Commercial Real Estate Property Brokers Experience Profit Drop as Market Slows Down

Commercial Property companies are starting to experience decrease in their profits as the commercial real estate market start to lose its heat.

According to Bloomberg.com, CBRE Group Inc. and Jones Lang LaSalle Inc. experienced their biggest loss since 2011 due to difficulties in equities. The loss brought a 14% drop for CBRE Group and 16% for Jones Lang LaSalle. HFF Inc. dropped with 20% in August while Marcus & Millichap Inc. dropped with 17%.

The possible further decrease in real estate transactions is raising concern among big brokerage firms that their profit will also decline together with the transactions. The possible drop in profit might cause for the firms to lease their properties instead of selling them.

Brad Burke, analyst at Goldman Sachs Group Inc., said that the profit growth at the companies "is in the rear- view mirror at this point. This is a natural maturing of the real estate cycle."

According to Real Capital Analytic Inc., commercial real estate transactions in the U.S. increase with 23% during last year's second quarter. Major several sales made early last year had "front- loaded" the first half volume of $255.1 billion. Two industrial portfolio were included in the transaction, namely Manhattan's Waldorf Astoria Hotels and Willis Tower in Chicago.

Sam Chandan, founder and chief economist of Chandan Economics, said that "We have had a very rich transaction market for some time, so the rate of growth in activity has necessarily begun to taper off. It's not the kind of growth we saw when we were coming off the bottom."

According to ChicagoBusiness.com, a quarterly report from Federal Reserve Data revealed that "the expansion in real estate lending is slowing." A 2.7% increase in outstanding commercial- mortgage debt in 2013 was observed and it raised again by 4.2% last year.

Various factors affect the slowdown in commercial property market business. Some of those factors were a strong dollar's effect non- U.S. profit, drop in oil prices that causes decrease in real estate demand "energy hubs" such as Calgary and Houston.

Oil's Impact on Commercial Real Estate

Perhaps more so than any other industry, oil and its pricing volatility impacts all elements of the U.S. economy, both positively and negatively. Looking at it from a macroeconomic level, higher oil prices are good for some industries, and yet bad for others—and the same goes for lower prices. So overall, how does oil and energy affect the commercial real estate economy? Well, almost in the exact same way, if you break it down.

According to recent statistics from the U.S. Energy Information Administration., U.S. oil production will grow to 9.31 million barrels daily by 2016, so the industry is still healthy production-wise. But for the past few years, prices have remained low and are expected to remain steady or even decline for the foreseeable future. Where this has the greatest impact for commercial real estate is in the retail sector. It’s a simple equation: Reduced gas prices cause a boost in discretionary income and the end result is additional spending for the country. Money that would be typically earmarked towards filling car and home gas tanks now remains in the wallets of U.S. consumers and retailers are the clear beneficiaries.

It’s not a coincidence that the retail sector has shown a marked improvement as oil prices have plummeted. The 2014 holiday retail sales were strong and 2015 is expected to be much the same. By extension, another byproduct winner in this ripple effect are operators of industrial properties, particularly as online retail demand triggers the movement of purchased items through their facilities.

But while retailers and shopping center and industrial building owners celebrate continued affordable gas prices, commercial real estate within markets like Houston, where oil production is the “bread and butter” business, the news is not so welcome. In fact, the entire state of Texas, our country’s number one oil drilling state, has really been squeezed by the price decline.

The Lone Star State is always subject to the underlying forces of the energy sector. When oil fundamentals are strong and prices are up, Texas is a national economic leader. But when the opposite occurs, stunted financial growth is the unfortunate result. This decline has seeped into most of the regional commercial real estate segments such as the Texas office and retail sectors. In addition, a slowdown in local construction has been steadily occurring. Fortunately, Texans have learned from previous oil crunches to diversify the businesses to avoid being completely beholden to the energy industry—so while there has been some job loss, it has been mitigated to some degree.

But Texas and other localized markets specializing in energy aside, the current state of the oil industry and its lower than normal prices and the uplift in consumer spending has generally been considered a good thing for commercial real estate. While the long-term future of oil prices remains a mystery, retailers will still be able to ride this wave for the time being.

Slippery Situation: Oil’s Potential Impact on Real Estate

While it’s certainly good news for the majority of consumers, the sliding cost of oil and gas could gum up the works for some real estate owners and investors.

With crude oil prices hovering around $50 a barrel since the beginning of the year, industry watchdogs are voicing concerns about the threats to particular real estate markets and CMBS transactions.

Oversupply and weak demand have pushed crude oil down more than 55 percent from its recent peak of $107 a barrel in June 2014. For the regions and commercial assets that are fueled by the petroleum industry—including parts of Texas, Colorado and North Dakota—sustained low oil prices could lead to vacancies and reduced property incomes, several real estate observers cautioned.

That, in turn, could bring on a new wave of delinquencies on highly leveraged properties, as well as increased volatility in high-yield bonds, some said.

“What people are most worried about is exposure to real estate markets with a lot of oil-services tenants,” Trepp Senior Managing Director Manus Clancy told Mortgage Observer in mid-January, noting that so far the impacts are largely theoretical.

“Upon re-leasing, the office tenants in those spaces would look to either give up space or spend less money,” he said. “Houston seems to be ground zero for that concern.”

Mr. Clancy said the submarkets at greatest risk are the oilfield “man camps” in West and South Texas and North Dakota’s Bakken shale region, where oil workers drill for fresh supply.

“These are places where there may be a couple of limited-service hotels and multifamily properties and everyone is there just to drill,” he said. “Those will be the first places to close up and die if oil remains in the $40 to $50 range.”

Jana Partners, an activist hedge fund that once held a major investment in the recently spun-off oilfield lodgings company Civeo Corp. sold its entire $51 million stake in the Houston-based firm on Dec. 30, 2014, regulatory filings show.

The New York-based fund dumped its 12 million shares after Civeo announced plans to severely cut its 2015 spending to between $75 million and $85 million, from $260 million and $280 million in 2014, as previously reported. Civeo plans to close sites and further reduce its North American workforce.

Civeo’s stock closed at $3.14 a share on Jan. 21, down from about $25 a share in October 2014. Representatives for Jana and Civeo declined to comment.

Several other Houston-based companies that specialize in oil and oil services, including Baker Hughes and Schlumberger, have announced budget cuts and layoffs. Overall, oil company analysts have said they expect 500 to 800 U.S. drilling rigs to come out of service in 2015, the Houston Chronicle reported in late December.

Likewise, CMBS deals backed by properties with heavy oil-related tenant bases could also take a hit if oil prices remain at a sustained low for several months or more, according to Trepp and other industry sources.

“For the Houston market, the concern is that if you just took out a $100 million loan on an office property where you have three big energy tenants, your grade-A tenants may start to look like grade-B tenants,” Mr. Clancy said. “If oil prices remain low, the securitizer may wonder, ‘Will they shrink their square footage? Will they go out of business?’ he added. “Nobody can say for sure what will happen to these guys, so that’s where all eyes will be.”

One prominent B-piece buyer who spoke at CRE Financial Council’s January 2015 conference in Miami Beach said that some recently issued securitizations for non-prime Texas developments are in jeopardy with oil and gas prices down. That buyer, who could not be named due to a strict conference policy on attribution, said those CMBS loans had been originated with high loan-to-value ratios and that the properties’ projected revenue streams relied on continued oil sector growth.

Now that that growth has been stymied, the panelist said he fears the loans may be headed to special servicing in the near future. That speaker and other industry representatives at CREFC declined to go on the record with their comments.

To be sure, others see the drop in oil prices as a minor concern in the context of a stable economy and rejuvenated real estate industry.

“The geographic diversity of other assets in multi-borrower deals will mitigate oil price exposure for CMBS,” Mary MacNeill, managing director of U.S. CMBS at Fitch Ratings, told Mortgage Observer.

There are no records of a single-asset securitized loan on a property in Texas, according to Fitch. However, the loan could still bring down the cash flow of securitizations that hold other mortgages.

“Vacancies in certain markets will rise over time if oil prices stay low for a more protracted period,” said Ms. MacNeill. “Particularly for office properties in Houston or other oil-dependent markets.”

The city of 2.1 million people, which is commonly referred to as the “energy capital of the world,” houses more than 5,000 energy-related firms, according to city government data.

Among several buildings in Houston that could be exposed are two office properties: Two Westlake Park at 580 Westlake Park Boulevard, owned by Houston-based Hicks Ventures, and Two Allen Center at 1200 Smith Street, owned by Brookfield Office Properties, loan documents provided by Trepp show.

Two Westlake Park is 80 percent leased to ConocoPhillips and BP, while Two Allen Center is 52 percent leased to U.S.-based natural gas and oil producer Devon Energy Corporation. Civeo is based in nearby Three Allen Center at 333 Clay Street, also owned by Brookfield.

The Devon Energy lease does not expire until 2020, which gives the space “minimal near-term exposure,” according to a Brookfield spokesperson.

“While Houston is considered a resource market, its economy is clearly more diversified now than it was during the ’80s and ’90s,” said Paul Frazier, head of the real estate giant’s Houston region. “Furthermore, the mid-stream and down-stream sectors of the energy space are also prominent in our economy, which gives us a hedge against lower commodity prices.”

Tom Fish, co-head of real estate investment banking in JLL’s capital markets group, also said that Houston’s economy and real estate market are adaptable enough to handle a shock to the oil industry.

“I don’t expect developers and projects to be going bankrupt or for there to be a string of foreclosures because of over-leveraged debt,” said Mr. Fish, who is based in Texas’ most populous city. “The capital markets for new development are efficient enough to withstand distress in the market,” he said. “I was here during the oil downturn of the ’80s and I don’t think we’re there again.”

Still, Mr. Fish said that there are concerns about the future of office and high-end multifamily properties in Houston with crude oil prices at such a low.

“Those have been the two most active sectors of construction in our city for the past few years,” he said. “If oil prices were to stay below $50 a barrel for several years, it would take its toll, but we are a long way from reaching a point where we see a lot of defaults.”

For the time being, low oil prices create a boon for retail companies, medical facilities, technology firms, and low- to moderate-income residences, Mr. Fish said.

“We’re a consumer-driven economy,” he told Mortgage Observer. “There’s no better way to turbocharge that than to put money back into consumers’ pockets.”

Is Houston the Next Gateway City?

Institutional investor demand for Houston commercial real estate, coupled with job growth, a less expensive cost of housing and movement of oil and energy industries into the city is leading local players to predict that the most populousmetropolis in Texas could become the next gateway market. "Houston has always been a strong market for institutional investment, but it is now viewed as a gateway city," Kevin Roberts, the southwest president at Transwestern, said. "Today, it is considered one of the top tier investment markets in the U.S."

Las yea, the city was ranked fourth in the U.S. for foreign investment and fifth globally, according to the Association of Foreign Investors in Real Estate. "This was a huge improvement since not all that long ago, Houston was not a primary investment market for foreign capital, because most foreign investors were going toward gateway markets such as Los Angeles, San Francisco, New York, Washington, D.C., and Boston," Tom Fish, executive managing director at JLL, said. "[The city has] recently been perceived as a gateway market in the eyes of foreign investors, and [it] now has a healthy amount of foreign bidders."

Consolidation of the oil and energy industries into Houston has created internationally competitive jobs that draw foreign capital to the region, Kevin Roberts, the southwest president at Transwestern, said. He explained that Houston is predicted to be the number one supplier of oil and gas in teh United States in 2015.

Because of this, there has been a rapid increase in foreign investment from Mexico as well as an in-migration trend, according to Jan Sparks, managing director of structured finance at Transwestern. "There is significant influx of wealthy Mexican nationals into Houston, predominantly in Mexico City and Monterrey. Houston offers a stabilized, safer environment for them to raise their families and conduct their business. Commuting to numerous cities in Mexico from Houston is easy and inexpensive. They can get in and out of Mexico in the same day if they desire," she said.

The city has seen in-migration from the Northeastern, Midwestern and Western parts of the U.S., Roberts said, as people seek to take advantage of low-tax business opportunities. "Our governor has been very aggressive in trying to attract people to those businesses," Fish said. "The one thing that is interesting about the oil business is that it's not just people in hard hats drilling. It also produces an enormous amount of technology jobs, and a lot of people are coming in from places like California to fill those positions."

 

Job growth in Houston, which is seeing 80,000-100,000 new jobs created each year, is close to double the national average, Fish said. This means the office sector has seen a lot of demand, Sparks said, as it has been an efficient way to place large amounts of equity for the past two years. Houston now has more office space under construction than any city in the country, according to Fish, a vast majority of which is already leased.

 

Multifamily is also one of the leading product types in Houston this year, Roberts said, with more than 17,000 multifamily units delivered in 2014 and nearly 15,000 of those units abosorbed. "Many members of Generation Y are coming in and renting these urban, multifamily units," Roberts said. "Sixty percent of Generation Y renters think that they'll move within the next five years, so they're willing to pay up for apartment units because they are renters by choice."

 

With all of the new construction, Fish said that he believes there is enough discipline in the market to limit it to the best products that are able to get capitalized. "We have had a terrific four years of double-digit rent growth, and as long as we continue to experience the job growth that we are now, I think we'll be able to absorb the units that we have coming in," he said. "Even though construction prices are going up because of the heightened labor market, I think the future of Houston looks pretty healthy. There's always a little bit of caution about what will happen in the oil industry, but I'm very optimistic."

 

Although the market in Houston has been favored among investors for a couple of years, according to Roberts, he doesn't believe Houston has seen its peak yet. "Many use baseball analogy that we're in teh middle innings of an extra innings baseball game," Roberts said. "Fundamentals in Houston and the economy's supply and demand equilibrium are very much in check, and I do believe that this current cycle will have a very nice run. I don't think we're close to the end. I think we have several years in the future to enjoy this momentum and continue to build on it."

Energy exploration propping up Alberta commercial real estate market: Cities and towns being shaped by oil and gas sector

CALGARY - Billions of dollars invested in unconventional energy exploration is dramatically affecting economic and commercial real estate activity in key North American exploration hubs, including Alberta, creating opportunities for both investors and developers, according to a new report from CBRE Group, Inc.

The report said the new airport terminal in Fort McMurray, the gateway to the Alberta oilsands, is a prime example of some of the changes that are underway.

“Expectations are changing for energy markets in Canada and across North America,” said Ross Moore, director of research for CBRE in Canada, in a statement. “With new technologies and some of the largest oil and gas reserves on the continent, Canadian energy markets are set to experience sustained investment over several decades instead of the traditional boom and bust cycle. This certainly bodes well for local economies and demand for commercial real estate where energy exploration is taking place.”

The CBRE report, Energy Revolution Impact on Americas Commercial Real Estate, said Calgary and Edmonton have been joined by a growing number of cities and towns in the province that are being shaped by the oil and gas sector.

“We continue to see oil and gas activity bolster operations markets like Calgary and Edmonton where low office vacancy rates and significant industrial construction are the norm. Smaller energy exploration markets are also undergoing significant changes,” said Moore. “Robust demand for hotels in Whitecourt and Grand Prairie reflect this, as do rising apartment rents in Cold Lake.”

Greg Kwong, executive vice-president and regional managing director of CBRE in Calgary, said the reliance on the oil and gas industry is still very strong in the local downtown office market.

“But the good thing is that the oilpatch is a lot stronger than it was say 20 to 30 years ago. We have a lot more head offices here and those head offices comprises large chunks of office space,” said Kwong.

“The reliance on the oilpatch has proven to be good historically. If you look at the last 10 years, Houston, Dallas and Calgary have consistently been top office market performers because of the oilpatch. Even during the recession in 2009, Calgary and Houston came out not so bad.”

According to Calgary Economic Development, energy sector employment in the Calgary Economic Region in 2013 was 72,200, a 73.6 per cent increase from 2004. During the same time period, employment across all sectors increased by 27.8 per cent.

Employment in the energy sector accounts for 8.7 per cent of all employment in the Calgary Economic Region.

There are 1,743 energy sector businesses in the region accounting for three per cent of all businesses.

There are 135 head offices in Calgary as the city registered 60.7 per cent growth in head offices from 2003-2012.

Calgary has the highest concentration of head offices in Canada with 10.3 per 100,000 population compared with Toronto which is next with 4.1 per 100,000 population.

Newcor Commercial Real Estate Launches Firm in The Woodlands, Texas

THE WOODLANDS, Texas, Jan. 9, 2014 /PRNewswire/ -- Newcor Commercial Real Estate announced the opening of their new office in The Woodlands, Texas. With 43 years of combined experience and more than $500 million in transaction volume, Managing Principal Rob Banzhaf along with David Alexander, Krissie Vanyo and Ryan Dierker will head the Newcor leadership team.

"Newcor was established to offer our clients unparalleled service. We believe in building client relationships based on trust and results. I am elated with the team we have assembled as they embody the guiding principles of the firm," states Banzhaf.

In 2014 The Woodlands and North Houston will realize the culmination of two monumental projects; the largest civil infrastructure project in Texas history with the opening of the north portion of the Grand Parkway and the completion of the largest current construction project in the world with the new Exxon Mobil campus. These projects coupled with the local growth of companies such as Anadarko, Chevron, Southwestern Energy and Repsol are setting a precedent that is distinct from any region in the country.

"The growth of Houston's newest energy corridor and the economic affects on the area are unparalleled to anything going on right now. We are witnessing the beginning of the demand that will drive our market for the next 20 years," says Banzhaf.

About Newcor Commercial Real Estate:

Newcor Commercial Real Estate is a full service commercial real estate company headquartered in The Woodlands, Texas. With a focus on North Houston and around the new Exxon Mobil campus, Newcor is positioned to maximize their clients' opportunities in and around Houston's "New Energy Corridor."

Newcor Commercial Real Estate
25307 Interstate 45N, Suite 150
The Woodlands, TX 77380
Phone: 281-210-3090
Website: www.newcorcre.com
E-mail: info@newcorcre.com

CONTACT: Robert Banzhaf, 281.210.0093, rob@newcorcre.com

Multifamily Boom Slows

The multifamily industry is on an ascending path, with trendlines pointing to a steady, albeit slow, recovery of the housing market all throughout the U.S metro areas.

The construction pipeline remains active in most markets, with 1,400 properties, 316,010 units, currently under construction, according to the latest data from Pierce-Eislen. The company’s services monitor the 50+ unit apartment universe from the property level to the submarket/market level within 59 United States markets, extending in geography from the Pacific Northwest to the Mid-Atlantic.

Denver, L.A. Metro, Seattle and the Carolina Triangle lead the charts in terms of new apartment development, followed closely by Washington D.C., Northern Virginia, Urban Boston, and three of Texas’s economic hubs, North Dallas, Austin and West Houston.

Common Characteristics

Pierce-Eislen research shows that more than 90 percent of the units under construction possess two characteristics in common: the developments are located in urban environments, and they are positioned so as to serve the two, “renters-by-choice” lifestyle rental categories: wealthy empty nesters (55+), and young professional, double-income-no-kids-households.

The capital source, lender, developer, investor universe all seem to point to the same conclusion: urban, cutting-edge development, fully dressed up, with all the amenities is the one configuration that actually works in the current economic context.

On the other hand, when conducting quarterly comparisons of market data, the apartment industry conditions seem to be weakening. All four indexes of the National Multi Housing Council’s (NMHC) October Survey of Apartment Market Conditions dropped below 50 for the first time since July 2009. Market Tightness (46), Sales Volume (46), Equity Financing (39) and Debt Financing (41) all showed declining conditions from the previous quarter.

“After four years of almost continuous improvement across all indicators, apartment markets have taken a small step back,” said Mark Obrinsky, NMHC’s Vice President of Research and Chief Economist, in a statement. “Conditions cannot continue to improve indefinitely and new development is at least somewhat constrained by available capital – though more on the equity than the debt side. Even so, both the Market Tightness and Sales Volume Index are within hailing distance of the breakeven level and the Debt Financing Index rose despite some rise in interest rates. This bodes well for the apartment industry going forward.”

Key findings of the NMHC survey include:

Mixed sentiments regarding the availability of capital for new development. More than three quarters of the respondents regarded construction debt financing as widely available – 34 percent think both equity and debt financing are widely available, while 43 percent think construction loans are widely available but equity capital for new development is constrained. Only 36 percent think equity capital is widely available.

Market Tightness Index fell to 46 from 55. Conditions vary greatly from place to place, but on balance, most respondents (67 percent) said they saw no change in market tightness (higher rents and/or occupancy rates) compared with three months ago. One-fifth of respondents felt that markets were looser than three months ago, while 13 percent saw tighter markets.

The Sales Volume Index remained at 46. Almost one-third (32 percent) of respondents saw a lower number of property sales, compared with almost one-quarter (24 percent) who said sales volume was unchanged. A plurality of 44 percent regarded sales volume as unchanged.

The Equity Financing Index dipped to 39. Sixty percent viewed equity financing as unchanged – this was the tenth consecutive quarter in which the most common response was that equity finance conditions were unchanged from three months ago. By comparison, 27 percent of respondents viewed conditions as less available and only 5 percent viewed equity financing as more available.

Debt Financing Index rose 21 points to 41. Almost one quarter of respondents (22 percent) viewed conditions as better from three months ago, a sizable increase from eight percent last quarter. Forty-one percent of respondents believed now is a worse time to borrow, down from 67 percent in July.

The survey was conducted October 7-October 16 and included the responses of 64 CEOs and other senior executives of apartment-related firms nationwide.

Foreign buyers boost commercial real estate investment

Summary:  Canadian, European, and Middle Eastern investors, ushered by the hospitable lending environment, are looking to make real estate investments in the U.S.  The new wave of foreign investors have focused on the East and West Coasts. but are projected to move inland toward Dallas and Houston, which have the attractive job growth and population growth foreign real estate investors find attractive.  The asset class is itself an attractive alternative to volatile securities markets.  Foreign investment is expected to reach $350 billion this year, up 30% from last year, though still below the 2007 record of $570 billion.  It is a sellers market as commercial real estate supply is low.

Dallas --(U.S. Dallas News)--
The commercial real estate market is quickly making up ground lost in the recession.

And so far higher interest rates haven’t rained on the parade of investors looking to take advantage of the market.

A surge in foreign investment in this county’s property markets is also underway.

“The amount of capital that is coming from foreign investors in the U.S. is going to accelerate pretty dramatically,” Mark Gibson, executive managing director of HFF LP, told real estate executives meeting in Dallas on Friday.

Gibson said most of the offshore investors looking to boost their U.S. real estate holdings are coming from Canada, Europe and the Middle East.

Increasingly these buyers are spreading out from the large East and West Coast markets to buy in other cities, including Houston and Dallas.

Commercial property investors are focused on locations with the best long-term growth prospects, Gibson told members of the Commercial Real Estate Women Network at the Omni Dallas Hotel.

“They are looking at markets with job and population growth,” he said. “And they are looking for the infrastructure that is going to support jobs and population growth.”

Dallas-Fort Worth and Houston are near the top of the list of the country’s fastest employment growth markets. All of Texas’ major markets are seeing huge population increases — due in part to migration of people and business from other states.

“There are more corporate headquarters moves happening in the U.S. now than we’ve seen ever,” Gibson said. “A stunning amount of corporate America is relocating out of California to other places.”

Gibson said HFF — one of the country’s largest commercial real estate investment banking and property marketing firms — is forecasting about $350 billion in commercial real estate investment in the U.S. this year.

That’s up about 30 percent from last year, but it’s still well below the record $570 billion in 2007.

Gibson said many of the commercial property problems created by the recession have been solved. “Distressed asset problems — that’s yesterday,” he said.

Most of the big bank lenders “have worked through all their [problem properties] for the most part,” Gibson said. “They are on offense instead of defense — they are deploying capital into real estate.”

Even with this year’s higher interest rates, investors are pumping billions into commercial property, Gibson said.

“They are very tired of volatility in the public securities market,” he said. “They think it’s been hijacked by traders.”

Gibson doesn’t see any of the commercial property pricing and construction excesses that were apparent before the recession.

“There is discipline in the market, which there wasn’t in 2007,” he said. “Commercial real estate supply is still modest.”

In fact, he said, “It’s the lowest percentage supply of commercial real estate as a percentage of GDP in U.S. history.”

http://www.dallasnews.com/business/commercial-real-estate/headlines/20131011-foreign-buyers-boost-commercial-real-estate-investment.ece