Explosion of Commercial RE signs in the Spectrum area
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Joe33_IHB
New member
[quote author="PANDA" date=1253921770]Joe,
Any chance that TIC will buy back most of the privately owned industrial properties if pricing gets too low to protect its value?</blockquote>
I don't know TIC all that well but I would be very surprised. They seem to do only very large scale acquisition activity. Plus from what I hear over there they have cut all of their new investment and development personnel on the commercial side down to close to nothing.
Any chance that TIC will buy back most of the privately owned industrial properties if pricing gets too low to protect its value?</blockquote>
I don't know TIC all that well but I would be very surprised. They seem to do only very large scale acquisition activity. Plus from what I hear over there they have cut all of their new investment and development personnel on the commercial side down to close to nothing.
acpme_IHB
New member
[quote author="Joe33" date=1253920804]I work in large multi-family investment area and I would say that prices have started to tick back up in the last 60 days. I don't know if that is applicable at all to industrial condos, but it is definitely happening.
When people say that commercial RE is about to blow up and has years to go they are completely wrong....or at least looking at it sideways. Commercial RE has already completely blown up. Prices are down 30% to 40%. Rents and revenue are way down. Vacancy is way up. All that has already happened. What hasn't happened yet is for all of the upside down loan problems that the value declines created to be recognized by those that are going to suffer the losses. The lenders are already way upside down on billions of commercial RE loans, they just haven't recognized and accounted for the problem yet. So I guess it depends on your perspective if you think that the commercial RE decline has years to go because like I said earlier, prices have started to tick upwards a little bit in multifamily. Of course it doesn't hurt that in multi-family you can get great loans from fannie and freddie that no other commercial RE sector gets.</blockquote>
if we believe the consensus view of flat employment growth regardless of "recovery" in a macro sense, wouldn't that mean industrial fundamentals continue to decline, or at least will remain stagnant? aside from cost of debt, multi-family is different in that leases are short-term and any improvement in the economy means higher revenue right away. sectors with longer-term leases are probably still rolling over higher rents signed at/before the peak. any tenant signing new long-term leases in the past yr and through next yr are probably going to be underpaying the market 3+ yrs from now, but what can a landlord do? in other words, slow macro recovery tends to be even slower for CRE.
When people say that commercial RE is about to blow up and has years to go they are completely wrong....or at least looking at it sideways. Commercial RE has already completely blown up. Prices are down 30% to 40%. Rents and revenue are way down. Vacancy is way up. All that has already happened. What hasn't happened yet is for all of the upside down loan problems that the value declines created to be recognized by those that are going to suffer the losses. The lenders are already way upside down on billions of commercial RE loans, they just haven't recognized and accounted for the problem yet. So I guess it depends on your perspective if you think that the commercial RE decline has years to go because like I said earlier, prices have started to tick upwards a little bit in multifamily. Of course it doesn't hurt that in multi-family you can get great loans from fannie and freddie that no other commercial RE sector gets.</blockquote>
if we believe the consensus view of flat employment growth regardless of "recovery" in a macro sense, wouldn't that mean industrial fundamentals continue to decline, or at least will remain stagnant? aside from cost of debt, multi-family is different in that leases are short-term and any improvement in the economy means higher revenue right away. sectors with longer-term leases are probably still rolling over higher rents signed at/before the peak. any tenant signing new long-term leases in the past yr and through next yr are probably going to be underpaying the market 3+ yrs from now, but what can a landlord do? in other words, slow macro recovery tends to be even slower for CRE.
Joe33_IHB
New member
[quote author="acpme" date=1253928079][quote author="Joe33" date=1253920804]I work in large multi-family investment area and I would say that prices have started to tick back up in the last 60 days. I don't know if that is applicable at all to industrial condos, but it is definitely happening.
When people say that commercial RE is about to blow up and has years to go they are completely wrong....or at least looking at it sideways. Commercial RE has already completely blown up. Prices are down 30% to 40%. Rents and revenue are way down. Vacancy is way up. All that has already happened. What hasn't happened yet is for all of the upside down loan problems that the value declines created to be recognized by those that are going to suffer the losses. The lenders are already way upside down on billions of commercial RE loans, they just haven't recognized and accounted for the problem yet. So I guess it depends on your perspective if you think that the commercial RE decline has years to go because like I said earlier, prices have started to tick upwards a little bit in multifamily. Of course it doesn't hurt that in multi-family you can get great loans from fannie and freddie that no other commercial RE sector gets.</blockquote>
if we believe the consensus view of flat employment growth regardless of "recovery" in a macro sense, wouldn't that mean industrial fundamentals continue to decline, or at least will remain stagnant? aside from cost of debt, multi-family is different in that leases are short-term and any improvement in the economy means higher revenue right away. sectors with longer-term leases are probably still rolling over higher rents signed at/before the peak. any tenant signing new long-term leases in the past yr and through next yr are probably going to be underpaying the market 3+ yrs from now, but what can a landlord do? in other words, slow macro recovery tends to be even slower for CRE.</blockquote>
That is absolutely right. Multi-family has already experienced a good amount of its revenue decline while the longer term lease product types (office, industrial, retail) will probably be experiencing it for at least the next couple of years. But at least from a value perspective, all of that decline is already baked into the cake. Anybody running a pro-forma to buy a commercial building is assuming all of those things to happen, and their overall underwriting is pretty conservative due to the state of the economy. The thing that would cause values to drop further would be an economy that trends lower than what those expecations already are. That is certainly possible. But for now, with a stabilizing economy, I think those values are stabilizing as well.
When people say that commercial RE is about to blow up and has years to go they are completely wrong....or at least looking at it sideways. Commercial RE has already completely blown up. Prices are down 30% to 40%. Rents and revenue are way down. Vacancy is way up. All that has already happened. What hasn't happened yet is for all of the upside down loan problems that the value declines created to be recognized by those that are going to suffer the losses. The lenders are already way upside down on billions of commercial RE loans, they just haven't recognized and accounted for the problem yet. So I guess it depends on your perspective if you think that the commercial RE decline has years to go because like I said earlier, prices have started to tick upwards a little bit in multifamily. Of course it doesn't hurt that in multi-family you can get great loans from fannie and freddie that no other commercial RE sector gets.</blockquote>
if we believe the consensus view of flat employment growth regardless of "recovery" in a macro sense, wouldn't that mean industrial fundamentals continue to decline, or at least will remain stagnant? aside from cost of debt, multi-family is different in that leases are short-term and any improvement in the economy means higher revenue right away. sectors with longer-term leases are probably still rolling over higher rents signed at/before the peak. any tenant signing new long-term leases in the past yr and through next yr are probably going to be underpaying the market 3+ yrs from now, but what can a landlord do? in other words, slow macro recovery tends to be even slower for CRE.</blockquote>
That is absolutely right. Multi-family has already experienced a good amount of its revenue decline while the longer term lease product types (office, industrial, retail) will probably be experiencing it for at least the next couple of years. But at least from a value perspective, all of that decline is already baked into the cake. Anybody running a pro-forma to buy a commercial building is assuming all of those things to happen, and their overall underwriting is pretty conservative due to the state of the economy. The thing that would cause values to drop further would be an economy that trends lower than what those expecations already are. That is certainly possible. But for now, with a stabilizing economy, I think those values are stabilizing as well.
usctrojanman29_IHB
New member
[quote author="PANDA" date=1253921770]Joe,
Any chance that TIC will buy back most of the privately owned industrial properties if pricing gets too low to protect its value?</blockquote>
Zero chance. Panda, a good way for you to back into what the value should be for these units is to apply a similar rental parity calculation as you would for residential properties where you would use average market rent, a market vacancy factor, and a market expense ratio. The only difference is that you would have to capitalize the estimate net operating income by the a cap rate (you can use closed comps plus a cushion) to derive the estimate value of the property. I would guestimate that these units you are interested in will probably bottom out around $150/sf +/-.
Any chance that TIC will buy back most of the privately owned industrial properties if pricing gets too low to protect its value?</blockquote>
Zero chance. Panda, a good way for you to back into what the value should be for these units is to apply a similar rental parity calculation as you would for residential properties where you would use average market rent, a market vacancy factor, and a market expense ratio. The only difference is that you would have to capitalize the estimate net operating income by the a cap rate (you can use closed comps plus a cushion) to derive the estimate value of the property. I would guestimate that these units you are interested in will probably bottom out around $150/sf +/-.
PANDA_IHB
New member
[quote author="USCTrojanCPA" date=1253937487][quote author="PANDA" date=1253921770]Joe,
Any chance that TIC will buy back most of the privately owned industrial properties if pricing gets too low to protect its value?</blockquote>
Zero chance. Panda, a good way for you to back into what the value should be for these units is to apply a similar rental parity calculation as you would for residential properties where you would use average market rent, a market vacancy factor, and a market expense ratio. The only difference is that you would have to capitalize the estimate net operating income by the a cap rate (you can use closed comps plus a cushion) to derive the estimate value of the property. I would guestimate that these units you are interested in will probably bottom out around $150/sf +/-.</blockquote>
$150/sf +/- Wow! Are you serious? I am more excited about this than Irvine residential coming down to $250/sf. That would be a Dream come true 50% off from the peak. Thanks T-man!
Any chance that TIC will buy back most of the privately owned industrial properties if pricing gets too low to protect its value?</blockquote>
Zero chance. Panda, a good way for you to back into what the value should be for these units is to apply a similar rental parity calculation as you would for residential properties where you would use average market rent, a market vacancy factor, and a market expense ratio. The only difference is that you would have to capitalize the estimate net operating income by the a cap rate (you can use closed comps plus a cushion) to derive the estimate value of the property. I would guestimate that these units you are interested in will probably bottom out around $150/sf +/-.</blockquote>
$150/sf +/- Wow! Are you serious? I am more excited about this than Irvine residential coming down to $250/sf. That would be a Dream come true 50% off from the peak. Thanks T-man!
usctrojanman29_IHB
New member
[quote author="PANDA" date=1253939058][quote author="USCTrojanCPA" date=1253937487][quote author="PANDA" date=1253921770]Joe,
Any chance that TIC will buy back most of the privately owned industrial properties if pricing gets too low to protect its value?</blockquote>
Zero chance. Panda, a good way for you to back into what the value should be for these units is to apply a similar rental parity calculation as you would for residential properties where you would use average market rent, a market vacancy factor, and a market expense ratio. The only difference is that you would have to capitalize the estimate net operating income by the a cap rate (you can use closed comps plus a cushion) to derive the estimate value of the property. I would guestimate that these units you are interested in will probably bottom out around $150/sf +/-.</blockquote>
$150/sf +/- Wow! Are you serious? I am more excited about this than Irvine residential coming down to $250/sf. That would be a Dream come true 50% off from the peak. Thanks T-man!</blockquote>
What I mentioned is a "Direct Capitalization" method to commercial real estate valuation. The other way to formulate a calculated value for commercial real estate is to do a 10 year discounted cash-flow on the property. When you get closer to pulling the trigger on something like this, I'll share with you a excel spreadsheet model that I created for both methods of valuation. There are 3 ways that a commercial real estate appraiser will derive the value of a commercial real estate property:
1. Sales method (using closed comps to determine a $/sf with adjustments up or down based upon the location and features of the property)
2. Replacement cost (basically figuring out what it would cost to bring the same structure at the time of the appraisal minus depreciation) *LEAST COMMONLY USED METHOD*
3. Direct Capitalization OR Discounted Cash Flow (the DCF is preferable to the direct capitalization method but it does require coming up with most validated assumption) *MOST COMMONLY USED METHOD*
Any chance that TIC will buy back most of the privately owned industrial properties if pricing gets too low to protect its value?</blockquote>
Zero chance. Panda, a good way for you to back into what the value should be for these units is to apply a similar rental parity calculation as you would for residential properties where you would use average market rent, a market vacancy factor, and a market expense ratio. The only difference is that you would have to capitalize the estimate net operating income by the a cap rate (you can use closed comps plus a cushion) to derive the estimate value of the property. I would guestimate that these units you are interested in will probably bottom out around $150/sf +/-.</blockquote>
$150/sf +/- Wow! Are you serious? I am more excited about this than Irvine residential coming down to $250/sf. That would be a Dream come true 50% off from the peak. Thanks T-man!</blockquote>
What I mentioned is a "Direct Capitalization" method to commercial real estate valuation. The other way to formulate a calculated value for commercial real estate is to do a 10 year discounted cash-flow on the property. When you get closer to pulling the trigger on something like this, I'll share with you a excel spreadsheet model that I created for both methods of valuation. There are 3 ways that a commercial real estate appraiser will derive the value of a commercial real estate property:
1. Sales method (using closed comps to determine a $/sf with adjustments up or down based upon the location and features of the property)
2. Replacement cost (basically figuring out what it would cost to bring the same structure at the time of the appraisal minus depreciation) *LEAST COMMONLY USED METHOD*
3. Direct Capitalization OR Discounted Cash Flow (the DCF is preferable to the direct capitalization method but it does require coming up with most validated assumption) *MOST COMMONLY USED METHOD*
Joe33_IHB
New member
A decent rule of thumb cap rate to use for something like this right now would be about 8%.
$150 per foot sounds low to me. If you use an 8% cap rate and assume the rents are all NNN (no expenses go through to the landlord, all paid by tenants), you would need a rent of $1 per foot per month to get to that low of a value (or $1.10 per foot with a 10% vacancy rate). I don't have any idea where rents are for that kind of product, but that rent sounds awfully low.
Any idea what the rent would be right now for that space?
$150 per foot sounds low to me. If you use an 8% cap rate and assume the rents are all NNN (no expenses go through to the landlord, all paid by tenants), you would need a rent of $1 per foot per month to get to that low of a value (or $1.10 per foot with a 10% vacancy rate). I don't have any idea where rents are for that kind of product, but that rent sounds awfully low.
Any idea what the rent would be right now for that space?
acpme_IHB
New member
because those other expenses can be significant, it's often useful to calculate an alternative valuation accounting for those recurring capital expenditures. it's no different than when IHB refers to TRUE cost of ownership for a residential property.
Ast Val = ( NOI - CapEx ) / Cap Rate
Ast Val = ( NOI - CapEx ) / Cap Rate
PANDA_IHB
New member
[quote author="Joe33" date=1253941110]A decent rule of thumb cap rate to use for something like this right now would be about 8%.
$150 per foot sounds low to me. If you use an 8% cap rate and assume the rents are all NNN (no expenses go through to the landlord, all paid by tenants), you would need a rent of $1 per foot per month to get to that low of a value (or $1.10 per foot with a 10% vacancy rate). I don't have any idea where rents are for that kind of product, but that rent sounds awfully low.
Any idea what the rent would be right now for that space?</blockquote>
Looking at comparable 4000 sq/ft industrial condos, I think 16181 Scientific would rent for about $5000 a month. So the 3450 square feet should rent for about $4300 a month. Some of the older products in Hammond are $10.80 /SF/Year where as newer products like Koll Center are $15.00 /SF/Year, which puts a 3500 sq/ft industrial condo at $3164 a month in rent. I've noticed that Hammond has the cheapest rent than any other industrial condos in Irvine.
Koll Center II
4,089 SF
Market Selling Price: $889,900
$15.00 /SF/Year
1 Space
4,089 SF Bldg
Warehouse
24 Hammond
Market Selling Price: $664,524
3,516 SF
$10.80 /SF/Year
1 Space
3,516 SF Bldg
Warehouse
$150 per foot sounds low to me. If you use an 8% cap rate and assume the rents are all NNN (no expenses go through to the landlord, all paid by tenants), you would need a rent of $1 per foot per month to get to that low of a value (or $1.10 per foot with a 10% vacancy rate). I don't have any idea where rents are for that kind of product, but that rent sounds awfully low.
Any idea what the rent would be right now for that space?</blockquote>
Looking at comparable 4000 sq/ft industrial condos, I think 16181 Scientific would rent for about $5000 a month. So the 3450 square feet should rent for about $4300 a month. Some of the older products in Hammond are $10.80 /SF/Year where as newer products like Koll Center are $15.00 /SF/Year, which puts a 3500 sq/ft industrial condo at $3164 a month in rent. I've noticed that Hammond has the cheapest rent than any other industrial condos in Irvine.
Koll Center II
4,089 SF
Market Selling Price: $889,900
$15.00 /SF/Year
1 Space
4,089 SF Bldg
Warehouse
24 Hammond
Market Selling Price: $664,524
3,516 SF
$10.80 /SF/Year
1 Space
3,516 SF Bldg
Warehouse
Joe33_IHB
New member
[quote author="PANDA" date=1253942061][quote author="Joe33" date=1253941110]A decent rule of thumb cap rate to use for something like this right now would be about 8%.
$150 per foot sounds low to me. If you use an 8% cap rate and assume the rents are all NNN (no expenses go through to the landlord, all paid by tenants), you would need a rent of $1 per foot per month to get to that low of a value (or $1.10 per foot with a 10% vacancy rate). I don't have any idea where rents are for that kind of product, but that rent sounds awfully low.
Any idea what the rent would be right now for that space?</blockquote>
Looking at comparable 4000 sq/ft industrial condos, I think 16181 Scientific would rent for about $5000 a month. So the 3450 square feet should rent for about $4300 a month. Some of the older products in Hammond are $10.80 /SF/Year where as newer products like Koll Center are $15.00 /SF/Year, which puts a 3500 sq/ft industrial condo at $3164 a month in rent. I've noticed that Hammond has the cheapest rent than any other industrial condos in Irvine.
Koll Center II
4,089 SF
Market Selling Price: $889,900
$15.00 /SF/Year
1 Space
4,089 SF Bldg
Warehouse
24 Hammond
Market Selling Price: $664,524
3,516 SF
$10.80 /SF/Year
1 Space
3,516 SF Bldg
Warehouse</blockquote>
At those kind of rents maybe the values should shake out at about $150 per foot.
$150 per foot sounds low to me. If you use an 8% cap rate and assume the rents are all NNN (no expenses go through to the landlord, all paid by tenants), you would need a rent of $1 per foot per month to get to that low of a value (or $1.10 per foot with a 10% vacancy rate). I don't have any idea where rents are for that kind of product, but that rent sounds awfully low.
Any idea what the rent would be right now for that space?</blockquote>
Looking at comparable 4000 sq/ft industrial condos, I think 16181 Scientific would rent for about $5000 a month. So the 3450 square feet should rent for about $4300 a month. Some of the older products in Hammond are $10.80 /SF/Year where as newer products like Koll Center are $15.00 /SF/Year, which puts a 3500 sq/ft industrial condo at $3164 a month in rent. I've noticed that Hammond has the cheapest rent than any other industrial condos in Irvine.
Koll Center II
4,089 SF
Market Selling Price: $889,900
$15.00 /SF/Year
1 Space
4,089 SF Bldg
Warehouse
24 Hammond
Market Selling Price: $664,524
3,516 SF
$10.80 /SF/Year
1 Space
3,516 SF Bldg
Warehouse</blockquote>
At those kind of rents maybe the values should shake out at about $150 per foot.