a review of commercial real estate during the first decade of the 21st century
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A Review of
Commercial Real Estate
In the 21st Century
By: John Boyer
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© 2010 Coldwell Banker Commercial Affiliates. A Realogy Company. All Rights Reserved. Coldwell Banker Commer-
cial Affiliates fully supports the principles of the Equal Opportunity Act. Each Office is Independently Owned and
Operated. Coldwell Banker Commercial, the Coldwell Banker Commercial Logo are registered (or unregistered)
service marks licensed to Coldwell Banker Commercial Affiliates. Information was provided by sources deemed
reliable. The views express herein this document do not represent the views of the Coldwell Banker Commercial
organization.
Over the first decade in the 21st century, there were several key events / factors that
had a major impact on the commercial real estate business. This document examines
the following topics:
General Commercial Real Estate…..3
Dot-Com Bubble…..4
September 11, 2001…..5
Base Realignment and Closure 2005….6
The ―Prosperous Times‖…..7
Credit Crunch & Housing Market…..8
Technology’s Effect…..9
Individual Property Types…..10-17
Vacancies
Transactions
Cap Rates
Volume
Price / SF
Absorption
What has Changed…..18
What the Future Holds?.....19
About Coldwell Banker Commercial..20
Table of Contents
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Commercial Real Estate in the 2000s
About this Document
To say the least, the first decade of the 2000s was a very interesting era in commercial real estate. It was unlike any preceding
decade and will go down in history as a benchmark. The industry has drastically changed over the last 10 years and this document
will examine some of the major challenges the industry faced. There is a subsequent PDF timeline available for visual reference.
By no means does this cover everything that happened during this time period, but it will look at the major events and the impact on
commercial real estate.
Change in Prices over the Decade1
The chart below highlights the change in price of some common items over the decade. Interesting to note the significant increase
in prices related to a declining household income.
See More: www.walletpop.com/blog/2009/12/29/then-vs-now-how-prices-have-changed-since-1999/
As for commercial real estate, as the charts in the later part of the document indicate, across all sectors, sales and prices rose for
eight straight years, followed by two very down years. To say the least, this decade was a very intriguing time for commercial real
estate.
Industry Happenings
During the early part of the 21st century, mergers and acquisitions
are the key words that come to mind. Several firms either merged
or were acquired by others, causing the commercial real estate
market share to shift dramatically.
CBRE acquired Insignia
CBRE acquired Trammel Crow
Spaulding & Slye merged with Jones Lang LaSalle (JLL)
Staubach merged with Jones Lang LaSalle (JLL)
Oncor International was purchased by Realogy Corporation
Equity Office Property Trust (the largest owner of office
buildings in the US) was acquired by Blackstone Group
Colliers International and First Services Real Estate Advisors
join to become known as Colliers International.
Colliers Turley Martin Tucker, Cassidy & Pinkard Colliers, Colliers Pinkard, Colliers ABR, BT Commercial, BRE Commercial, and
Colliers Houston rebrand as Cassidy Turley.
Now, lets take a look at the first major event that effected Commercial real estate in the 2000s: the Dot-Com bubble.
Item 2000 2009 % Change
Car (Toyota Corolla base) $17,518 $19,395 11%
Average Income per year $40,343 $39,423 (-1%)
Average Monthly Rent $675 $780 13%
Average Cost of a gallon of Gas $1.26 $2.56 49%
US Postage Stamp 33 cents 44 cents 25%
Loaf of Bread $1.72 $2.49 31%
Dozen Eggs 89 cents $1.37 35%
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Dot-Com Bubble
Dot-Com Bubble
The first decade of the 2000s started off with a bang, or ―BURST‖ that is.
After Netscape launched the first successful Internet browser in the
early 90s, the Internet industry exploded and a period began that is
now known as the ―Dot-Com‖ bubble. Hundreds of start-up internet
companies or ―dot-coms‖ popped up and thousands of jobs were
formed. Venture capital flowed into the new companies and investors
bought up stocks in companies that were highly over-valued, and a
number of dot-com millionaires were born.
Many of these companies engaged in unusual business practices with
the hopes of dominating the market. The mantra was growth over
profit, assuming that if they built up their customer base, their profits
would rise as well. At the height of the boom, it was possible for a
promising dot-com to make an initial public offering (IPO) of its stock
and raise a substantial amount of money, even though it had never
made a profit.
Investors responded to daring business practices with money; lots of
it. The US stock market rose dramatically during the this period, with
hundreds of companies being founded weekly, especially in tech hot
spots like the Silicon Valley near San Francisco. Some companies
engaged in lavish internal spending, such as elaborate business
facilities and luxury vacations for employees.
Then the bubble burst in March of 2000. Investors began selling off
stock in large quantities, putting the market into a precipitous fall for
the next two years until it finally bottomed out. Billions of dollars
vanished and thousands lost their jobs. 2 Follow the complete timeline
Commercial Real Estate Effect
Cities all over the US sought to become the "next‖ Silicon Valley by
building network-enabled office space to attract Internet
entrepreneurs. There was false demand for commercial real estate
that was fueled by the dot-com companies and their insatiable
appetite for growth. Many professionals achieved great success
quickly moving tenants into 100,000 SF facilities — much of which
was unneeded space.
In the beginning of the bubble, Data Centers — facilities housing
computers, servers, telecommunications and storage equipment, and
systems to backup and protect data, power and cooling systems —
were the popular purchase. When the bubble burst, much of these
Data Centers and office space were left vacant. The cost of
transferring Data Centers back to usable office space was very
expensive. Over-committed tenants quickly dumped their unneeded
space, quadrupling the available sublease inventory in the span of six
quarters to 146 million SF3. The flood of sublease space was
concentrated in technology hubs such as San Francisco, San Jose,
Seattle, Austin and Boston.
Silicon Valley and San Francisco were hit the hardest. Rents
plummeted in both areas. San Francisco's office demand in the 91-
block former industrial area known as South of Market, had 49%
vacancy after the burst. The citywide office vacancy rate climbed to
23% in the fourth quarter of 2001 from 1.8% in the third quarter of
2000. Office space from failed companies such as Pets.com were
turned into Apartments. Employment in Silicon Valley high-tech
industries declined by about 17% and rent fell 30%.4
Future Effect
Recent research suggests, however, that as many as 50% of the
dot-coms survived through 2004, reflecting two facts: the
destruction of public market wealth did not necessarily
correspond to firm closings, and second, that many of the dot-
coms were small players who were able to weather the financial
markets storm. Also, much of the sublease inventory opened
the doors for tenants to enjoy Class A space at reduced rates.
Web 2.0 Bubble?
In 2007, new Internet technologies prompted another rush of
start-ups to tap the energy associated with Web 2.0 - wikis,
blogs, podcasts, widgets and social media — to quickly extend
their Internet real estate.
But while the Web 2.0 phenomenon may have some things in
common with the Dot-Com bubble, experts note that there are
also differences, including the low cost of entry for companies
launching blog, wiki or social networking businesses. The main
difference, however, is that this time around, consumers are
driving the adoption of the technologies rather than companies
trying to force their Internet sites onto users.5
Opportunities Today
The business need for Internet speed is rising exponentially in
the digital era of Google, Yahoo, Netflix, YouTube, Facebook,
Twitter, online gaming and smart phones. Such "cloud" data
must be stored offsite at colossal data centers. Data center
property niche has been one of the few commercial real estate
sectors to generate sizzle through the recession.
Granted, data center sales, leasing and development transactions
slowed considerably in 2008 and 2009 as construction and
acquisition financing dried up. However, pent-up demand since
2005 has sparked a new flurry of construction, acquisitions and
equity raising activity by data center builders and investors, with
hundreds of thousands of square feet of new data center facilities
were announced in 2009-2010.6
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September 11, 2001
Just as the economy was showing signs of bouncing back from the Dot-Com
bubble, the September 11, 2001 attacks on the U.S. occurred.
About the Attack
September 11, 2001 - terrorists hijack four U.S. airliners. The attack of
planes leveled the World Trade Center and inflicted serious damage to the
Pentagon in Arlington, VA, causing nearly 3,000 total deaths. The fourth
plane was heroically crashed by passengers when they learned of the plot,
preventing destruction of another structure. The plot was attributed to the Al-
Qaeda organization led by Osama Bin Laden. The U.S. then began the War on
Terrorism and attacks Afghanistan. View some of the costs of the attacks.
Effect on NYC
In NYC, 13.4m SF of Class A office property was destroyed and another
14.4m SF damaged. This would negatively affect the national absorption
numbers for the office sector. Lower Manhattan lost approximately 30
percent of its office space. This was more than the total vacant space in an
already tight New York City office market. After 9/11, some tenants spread
to multiple locations, including suburbs, and, in many cases, moved to low-rise buildings. In New York City, about $2.8 billion in
wages were lost in the three months following the 9/11 attacks. The economic effects were mainly focused on the
city's export economy sectors. The city's GDP was estimated to have declined by $27.3 billion for the last three months of 2001 and
all of 2002.7
View the complete World Trade Center study by FEMA. View a Detailed report on Tenants that were effected in NYC
Effect on Commercial Real Estate & the Economy8
As a result of September 11, consumer confidence was low. Air travel was more difficult due to enhanced security and people were
afraid to fly. Retail spending was down. There was a lot of speculation that ―trophy‖ buildings would suffer, but that would prove not
to be the case. The effect of 9/11 was short-lived in that aspect. With hindsight, we can see that the U.S. economy was already
suffering and the 9/11 attacks did not have a significant effect on economic growth either nationally or in New York. In the months
that followed, there was a flock to secondary markets, especially in the retail and apartment sectors, but that would also prove to be
short-lived.
The 9/11 attacks had a profound impact on the attitudes among corporate real estate executives. Most firms were adopting a
number of new security and safety measures, revisiting all communication procedures and engaging in general disaster and business
recovery planning. Some firms moved their business to more suburban areas. Total occupancy costs, as a result of security and
insurance costs, were said to increase by 1% to 3% on average with greater increases on central business district high-rise properties.
At the same time, it appeared that lenders would not finance property if terrorist insurance was not part of the coverage. The cost of
insurance for office space went up from $0.24 to $0.40/SF. Some of these costs were pushed down to the tenants.
Security
In 2001, the cost of security in privately-owned office buildings was approximately $0.50/SF. By 2003, that cost had doubled to more
than $1.00/SF. The increased expenditures covered items such as: identity cards, scanners, security cameras and personnel. In
government-owned buildings, which have installed security codes, concrete barriers, structural reinforcement, wider stairways and
enhanced communication systems, the costs go as high as $2.00/SF. On the other hand, the cost of office security in the suburbs is
considerably less than it is in the cities. Moving just 15 to 20 miles outside of the city can reduce the cost of security by as much as
60 percent. Moreover, studies show workers feel safer when situated just a few miles outside the urban areas, so several firms did
move their shops to suburban areas.
Back-Up Sites Another result was the potential need for some firms to create back-up sites. Firms were wary of concentrating their data in one
place. The cost, time and manpower to research catastrophe preparedness, and the investment in additional real estate and
equipment to set up dual locations can be considerable.
Looking on the Bright Side This is not to say that heightened security measures are all negative. In fact, the number of robberies and break-ins committed in
New York City office buildings has declined. With gated and secure parking areas, there have been fewer car thefts. Over all,
commercial buildings are safer than ever before. 9
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Base Realignment and Closure 2005
What is BRAC (Base Realignment and Closure)? By
definition, BRAC is a process of closing excess
military installations and realigning the total asset
inventory to reduce expenditures on operations and
maintenance.
More than 350 installations have been closed in four
BRAC rounds: 1989, 1991, 1993, and 1995. The
most recent round of BRAC completed in the fall of
2005 and with the commission's recommendations
became law in November 2005.10
Base Realignment and Closure (BRAC) 2005
Major facilities slated for closure:
Fort McPherson, Georgia
Fort Gillem, Georgia
Naval Submarine Base New London in Connecticut
(removed from list August 24, 2005)
Portsmouth Naval Shipyard in Kittery, Maine
(removed from list August 26, 2005)
Naval Air Station Brunswick in Maine
Ellsworth Air Force Base in South Dakota (removed
from list August 26, 2005)
Cannon Air Force Base in New Mexico (temporarily
removed from closure August 26, 2005)
Fort Monmouth in New Jersey
Defense Finance and Accounting Service in New York
Fort Monroe, Virginia
Willow Grove Naval Air Station in Pennsylvania
Naval Station Ingleside, Texas
Otis Air National Guard Base, Massachusetts
(removed from list August 26, 2005)
Navy Supply Corps School
Major facilities slated for realignment:
Army Human Resource Command (HRC) in
Missouri, moving to the Fort Knox in Kentucky.
Walter Reed Army Medical in Washington, D.C.
Naval Station Great Lakes in Illinois
Naval Air Station Oceana in Virginia (extent
contingent on reopening the former Naval Air
Station Cecil Field in Florida)
Grand Forks Air Force Base in North Dakota
Eielson Air Force Base and Elmendorf Air Force
Base in Alaska
Rome Laboratory in New York
Wright Patterson Air Force Base in Ohio
View the Final Updated BRAC 2005 List11
Effect on Commercial Real Estate & the Economy
When a military facility closes, the effects ripple throughout the
surrounding community as families lose their neighbors, businesses
lose their customers and workers lose their jobs. It also may affect
transportation in many cities as workers are moved around to the
alignment. A positive impact is the ―buffer‖ space around the bases
may become available for development.
Although the report came out in 2005, the effects of it may not have
been seen yet. Many of the bases scheduled to close either have been
removed from the list, or haven’t closed yet. September 2011 is the
date that many of the facilities listed will be closed. We will know in
the years to come the economic impact of the BRAC 2005. Just to give
you an idea of the effect of a BRAC, the closure of Norton Air Force
Base in 1994 had a devastating impact especially to the City of San
Bernardino. There has been some redevelopment since then, however,
the financial impact on the city is still being felt today.
So what will communities do with the empty base space? These are
massive spaces that had a very specific function, and are typically in
secure, remote areas. Several plans have been put into place as to
what to do with the empty base space. These plans are guided by
“Local Redevelopment Authorities.‖ These plans include city centers,
green centers, biomedical research parks, residential and other
commercial uses. An issue to deal with is because of the security
levels of some bases, the street grid and other necessary items are not
extended out into the community. So the challenge becomes finding a
way, as the bases are redeveloped, to make those connections; new
roads, removal of security gates, etc.
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Prosperous Times
Prosperous Times
There was a period in the first decade of the 2000s, during
2005-2007, which one can refer to as ―Prosperous Times;‖
where it seemed like everyone was prospering within
commercial real estate. As shown in the graphs to the right
or in the later part of this document, across all property
types, sales were up, vacancies were down, CAP rates were
at historic lows and rents were rising. Development was
fast paced – construction and other bridge financing was
readily available and inexpensive – the market was
enjoying quite a ride.
Debt capital was abundant. Not only for home purchases,
refinances and other real estate related financial
transactions—but for corporations and private equity. Many
Buyers/Users looked to future projected income (in most
cases excessively optimistic) to justify present values that
were unsound.
Leverage buy-outs were abundant—the large banks, Wall
Street and pension fiduciaries were spending into the
economy like they had not done in the recent past.
Things were really good!
Virtually all of the significant transactions (displayed on
the following pages) were completed during this time. In
fact, there were several record-setting quarters for the
individual property types. Competition among buyers for
the largest and best assets remained fierce. Condo
Converters were running strong during these years. The
prices they paid for multi-family properties outpaced the
conservative business mind of the investor buyers.
It seemed liked everyone wanted to be in commercial
real estate. National commercial real estate trade shows, such as ICSC, experienced record levels of attendance.
Commercial real estate companies seemed to grow in size, more offices opened up, more professionals would be
licensed. To say the least, it was a great time to be in commercial real estate. The commercial industry lagged
slightly behind the Housing Boom, which took place between 2003-2005.
Housing Market
The ―Housing Market Boom,” a period between 2003-2005;
where home prices dramatically increased, bidding wars
were frequent, contracts were above asking prices and
houses remained on the market for short periods of time.
For a while, it seemed you could pay almost anything for a
home, wait a few months and make a profit selling it.
During this time, consumer confidence soared. Home
owners were building equity at a rate that outpaced their
savings; and as such, many stopped putting money aside
and were looking to their future net worth to be a product of
the value of their largest investment – their home. This in
turn, led to many homeowners stretching the envelope as
to what they felt they could afford. However, it appeared to
be a false “Prosperous Times” and this all led to...
In 2007 $423B of commercial real estate
assets traded hands.
“You could do less than half the things right and still
have an awesome year…” anonymous
Source: Fannie Mae
Source: Real Capital Analytics
$59 $65$74 $76
$175$196
$225
$271
$145 $155$175 $187
$0
$50
$100
$150
$200
$250
$300
2004 2005 2006 2007
CRE Avg. Price/SF 2004-2007
Industrial
Office
Retail
$0
$50,000
$100,000
$150,000
$200,000
$250,000
2004 2005 2006 2007
Mill
ion
s
CRE Sales Volume 2004-2007 ($5m+)
Industrial
Office
Retail
Apartment
Source: Real Capital Analytics
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Credit Crunch & Housing Market
After a short period of ―false‖ economic prosperity (See
Prosperous Times), Americans experienced an economic
crisis. In 2008, the National Bureau of Economic Research
announced that we were officially in a recession.
Unemployment rates sky-rocketed with well over a million jobs
lost in 2008.
During the ―Housing Market Boom,‖ inflated confidence in
prices led lenders to give mortgages to unqualified buyers,
which led to spectacular short-term gains. These "subprime"
loans were packaged into groups that were traded like
securities and purchased by some of the largest investment
houses including Citigroup and Merrill Lynch.
Then, in 2007, home prices began a rapid decline. This occurred as mortgage loan terms changed and interest rates rose,
causing homeowners to begin defaulting on the loans that they never should have qualified for in the first place. Many homes
went into foreclosure and the excess supply of homes put downward pressure on prices. The relaxation of real estate valuation
standards and real estate finance underwriting guidelines inflated loan to value ratios beyond levels that can be refinanced. The
banks had to write down the value of their mortgage-backed assets. This created huge losses for banks in 4th quarter of 2007,
and also restricted their ability to borrow and lend capital, which greatly reduced the capacity of banks to loan money, spurring a
“liquidity" crisis. It came to a head when Wall Street hemorrhaged losses. Lehman filed for bankruptcy, Goldman Sachs and
Morgan Stanley became bank holding companies, Wachovia merged with Wells Fargo, and Congress passed the Wall Street
bailout package.
A series of government measures to rescue ailing companies like AlG, Fannie Mae and Freddie Mac followed. The ―big three‖ car
companies (General Motors, Ford, and Chrysler) asked Congress for a bail-out to prevent the auto industry from going bankrupt.
Fearful Americans stopped shopping, and the retail industry hit a 40-year low.
Timeline of the entire Crisis12
Effect on Commercial Real Estate
In August 2007 on the commercial side of the business – as a
result of the subprime mortgage debacle – the securitized debt
markets became virtually non-existent. See CMBS Issuances Chart
Credit became unavailable due to the global financial meltdown.
As such, virtually every aspect of the commercial real estate
industry was impacted. Establishing current values was near
impossible due to lack of market activity, comparable sales and
short sales.
Investors were basing investment decisions on pure cash returns
vs. using leverage to bolster yields. According to Real Capital
Analytics, values declined considerably, by as much as 45% . Many
would-be sellers were holding properties off the market and in
many cases, find themselves today in ―negative equity purgatory‖.
There was a huge gap between buyer and seller expectations.
The result was a 88% decline in overall volume of assets traded
from $423B year-end 2007 to $51.4B in 2009 (the lowest of the
decade). 2009 would go in the record books as a devastating year
for commercial real estate. Price / SF also declined and
development was virtually non-existent. Average cap rates rose,
causing prices to fall. Vacancies rose to record levels and there are
many debt maturities on the horizon. As a result, many projects
were put on hold: View 10 CRE projects put on hold
Many distressed properties started to come to the market (with more slated to hit), and some commercial real estate
professionals were taking advantage of this new-found opportunity.
0.00.51.01.52.02.53.03.54.04.55.05.56.06.57.07.5
2000200120022003200420052006200720082009
U.S
. H
om
e S
ale
Un
its (
in m
illi
on
s)
$25
$45
$65$85
$105
$125
$145$165
$185
$205
$225$245
Me
dia
n H
om
e P
ric
e
(00
0s
)
U.S. Homesale Units Median Home Price
0
50,000
100,000
150,000
200,000
250,000
2005 2006 2007 2008 2009
CMBS Issuances
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Technology
Technology
Technology seemed to explode in the 2000s. Devices such as portable MP3 players, Nintendo Wii,
Xbox, Netflix, DVR, Blue-Ray and iTunes all revolutionized consumer behaviors. Let’s examine some of the
major technological advancements and their effect on commercial real estate.
Availability of Information
The Internet explosion took the commercial real estate business by storm. Information become
more readily available. While sites such as CoStar and LoopNet (which went public in 2006,
although both technically launched in the late 1990s) became increasingly popular, and in fact,
became the ―norm.‖ It seemed as if commercial real estate companies needed access to one or
both. Information such as comparables, that were traditionally coveted and indeed, a professional’s
differentiator, were now readily accessible, and leveled the playing field for professionals. In residential
real estate, this has become more prevalent with Listing Hubs, Zillow and Trulia; because now the
information is accessible to the general public instead of agents controlling what their clients see. The
question to ponder is, will commercial real estate follow in residential’s footsteps, as it typically does, in
making information even more readily available and accessible to the public? Read an interesting
LinkedIn conversation about information becoming more accessible.
Internet Shopping
Internet shopping wasn’t developed in the 2000s, but its popularity grew by leaps and bounds over the
last decade. From a commercial real estate perspective, this had a direct effect on the retail sector.
Music downloading sites such as Napster and iTunes severely damaged the CD industry, causing such
stores as Tower Records to close their doors. Netflix has really put a dent in Blockbuster’s market
dominance; and online discount shops have hurt retail sales, causing stores to close. View the list of
companies that have recently closed shops. It isn’t all bad news though. There has been a recent shift in
these shops requiring more warehouse space and shipping needs to house their internet distribution goods.
Smartphones
Without a doubt, the single technological advancement that changed commercial real estate the most in
the 2000s was the advent of the Smartphone. The nature of the business is persistent and consistent
contact with clients. The Smartphone allowed the convenience of being more accessible and ability to
retrieve and send emails while on the go, instead of at your desk. These days, it’s rare to see a commercial
real estate professional without a Smartphone. If you do see one, would you conduct business with him?
Social Media
Social Media exploded in the 2000s, especially the latter part of the decade. I don’t think we’ve
fully experienced the ramifications of Social Media yet for commercial real estate, but it is
coming. Social Media created a shift in the way we traditionally think about marketing. Typically,
you would market your properties to your sphere of clients via email, which was very localized and
had little interaction. Also, Social Media created a shift in the way we think about networking.
Typically, most networking took place at an industry event. You handed out a couple of business cards and
talked shop with a limited number of people. Most of the people were from your market. With Social
Media, these boundaries can be broken. You can network with and market to thousands of people on a
local, regional and national basis; at the click of a button! You can also reach many more people with your
marketing efforts.
Video
With the launch of YouTube in 2005, videos became more accessible to the public. Like Social Media,
Video hasn’t quite translated into the commercial real estate world, but many in the industry believe it will.
As video gets cheaper and easier to produce, you will see more ―virtual tours‖ and less flyers of a building.
What’s Next
There are a couple of new technologies on the horizon that could have a dramatic effect on commercial
real estate such as Augmented Reality and QR Codes to be aware of. You will have the ability to include
more information on building signs, business cards or property flyers; that a user can download directly to
their Smartphone.
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Name City, ST SF Price $/SF Buyer Year
General Motors Bldg New York, NY 1,925,000 $2,853,000,000 $1,482 Boston Properties JV Goldman
Sachs JV Meraas Capital 2008
666 Fifth New York, NY 1,550,000 $1,800,000,000 $1,161 Kushner Companies 2007
WorldWide Plaza New York, NY 1,600,000 $1,739,000,000 $1,087 Macklowe Properties 2007
MetLife Bldg New York, NY 2,840,000 $1,720,000,000 $606 Tishman Speyer Properties 2005
Travelers Complex New York, NY 2,600,000 $1,575,000,000 $606 SL Green Realty Corp 2007
Office 2001—2009
Source: Real Capital Analytics
Source: Real Capital Analytics Source: CoStar
Source: CoStar
Twin Towers Complex Arlington, VA 1,100,000 $670,000,000 $609 Monday Properties 2007
Twin Towers Complex Arlington, VA 1,100,000 $495,000,000 $450 Beacon Capital Partners 2005
Waterview Office Twr Arlington, VA 633,908 $435,000,000 $686 Paramount Group 2007
One & Two Fountain Sq Reston, VA 616,178 $420,000,000 $681 Beacon Capital Partners 2007
Polk & Taylor Bldgs Arlington, VA 886,447 $419,000,000 $473 Beacon Capital Partners 2007
Significant Transactions: CBD
Significant Transactions: Suburban
Source: Real Capital Analytics
$0
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$250,000
01' 02' 03' 04' 05' 06' 07' 08' 09' P/SFMillions
Office Volume & Price/SF
-100,000,000
-50,000,000
0
50,000,000
100,000,000
150,000,000
200,000,000
01' 02' 03' 04' 05' 06' 07' 08' 09'
Office Absorption
0%
2%
4%
6%
8%
10%
12%
0
1,000
2,000
3,000
4,000
5,000
01' 02' 03' 04' 05' 06' 07' 08' 09'CAPTrans
Office Transactions & Avg Cap Rate
0%
4%
8%
12%
16%
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
01' 02' 03' 04' 05' 06' 07' 08' 09'VacancyRental
Office Rental & Vacancy Rates
View next page for a breakdown of the Office Sector by year
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$0
$50
$100
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$250
$0
$10,000
$20,000
$30,000
$40,000
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$80,000
01' 02' 03' 04' 05' 06' 07' 08' 09' P/SFMillions
Retail Volume & Price/SF
-30,000,000
-20,000,000
-10,000,000
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
00' 01' 02' 03' 04' 05' 06' 07' 08' 09'
Retail Absorption
0%
2%
4%
6%
8%
10%
12%
0
1,000
2,000
3,000
4,000
5,000
01' 02' 03' 04' 05' 06' 07' 08' 09'CAPTrans
Retail Transactions & Avg Cap Rate
Name City, ST SF Price $/SF Buyer Year
Bay Street Emeryville Emeryville, CA 383,055 $234,000,000 $611
LaSalle Bank JV Madison
Marquette 2008
Suburban Square Ardmore, PA 360,501 $215,000,000 $596 Kimco Realty 2007
Jack London Square Oakland, CA 460,484 $191,000,000 $414 Nat Electrical Benefit Fund 2007
Villa Marina Mktplace Marina del Rey, CA 450,000 $189,000,000 $420 RREEF Funds 2006
Winter Garden Village Winter Garden, FL 758,988 $180,000,000 $238 Cole Capital Partners 2008
Retail 2001—2009
Source: Real Capital Analytics
Source: Real Capital Analytics Source: Reis
Source: Reis
Mall of America Minneapolis, MN 4,200,000 $1,800,000,000 $429 Triple Five Group 2006
Sawgrass Mills Sunrise, FL 1,991,491 $1,025,000,000 $515 Simon Property Group 2007
Grand Canal Shoppes Las Vegas, NV 445,151 $766,000,000 $1,721 General Growth Properties 2004
Potomac Mills Prince William, VA 1,606,000 $520,000,000 $324 Simon Property Group 2007
Westfield North Bridge Chicago, IL 680,933 $515,000,000 $756 Macerich JV Alaska Permanent
Fund Corp 2008
Significant Transactions: Strip Malls
Significant Transactions: Malls
Source: Real Capital Analytics
0
2
4
6
8
10
12
$13.00
$14.00
$15.00
$16.00
$17.00
$18.00
01' 02' 03' 04' 05' 06' 07' 08' 09'VacancyRental
Retail Rental & Vacancy Rates
View next page for a breakdown of the Retail Sector by year
14
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0%
2%
4%
6%
8%
10%
12%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
01' 02' 03' 04' 05' 06' 07' 08' 09' CAPTrans
Apart Transactions & Avg Cap Rate
Apartment 2001—2009
Source: Real Capital Analytics
Source: Real Capital Analytics Source: Reis
Name City, ST Units Price $/Unit Buyer Year
Empirian Village Greenbelt, MD 2,877 $275,000,000 $95,586 Empire Equity Group 2008
Jefferson at Bay Mdws San Mateo, CA 575 $220,000,000 $383 Archstone 2006
Palazzo East Los Angeles, CA 610 $199,000,000 $327 AIMCO 2005
The Avant Annandale, VA 1,065 $198,000,000 $186 Stellar Management 2007
The Park Kiely San Jose, CA 948 $190,000,000 $201,248 Laramar Group 2008
PeterCooper & StuyTown New York, NY 11,232 $5,400,000,000 $481 Tishman Speyer 2006
Trump Place New York, NY 12,330 $809,000,000 $658 Equity Residential 2005
Villas Parkmerced San Francisco, CA 3,486 $675,000,000 $194 Stellar Mgmt 2005
Manhattan House New York, NY 587 $623,000,000 $1,061 Richard Kalikow 2005
Presidential Towers Chicago, IL 2,346 $475,000,000 $202 Waterton Associates LLC 2007
Significant Transactions: Garden
Significant Transactions: High / Mid Rise
Source: Real Capital Analytics
$0
$40,000
$80,000
$120,000
$160,000
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
01' 02' 03' 04' 05' 06' 07' 08' 09'P/SFMillions
Apart Volume & Price/SF PPU
0
1
2
3
4
5
6
7
8
9
$750
$800
$850
$900
$950
$1,000
$1,050
01' 02' 03' 04' 05' 06' 07' 08' 09'VacancyRental
Apart Rental & Vacancy Rates
Source: Reis
View next page for a breakdown of the Apartment Sector by year
-20,000
0
20,000
40,000
60,000
80,000
100,000
120,000
01' 02' 03' 04' 05' 06' 07' 08' 09'
Apartment Absorption
16
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View next page for a breakdown of the Industrial Sector by year
$0
$20
$40
$60
$80
$100
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
01' 02' 03' 04' 05' 06' 07' 08' 09' P/SFMillions
Industrial Volume & Price/SF
-100,000,000
-50,000,000
0
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
01' 02' 03' 04' 05' 06' 07' 08' 09'
Industrial Absorption
0%
2%
4%
6%
8%
10%
12%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
01' 02' 03' 04' 05' 06' 07' 08' 09'CAPTrans
Industrial Transactions & Avg Cap Rate
Name City, ST SF Price $/SF Buyer Year
Dallas Market Center Dallas, TX 4,800,000 $249,000,000 $52 CNL Income Properties 2005
Sun Microsystems Cmplx Burlington, MA 805,000 $212,000,000 $263 Nordic Properties 2007
Sunset Gower Studios Los Angeles, CA 415,000 $205,000,000 $493 Hudson Capital 2007
San Diego Tech Center San Diego, CA 647,000 $185,000,000 $286 Maguire Properties 2005
Northlake Data Center Melrose Park, IL 700,000 $181,000,000 $259 Microsoft 2009
Industrial 2001—2009
Source: Real Capital Analytics
Source: Real Capital Analytics Source: CoStar (Flex & Warehouse combined)
Source: CoStar (Flex & Warehouse combined)
Pfizer La Jolla Campus La Jolla, CA 770,000 $372,000,000 $483 Pfizer Corp 2004
Metro Chicago Chicago, IL 3,743,211 $231,000,000 $62 RREEF Funds 2005
Pacific Gateway Ctr Torrance, CA 1,252,708 $195,000,000 $156 Prudential RE Investors 2006
Chino South Business Park Chino, CA 1,807,421 $147,000,000 $81 John Hancock Insurance Co 2008
110-112 Hidden Lake Duncan, SC 786,778 $135,000,000 $171 Lexington Corp Prop. Trust 2005
Significant Transactions: Flex
Significant Transactions: Warehouse
Source: Real Capital Analytics
0%
2%
4%
6%
8%
10%
12%
$0.00
$2.00
$4.00
$6.00
$8.00
01' 02' 03' 04' 05' 06' 07' 08' 09'VacancyRental
Industrial Rental & Vacancy Rates
18
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What has changed
What has changed
Now that you understand what happened during the first
decade of the 2000s, let’s take a minute to understand what
has changed. Over 200 Coldwell Banker Commercial®
professionals from across the U.S. responded to a survey
about what they felt has changed in the commercial real
estate industry.
If you've been in the business for more than 12 years, what is
different in the way you do commercial real estate now, than
in times before the year 2000?
Less Personal—Smartphones have made it easier to
become accessible. However, it also made it easier to
―text‖ answers to questions. There are a lot less face-to-
face meetings. The personal meetings to develop
strategic decisions and action plans are drawn out by
streams of piecemeal emails. The transactions may
initiate with a face-to-face meeting, but much of the
follow up is done via texting and emailing. Although we
haven’t fully transitioned away from it, the ―old school‖
style of brokerage is slowly fading and may fade more in years to come. However, it may never die, technology will just
integrate more.
More Information—Increased sophistication of marketing tools via the internet along with "user-friendly" software and sites
allowed more users access to materials that were easy to understand, increasing the public's awareness and exposure to
deals that were typically only available to "A" list and institutional clients. We can no longer use our ―possession‖ of the
information to attract clients. Instead, we must focus on how clients use the information - helping them - understand it,
interpret it, analyze it, simplify it and utilize it.
Less Localized—The internet has paved grounds for wider dissemination of marketing material and improved communication.
We are doing more regional and national business than we’ve done in the past. Networking is also much easier. You can
connect with many more professionals and potential clients on the various social media sites in a matter of minutes. This
would have taken years in the past.
What are clients doing differently?
Demand information faster—Most want property offering brochures sent by electronic means, not by fax or regular mail. They
want you to text them regularly to keep them updated. They don’t want to sit down for an hour lunch; they are happy with you
emailing the necessary info.
Shift in what they need—Clients don’t need someone who is just going to complete the transaction. Sites such as Craigslist
are assisting small property owners to market their property without the help of an agent. Clients now need an advisor. On
the leasing side, they are using space more efficiently and using an open plan "bullpen" set up more and more. They are
getting smarter with the amount of ―actual‖ space they need.
Due Diligence—Since information has become more readily available, clients are spending more time "crunching the
numbers.‖ They are being extremely patient, waiting for the right opportunities. Many clients are only buying when the seller
and buyer can make a deal without the banks participating; or, there is a deal below a reasonable market price. Many are
also purchasing based on cash flow rather than appreciation. Clients are pre-qualifying professionals they hire by visiting
websites which include personal sites, national websites, listing database sites and social media sites. They expect more and
won’t work with you if you are not qualified!
Expect You to be Prepared—As a result of the client's due diligence regarding professionals, clients now expect their
professionals to know something about their property and/or their corporate structure at the initial meeting. Professionals
must be prepared to discuss various strategies with their clients before their first face to face meeting or first conference call.
Feeling the effect of the Credit Crunch—Most transactions only occur when the sellers are willing or able to sell at steep
discounts compared to the asking price of a couple of years ago or are able to provide some form of owner financing or some
combination thereof. As a result, most sellers with better options are sitting on the sidelines while waiting for values to
return. Even when sellers have sufficient motivation to sell and they and ability to lower their price, buyers often times
cannot secure sufficient financing to complete a transaction with loan-to-value ratios being as low as 65% or lower. While
owner financing is usually an option, many sellers are not in a position to offer it which results in many deals that fall through.
19
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What the Future Holds
What the Future Holds
Although the last two years of the decade saw historic lows in property
transaction volume due to the Credit Crunch, according to Real Capital
Analytics, 2010 has started off on a positive note.
The first and second quarter results show the progress made in the
investment markets and the overall change in attitude from just a year
ago. Sales volume increased from Q2’09 with every property type
registering higher volume. Core rather than distressed sales were
primarily behind the volume gains despite the huge overhang of
distressed situations. Analysis also reveals that lenders are far more
likely to restructure and extend rather than liquidate troubled assets.
One sign of recovery is the increase of CMBS issuances which totaled 4
billion during the first quarter of 2010; whereas, only 3 billion were issued
in 2009.
When speaking of the future of commercial real estate, there are several
questions to ponder:
What other mergers will take place within CRE?
What will be the lasting effect of the BRAC?
How long will the Credit Crunch effect commercial real estate and the
economy?
When will the economy as a whole turn around?
Will internet sales continue to restructure the retail business?
What is the next technology that will come out?
Will data be made more available to the public?
What effect will the new NAR Realtors Property ResourceTM (RPR) -
an online real estate library/archive with data on every property in
the U.S.—have on the CRE industry? Yes, commercial information will
be included. Read their blog for more info
What new technologies will help evolve the Green movement?
What new products / materials will have an effect on CRE building
designs?
What new technologies will increase operating efficiencies?
What will drive leasing and sales in the coming years?
When will the wave of distressed assets actually hit the markets
and when will this activity slow down?
Sources:
1—www.thepeoplehistory.com/pricebasket.html
2—Dot-com bubble
3—www.commercialpropertyinfo.net/images/Office_Market_Report.pdf
4—Vacant Dot-Com Sites in San Francisco Turn Into New Apartments
5—Web 2.0: A new dot-com bubble in the making? Mar 19, 2007
6—Data Center Development Flying High Again In New Era of Cloud Computing. June 9, 2010
7—The Implications of September 11, 2001 New York attacks on U.S. Cities’ Urban Functionality and Corporate Location
8—9/11/2001 impact on trophy and tall office properties
9—The Economic Impact of Heightened Security Measures on the Commercial Real Estate Market, Post 9/11
10—Base Realignment and Closure, 2005
11—Final updated BRAC list
12—Economics of Crisis: Timeline of the entire Crisis
20
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About Coldwell Banker Commercial®
* Includes franchisees within the Coldwell Banker franchise
system that are licensed to use the Coldwell Banker
Commercial marks.
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Number of Companies 220*
Professionals 2,200 +
Countries 22
# of Listings 16,300 1
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The collective commercial real estate experience and know-how found in the Coldwell Banker Commercial system is without comparison in the industry - giving us insight into the complex challenges both corporate occupiers and owners face each day. We understand that commercial real estate is a fluid and ever-evolving process. By delivering precise solutions, customized to your specific requirements, we can assist you to anticipate and capitalize on changes as they arise. Each office around the globe is empowered to provide clients with critical market knowledge and support. Additionally, CBC of-fices collaborate and leverage their global presence through industry-leading technologies, enabling CBC professionals to effec-tively serve their clients.
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A Review of
Commercial Real Estate
In the 21st Century
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