realtors (NAR), indicated that commercial real estate markets have not yet begun their rebound to market equilibrium. The national Index, which measures 10 variables pertinent to the performance of U.S. industrial and office markets, dropped for a sixth straight quarter to an overall total of 76.4 points. This point drop placed it 23.6 points below the 100 point criteria that represents a balanced office and industrial marketplace and 43 points below its record high in spring 2006.

The West Region, weighing in with an Index score of 68.4 points, experienced the greatest decline in positive attitudes regarding the state of the office and industrial markets citing the housing downturn as a factor. Respondents from that region are reporting higher vacancy rates, deeper concessions for tenants, meager development activity, and a high rate of pessimism for their three month outlook.  However, this index paints too broad of strokes to accurately assess the condition of the Central Los Angeles Industrial real estate market which generally exceeds the broader commercial market in the West.

The SIOR Commercial Real Estate Index is constructed as a “diffusion index,” a very common and familiar indexing technique for economic measures. Other examples of diffusion indexes include the Index of Leading Economic Indicators, the Consumer Confidence Index, and the Institute of Supply Management’s Purchasing Managers’ Index. In the SIOR Commercial Real Estate Index, a value of 100 represents a well-balanced market for industrial and office property. Values significantly lower than 100 indicate weak market conditions; values significantly higher than 100 measure strong market conditions. The theoretical limits of this Index are a low of zero, and a high of 200, though it is unlikely that such limits would be approached as long as the property markets are operating efficiently.

The Index is based on a survey questionnaire with ten topics. The topics covered are (1) recent leasing activity; (2) trends in asking rents; (3) trends in vacancy rates; (4) subleasing conditions; (5) levels of concession packages in leases; (6) development activity; (7) site acquisition activity; (8) investment pricing levels; (9) the impact of the local economy on the property market; and, (10) the effect of the national economy on the property market. Survey respondents are given five choices. For each topic, five choices are provided, corresponding to conditions that are very weak, moderately weak, well-balanced, moderately strong, or very strong.

Market Trends & Indicators

Recession: First In, First Out?

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It’s all but certain the U.S. economy is in a recession, as falling home prices and Wall Street turmoil have put the brakes on consumer spending and stoked unemployment. But California got there first.  With its export businesses, manufacturing sector, professional services and big retail employers, California looks like many other U.S. states, only more so. California’s $1.8 trillion economy — twice the size of India’s and accounting for about 15% of the U.S. gross domestic product — is powerful enough to have ripple effects nationally. It is home to Hollywood, five of 30 Major League Baseball franchises and the largest farming sector in the nation.

California was also at the leading edge of the nation’s recent housing bubble, which is where its current problems started. Home prices in California rose higher and faster than in most of the U.S., and started weakening earlier, in 2005.  As Californians cut their spending, job losses spread from the housing sector to retail stores and auto dealers. Now the state’s unemployment rate is 7.7%, among the highest in the nation.

It’s unclear whether the state, as one of the first to enter an economic slowdown, will be among the first to emerge.

California Statistics
California Statistics
Market Trends & Indicators

Market Update

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While market activity has slowed overall in the past year, the Central Los Angeles industrial real estate area continues to demonstrate solid fundamentals.  Current indicators suggest that once the economy finds bottom, the long awaited rent growth phase will materialize.  Vacancy rates have hovered at or below 2% for 3 years and rents are stable to slightly increasing as both tenants and landlords seek immediate short-term safe solutions to mitigate cost.  Many landlords have been aggressively renewing receptive tenants avoiding vacancy, while tenants wait until the economy evidences a more positive trend to make significant long-term space commitments.