k dorin & rountrey - vcu school of business€¦ · 2004 real estate market survey c entral v...

KNIGHT DORIN & ROUNTREY

2004 Market Participant Survey

of Central Virginia

2004 REAL ESTATE MARKET SURVEY

CENTRAL VIRGINIA MARKET INSIGHT – 2004 & Market optimism peaked in 1999 and then slowly declined for several years. We saw increasing

optimism in 2003 and mixed signals for 2004.

& Vacancy expectations for most property types decreased slightly in 2003 but inched upwards again for 2004.

& Going-in cap rates are expected to remain fairly stable or decline for all property types. The overall cap rate expectations from this survey average just above 9.5%.

& Unleveraged IRR (discount rates) expectations have declined – averaging about 11.5%.

& Mortgage financing is expected to remain adequate for 2004 for all property types except hotels.

& Apartments are still attractive investments despite rising vacancies and wave of new construction.

& Retail continues to be in favor with generally positive trends.

& The industrial market experienced problems during the recent economic downturn, but appears to be stabilizing in 2004.

ECONOMIC EXPECTATIONS Outlook for 2004– The participants were very optimistic about the local economy for 2004 as 84%

indicated that the economy will be better in 2004 and 16% felt it would be the same. No one thought conditions would be worse. This is in contrast to 2003 where sixty- five percent of the participants predicted no change in economic conditions, 15% predicted a downturn and only 20% expected improved conditions.

As we discussed last year, the real estate market during the past 3 years has been like none other over the last several decades. Mortgage interest rates at 40 year lows and the flight of money away from alternative investments to real estate have caused values to grow significantly. This is despite negative real estate fundamentals of high vacancies and declining rent that typically lead to lower values. As shown in our survey, rates of return (capitalization rates and discount rates) declined an average of 65 basis points between 2001 and 2004. The question at this point is whether or not these conditions have created a bubble of inflated values. In 2003 and through the first quarter of 2004 mortgage rates continued to drop and real estate values kept growing. As we approach the second half of 2004, the good economic news of job growth has caused bad news for the mortgage market as rates are increasing. The answer to the question of whether or not we have a “bubble of inflated values” that will burst is now on the radar screen. We anticipate that savvy investors will proceed with caution, but the less experienced may make unwise decisions in this volatile environment.

We hope this survey proves useful and welcome your comments and suggestions.

KNIGHT, DORIN & ROUNTREY - 2 - Copyright © 2004 REAL ESTATE ANALYSTS Tel: (804) 427--6001

Fax: (804) 427--6004


INVESTMENT CRITERIA

Office Market

CATEGORY 2004 Range

2004 Average

2003 Range

2003 Average

Holding Period (Years) 4.0 – 20.0 9.1 3.0 – 15.0 8.1 Income (Growth Rate) 2.0% – 5.0% 2.8% 0.0% – 5.0% 2.6% Operating Expenses (Growth Rate) 2.0% – 3.0% 2.7% 2.0% – 3.0% 2.5% Vacancy Loss 4.0% – 10.0% 7.2% 3.0% – 10.0% 6.4% Going-In Capitalization Rate 9.0% – 11.0% 9.8% 9.3% – 11.0% 10.1% Terminal Capitalization Rate 9.8% – 12.0% 10.3% 9.5% – 15.0% 10.7% Discount Rates (Unleveraged IRR) 8.5% – 12.0% 11.1% 9.5% – 15.0% 12.2% Equity Yield (Leveraged IRR) 12.0% – 20.0% 15.2% 12.5% – 20.0% 16.3% Tenant Retention Rates:

Class A 60.0% – 85.0% 73.8% 60.0% – 85.0% 69.0% Class B 50.0% – 80.0% 67.4% 50.0% – 85.0% 69.0%

Months vacant between tenants: Class A 3.0 – 12.0 6.0 3.0 – 12.0 6.8 Class B 4.0 – 15.0 9.0 3.0 – 12.0 6.7

Retail Market

CATEGORY 2004 Range

2004 Average

2003 Range

2003 Average

Holding Period (Years) 6.0 – 20.0 10.4 5.0 – 15.0 9.8 Income (Growth Rate) 1.5% – 4.0% 2.8% 2.0% – 4.0% 2.6% Operating Expenses (Growth Rate) 2.0% – 4.0% 2.8% 2.0% – 3.0% 2.5% Vacancy Loss 3.0% – 10.0% 6.0% 5.0% – 7.0% 5.5% Going-In Capitalization Rate 6.5% – 10.0% 9.0% 9.3% – 10.5% 9.8% Terminal Capitalization Rate 7.0% – 10.5% 9.3% 9.5% – 11.0% 10.0% Discount Rates (Unleveraged IRR) 9.0% – 13.0% 11.4% 9.5% – 15.0% 12.1% Equity Yield (Leveraged IRR) 12.0% – 20.0% 15.9% 12.5% – 20.0% 15.9% Tenant Retention Rates:

Neighborhood 65% – 90% 77.8% 50% – 90% 72% Community 65% – 90% 77.5% 50% – 90% 70%

Months vacant between tenants: Neighborhood 3.0 – 12.0 5.0 3.0 – 8.0 4.9 Community 3.0 – 9.0 6.6 3.0 – 8.0 4.9

Apartment Market

CATEGORY 2004 Range

2004 Average

2003 Range

2003 Average

Holding Period (Years) 6.0 – 30.0 11.8 8.0 – 10.0 9.8 Income (Growth Rate) 2.0% – 6.5% 3.1% 2.0% – 6.5% 3.3% Operating Expenses (Growth Rate) 2.0% – 4.0% 3.2% 2.0% – 4.0% 2.8% Vacancy Loss 3.0% – 7.0% 5.6% 3.0% – 7.0% 4.7% Going-In Capitalization Rate 8.3% – 10.0% 9.0% 8.3% – 10.0% 9.2% Terminal Capitalization Rate 9.0% – 10.0% 10.3% 9.0% – 10.0% 9.5% Discount Rates (Unleveraged IRR) 9.5% – 12.0% 11.5% 9.5% – 12.0% 10.7% Equity Yield (Leveraged IRR) 13.0% – 19.0% 14.7% 13.0% – 19.0% 16.0%


Fax: (804) 427--6004


Industrial Market

CATEGORY 2004 Range

2004 Average

2003 Range

2003 Average

Holding Period (Years) 5.0 – 20.0 9.9 5.0 – 20.0 9.8 Income (Growth Rate) 0.0% – 4% 2.6% 0.0% – 4.0% 2.1% Operating Expenses (Growth Rate) 0.0% – 3.0% 2.5% 0.0% – 3.0% 2.3% Vacancy Loss 3.0% – 10.0% 6.3% 3.0% – 10.0% 6.0% Going-In Capitalization Rate 9.0% – 12.0% 10.2% 9.0% – 12.0% 10.1% Terminal Capitalization Rate 9.5% – 11% 10.7% 9.5% – 11.0% 10.0% Discount Rates (Unleveraged IRR) 9.5% – 15% 11.4% 9.5% – 15.0% 11.6% Equity Yield (Leveraged IRR) 13% – 19% 15.8% 13.0% – 19.0% 16.0% Tenant Retention Rates:

Office/Whse. 60% – 90% 75.7% 50% – 90% 60.0% Distribution 50% – 90% 69.3% 50% – 90% 66.0%

Months vacant between tenants: Office/Whse. 2.0 – 12.0 6.9 3.0 – 9.0 5.7 Distribution 2.0 – 12.0 7.4 3.0 – 14.0 8.1

HOTEL MARKET

There was a very limited response from participants in the hotel industry. Therefore, any survey indicators would most likely be very weak or tainted. Some of the information has been included in the historical charts presented later in this report.

LAND LEASE RATES Range Average

Cap Rate (with flat rent) 6.5% - 11.0% 9.5% Cap Rate (average 2% escalation) 7.0% - 10.5% 8.7% Subordination Impact? 100 – 200 basis points Credit Impact? 50 - 200 basis points

RESERVES, LEASING COSTS, AND TI'S Include in Cap Rate Analysis Yes No Reserves for Replacement 72.0% 28.0% Leasing Commissions 62.5% 37.5% Tenant Improvement Costs 45.8% 54.2%

COST OF SALE Price Range Low High Average

<$500K 5.0% 8.0% 7.8% $500K to $1M 4.5% 7.0% 5.8% $1M to $3M 3.5% 6.0% 4.6% $3M to $5M 3.0% 5.0% 4.0% >$5M 2.5% 4.5% 3.5%


Fax: (804) 427--6004


ENTREPRENEURIAL PROFIT Basis Year Low High Median

Improvements Only 1998 10% 30% 19% 1999 8% 33% 18% 2000 4% 30% 15% 2001 12% 20% 15% 2002 10% 30% 20% 2003 5% 15% 10% 2004 10% 20% 13%

Land and Improvements 1998 5% 35% 15% 1999 10% 30% 18% 2000 4% 35% 13% 2001 11% 20% 12% 2002 10% 30% 16% 2003 10% 20% 13% 2004 10% 25% 14%

Gross Sales 1998 5% 33% 20% 1999 5% 35% 23% 2000 5% 30% 25% 2001 20% 33% 25% 2002 25% 35% 30% 2003 10% 25% 18% 2004 15% 33% 22%

LOT PRICE RATIOS Improved

Property Price Lot Value Ratio Range as % of Total Price Median 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004

Under $100K 20-30% 22-35% 25-35% 20-30% 22-30% 28% 27% 30% 25% 26%

$100-$150K 19-30% 18-35% 20-35% 15-27% 22-33% 25% 25% 28% 25% 26%

$150-$200K 20-28% 18-35% 20-35% 20-25% 20-30% 23% 24% 25% 25% 24%

$200-$300K 20-28% 21-28% 20-30% 20-30% 20-30% 21% 24% 25% 25% 24%

Over $300K 18-28% 20-33% 20-30% 20-35% 18-30% 20% 25% 25% 22% 22%

AVAILABILITY OF MORTGAGE FINANCING Property Type Past 12 months Next 12 months Apartments 2.7 2.6 Hotels 1.3 1.8 Industrial 2.3 2.4 Office 2.3 2.3 Retail 2.5 2.6 Residential (A & D) 2.5 2.5 Rating Scale: 1 = Inadequate 2 = Adequate 3 = Abundant


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REAL ESTATE LIQUIDITY – MARKETING PERIOD % of Responses

Property Type < 6 Months 6-12 Months > 12 Months Retail Free-standing single user retail 47% 47% 6% Small unanchored retail center 34% 53% 13% Neighborhood retail center 56% 37% 7% Community retail center 33% 58% 9% Regional retail center 40% 40% 20% Multi-family Apartment (> 120 units) 62% 38% 0% Apartment (< 120 units) 46% 46% 8% Office Large - well leased 58% 42% 0% Large – poorly leased 17% 33% 50% Small – well leased < 20,000 sf 47% 43% 10% Small – poorly leased < 20,000 sf 11% 39% 50% Industrial Small single user 25% 65% 10% Multi-tenant flex/bulk distribution 35% 55% 10% Manufacturing Buildings 0% 0% 100% Special use properties Banks, historic, churches, etc. 8% 42% 50% Land Single family development 52% 24% 24% Multi-family development 41% 30% 29% Retail 31% 38% 31% Office 0% 28% 72% Industrial 0% 28% 72%

No Change Increase Decrease Marketing periods for 2004 74% 11% 15%


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Market Survey Historical Summary (Response Averages)

Category 1993 1994 1995 1996 1997 1998 Year

1999 2000 2001 2002 2003 2004

Holding Period (Years) Office Retail Industrial Apartments Hotels

9.9 9.6

10.9 8.9

10.0

9.9 9.6 9.2 8.8 6.0

8.8 9.8

12.6 9.4 8.3

8.7 10.1 11.9 10.9 10.4

10.6 9.8

11.6 9.7 7.8

7.8 9.8 9.4 9.3

10.8

8.9 10.7 10.6 11.7 8.3

7.2 8.0 9.3

10.3 7.0

6.8 7.6 9.1 9.6 7.3

8.1 9.8 9.8 9.8

9.1 10.4 9.9

11.8 7.5

Income (Growth Rate) Office Retail Industrial Apartments Hotels

2.6% 2.7% 3.1% 3.1%

3.5% 3.3% 3.6% 3.3% 2.8%

4.2% 3.0% 3.7% 4.5% 5.7%

3.7% 3.3% 3.1% 3.4% 3.5%

3.2% 2.9% 2.9% 3.2% 3.6%

3.5% 3.0% 3.1% 3.0% 3.7%

2.9% 2.7% 2.8% 3.1% 1.8%

3.4% 2.6% 3.0% 3.2% 1.7%

2.9% 2.9% 3.1% 2.9% 2.2%

2.4% 2.9% 2.6% 3.2% 0.8%

2.6% 2.6% 2.1% 3.3%

2.8% 2.8% 2.6% 3.1% 0.7%

Operating Expenses (Growth Rate) Office Retail Industrial Apartments Hotels

3.6% 3.6% 3.5% 3.8%

3.1% 3.2% 3.2% 3.9% 3.4%

3.5% 3.0% 3.0% 3.9% 4.4%

3.1% 3.1% 2.8% 3.8% 4.3%

3.8% 3.1% 3.1% 3.4% 3.2%

3.0% 2.9% 2.9% 3.5% 3.7%

3.0% 2.4% 2.7% 3.2% 3.5%

2.6% 2.3% 2.4% 2.7% 3.4%

2.8% 2.6% 2.8% 3.0% 3.1%

2.8% 2.8% 2.5% 3.1% 2.7%

2.5% 2.5% 2.3% 2.8%

2.7% 2.8% 2.5% 3.1% 2.7%

Vacancy Loss Office Retail Industrial Apartments Hotels

10.4% 8.6% 7.2% 6.3%

35.0%

7.3% 8.0% 6.7% 5.6%

30.0%

6.1% 6.7% 5.3% 5.4%

30.0%

5.8% 6.1% 4.3% 5.3%

30.8%

6.5% 6.5% 5.1% 6.2%

31.7%

5.7% 5.5% 4.8% 4.7%

32.5%

5.3% 6.0% 5.8% 4.9%

31.3%

5.4% 6.0% 5.6% 4.9%

25.7%

7.4% 6.9% 6.5% 5.9%

22.5%

6.4% 5.5% 6.0% 4.7%

7.2% 6.0% 6.3% 5.6%

32.7%

Going-In Capitalization Rate Office Retail Industrial Apartments Hotels

11.0% 10.2% 10.2% 9.8%

12.0%

11.1% 10.4% 10.1% 9.2%

12.4%

10.8% 10.5% 10.4% 9.3%

12.0%

10.4% 10.4% 10.0% 9.3%

11.1%

10.2% 10.5% 10.0% 9.5%

11.6%

10.0% 10.2% 9.8% 9.4%

10.9%

10.1% 9.9% 9.9% 9.2%

11.7%

9.9% 10.0% 10.1% 9.6%

12.6%

10.1% 10.2% 10.3% 9.3%

12.1%

10.5% 10.2% 10.3% 9.1%

11.3%

10.1% 9.8%

10.1% 9.2%

9.8% 9.0%

10.2% 9.0%

12.3%

Terminal Capitalization Rate Office Retail Industrial Apartments Hotels

10.8% 10.4% 10.4% 10.6% 12.9%

11.1% 10.5% 10.5% 9.7%

12.3%

10.6% 10.5% 10.5% 9.7%

12.5%

10.6% 10.4% 10.4% 9.9%

12.3%

10.5% 10.6% 10.2% 10.3% 12.3%

10.7% 10.6% 10.6% 9.9%

12.2%

10.3% 10.3% 10.2% 10.0% 13.2%

10.6% 10.6% 10.7% 10.1% 13.0%

10.8% 10.3% 10.4% 9.8%

12.5%

10.4% 10.3% 10.4% 9.4%

11.9%

10.7% 10.0% 10.0% 9.5%

10.3% 9.3%

10.7% 10.3% 13.8%

Discount Rates (Unleveraged IRR) Office Retail Industrial Apartments Hotels

13.7% 12.8% 12.6% 13.9% 14.2%

13.6% 12.3% 12.0% 11.5% 13.5%

12.7% 12.3% 12.5% 13.1% 14.0%

12.7% 12.5% 12.0% 12.6% 16.9%

12.4% 12.8% 12.1% 12.1% 14.2%

12.6% 12.9% 12.5% 12.0% 14.1%

12.2% 12.3% 12.0% 11.8% 14.3%

11.6% 12.4% 12.1% 11.5% 16.6%

12.3% 12.7% 12.3% 11.4% 16.0%

12.6% 12.4% 12.4% 11.6% 14.7%

12.2% 12.1% 11.6% 10.7%

11.1% 11.4% 11.4% 11.5% 17.5%

Equity Yield (Leveraged IRR) Office Retail Industrial Apartments Hotels

15.6% 15.4% 14.7% 16.5% 20.3%

16.1% 15.8% 14.5% 14.4% 17.5%

17.5% 16.8% 15.5% 15.5% 18.8%

17.0% 17.4% 15.6% 17.8% 21.5%

16.7% 16.9% 16.7% 16.4%

17.2% 16.7% 15.7% 16.5%

14.8% 15.3% 14.8% 13.5%

17.1% 16.7% 16.0% 16.5% 18.0%

16.3% 15.9% 16.0% 16.0%

15.2% 15.9% 15.8% 14.7% 25.0%

KNIGHT, DORIN & ROUNTREY Real Estate Analysts

9157 Atlee Road, Suite A Mechanicsville, VA 23116

(804) 427-6001 Fax: (804) 427-6004 Copyright © 2004

CENTRAL VIRGINIA MARKET SURVEY HISTORICAL SUMMARY 2004

(Response Averages)

Knight, Dorin & Rountrey Real Estate Analysts

9157 Atlee Road, Suite A Mechanicsville, VA 23116

(804) 427-6001 Fax: (804)427-6004 Copyright © 2004

Holding Period

6789

10111213

1993

1995

1997

1999

2001

2003

Year

s

OfficeRetailIndustrialApartmentsHotels

Vacancy Loss

4.0%5.0%6.0%7.0%8.0%9.0%

10.0%11.0%

1993

1995

1997

1999

2001

2003

OfficeRetailIndustrialApartments

Income Growth Rates

1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%5.5%6.0%

1993

1995

1997

1999

2001

2003


Expense Growth Rates

1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%5.5%6.0%

1993

1995

1997

1999

2001

2003


Going-In Cap Rates

9.0%9.5%

10.0%10.5%11.0%11.5%12.0%12.5%13.0%

1993

1995

1997

1999

2001

2003


Terminal Cap Rates

9.0%9.5%

10.0%10.5%11.0%11.5%12.0%12.5%13.0%

1993

1995

1997

1999

2001

2003


Discount Rates

11.0%12.0%13.0%14.0%15.0%16.0%17.0%

1993

1995

1997

1999

2001

2003


Equity Yield Rates

14.0%15.0%16.0%17.0%18.0%19.0%20.0%21.0%22.0%

1993

1995

1997

1999

2001

2003



CORPORATE PROFILE

KNIGHT, DORIN & ROUNTREY

REAL ESTATE ANALYSTS

REAL ESTATE MARKET KNOWLEDGE

• Leading real estate appraisal and consulting company founded in 1986

• Strong network with other real estate professionals • Most comprehensive commercial real estate

transaction database in Central Virginia • Over 1,000 commercial lease and sale transactions

analyzed annually • Over $500 million in property value appraised in

Central Virginia annually • Clients – include financial institutions, government

agencies, law firms, investors, developers, and major corporations

COMMERCIAL APPRAISAL SERVICES FOR

• Office, retail, industrial, apartment, subdivision, and special purpose properties

• Mortgage, securitization, investments, and exchanges • Buyer, seller, tenant – decision support analysis • Estates, trusts, partitions, partial interests, valuation

subject to environmental impairment • Portfolio evaluation • Appraisal reviews • Litigation support • Bankruptcy • Estate planning

MARKET COVERAGE – VIRGINIA

• Richmond-Petersburg MSA • Norfolk-Newport News-Virginia Beach MSA • Williamsburg Area • Charlottesville MSA • Roanoke MSA – Shenandoah Valley area • Outer Banks – Northeastern North Carolina area

OWNER

Edward G. Knight, MAI, SRA

PROFESSIONAL STAFF

J. Parks Rountrey, MAI, SRA William A. Hopkins, Jr., MAI, SRA Joseph W. Smith, III, MAI Michael A. Knight

ADVISORY & CONSULTING SERVICES

• Market studies • Feasibility analysis • Project development analysis • Litigation support • Highest and best use analysis • Lease analysis • Asset evaluation • Strategic planning • Due diligence research and advice • Site selection • Land use analysis

Contact Us Knight, Dorin & Rountrey Real Estate Analysts 9157 Atlee Road, Suite A Mechanicsville, Virginia 23116 For more information call 804-427-6001 or e-mail E-mail address: [email protected]


Fax: (804) 427--6004

mailto:[email protected]

k dorin & rountrey - vcu school of business€¦ · 2004 real estate market survey c entral v...

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