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A Review of
Commercial Real Estate
  In the 21st Century




                                                        1
                                           By: John Boyer
  View other sections: www.crereview.com
Table of Contents

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
   © 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        2
   organization.
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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.
                      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%


                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.
                                                                                                                                         3

                                         View other sections: www.crereview.com
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
                                                                             Future Effect
spots like the Silicon Valley near San Francisco. Some companies
engaged in lavish internal spending, such as elaborate business              Recent research suggests, however, that as many as 50% of the
facilities and luxury vacations for employees.                               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-
Then the bubble burst in March of 2000. Investors began selling off          coms were small players who were able to weather the financial
stock in large quantities, putting the market into a precipitous fall for    markets storm. Also, much of the sublease inventory opened
the next two years until it finally bottomed out. Billions of dollars        the doors for tenants to enjoy Class A space at reduced rates.
vanished and thousands lost their jobs. 2 Follow the complete timeline
                                                                             Web 2.0 Bubble?
Commercial Real Estate Effect                                                In 2007, new Internet technologies prompted another rush of
Cities all over the US sought to become the "next‖ Silicon Valley by         start-ups to tap the energy associated with Web 2.0 - wikis,
building network-enabled office space to attract Internet                    blogs, podcasts, widgets and social media — to quickly extend
entrepreneurs. There was false demand for commercial real estate             their Internet real estate.
that was fueled by the dot-com companies and their insatiable
appetite for growth. Many professionals achieved great success
                                                                             But while the Web 2.0 phenomenon may have some things in
quickly moving tenants into 100,000 SF facilities — much of which
                                                                             common with the Dot-Com bubble, experts note that there are
was unneeded space.
                                                                             also differences, including the low cost of entry for companies
                                                                             launching blog, wiki or social networking businesses. The main
In the beginning of the bubble, Data Centers — facilities housing            difference, however, is that this time around, consumers are
computers, servers, telecommunications and storage equipment, and            driving the adoption of the technologies rather than companies
systems to backup and protect data, power and cooling systems —              trying to force their Internet sites onto users.5
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               Opportunities Today
expensive. Over-committed tenants quickly dumped their unneeded
space, quadrupling the available sublease inventory in the span of six       The business need for Internet speed is rising exponentially in
quarters to 146 million SF3. The flood of sublease space was                 the digital era of Google, Yahoo, Netflix, YouTube, Facebook,
concentrated in technology hubs such as San Francisco, San Jose,             Twitter, online gaming and smart phones. Such "cloud" data
                                                                             must be stored offsite at colossal data centers. Data center
Seattle, Austin and Boston.
                                                                             property niche has been one of the few commercial real estate
                                                                             sectors to generate sizzle through the recession.
Silicon Valley and San Francisco were hit the hardest. Rents
plummeted in both areas. San Francisco's office demand in the 91-            Granted, data center sales, leasing and development transactions
block former industrial area known as South of Market, had 49%               slowed considerably in 2008 and 2009 as construction and
vacancy after the burst. The citywide office vacancy rate climbed to         acquisition financing dried up. However, pent-up demand since
23% in the fourth quarter of 2001 from 1.8% in the third quarter of          2005 has sparked a new flurry of construction, acquisitions and
2000. Office space from failed companies such as Pets.com were               equity raising activity by data center builders and investors, with
turned into Apartments. Employment in Silicon Valley high-tech               hundreds of thousands of square feet of new data center facilities
                                                                             were announced in 2009-2010.6                                       4
industries declined by about 17% and rent fell 30%. 4
                                              View other sections: www.crereview.com
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
                                                                                                                                           5

                                           View other sections: www.crereview.com
Base Realignment and Closure (BRAC) 2005
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

Major facilities slated for closure:

    Fort McPherson, Georgia
    Fort Gillem, Georgia
    Naval Submarine Base New London in Connecticut       Effect on Commercial Real Estate & the Economy
    (removed from list August 24, 2005)
                                                         When a military facility closes, the effects ripple throughout the
    Portsmouth Naval Shipyard in Kittery, Maine
                                                         surrounding community as families lose their neighbors, businesses
    (removed from list August 26, 2005)
                                                         lose their customers and workers lose their jobs. It also may affect
    Naval Air Station Brunswick in Maine                 transportation in many cities as workers are moved around to the
    Ellsworth Air Force Base in South Dakota (removed    alignment. A positive impact is the ―buffer‖ space around the bases
    from list August 26, 2005)                           may become available for development.
    Cannon Air Force Base in New Mexico (temporarily
    removed from closure August 26, 2005)
    Fort Monmouth in New Jersey                          Although the report came out in 2005, the effects of it may not have
    Defense Finance and Accounting Service in New York   been seen yet. Many of the bases scheduled to close either have been
    Fort Monroe, Virginia                                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
    Willow Grove Naval Air Station in Pennsylvania
                                                         the years to come the economic impact of the BRAC 2005. Just to give
    Naval Station Ingleside, Texas                       you an idea of the effect of a BRAC, the closure of Norton Air Force
    Otis Air National Guard Base, Massachusetts          Base in 1994 had a devastating impact especially to the City of San
    (removed from list August 26, 2005)                  Bernardino. There has been some redevelopment since then, however,
    Navy Supply Corps School                             the financial impact on the city is still being felt today.

Major facilities slated for realignment:
                                                         So what will communities do with the empty base space? These are
                                                         massive spaces that had a very specific function, and are typically in
    Army Human Resource Command (HRC) in                 secure, remote areas. Several plans have been put into place as to
    Missouri, moving to the Fort Knox in Kentucky.       what to do with the empty base space. These plans are guided by
    Walter Reed Army Medical in Washington, D.C.         “Local Redevelopment Authorities.‖ These plans include city centers,
    Naval Station Great Lakes in Illinois                green centers, biomedical research parks, residential and other
    Naval Air Station Oceana in Virginia (extent
                                                         commercial uses. An issue to deal with is because of the security
    contingent on reopening the former Naval Air         levels of some bases, the street grid and other necessary items are not
    Station Cecil Field in Florida)                      extended out into the community. So the challenge becomes finding a
                                                         way, as the bases are redeveloped, to make those connections; new
    Grand Forks Air Force Base in North Dakota
                                                         roads, removal of security gates, etc.
    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




                                                                                                                                   6

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Prosperous Times
  Prosperous Times
                                                                                   CRE Sales Volume 2004-2007 ($5m+)
  There was a period in the first decade of the 2000s, during
  2005-2007, which one can refer to as ―Prosperous Times;‖                    $250,000




                                                                   Millions
  where it seemed like everyone was prospering within
  commercial real estate. As shown in the graphs to the right                 $200,000
  or in the later part of this document, across all property
  types, sales were up, vacancies were down, CAP rates were                   $150,000                                                          Industrial
  at historic lows and rents were rising. Development was                                                                                       Office
  fast paced – construction and other bridge financing was                    $100,000                                                          Retail
  readily available and inexpensive – the market was                                                                                            Apartment
  enjoying quite a ride.                                                       $50,000


                                                                                   $0
  Debt capital was abundant. Not only for home purchases,
                                                                                           2004        2005       2006           2007
  refinances and other real estate related financial                                                                     Source: Real Capital Analytics
  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                In 2007 $423B of commercial real estate
  were unsound.                                                                        assets traded hands.

  Leverage buy-outs were abundant—the large banks, Wall
  Street and pension fiduciaries were spending into the                              CRE Avg. Price/SF 2004-2007
  economy like they had not done in the recent past.              $300
  Things were really good!                                                                                                  $271
                                                                  $250                                        $225
                                                                  $200                             $196
  Virtually all of the significant transactions (displayed on                            $175                               $187
  the following pages) were completed during this time. In                                                       $175                        Industrial
                                                                  $150                    $145     $155
  fact, there were several record-setting quarters for the                                                                                   Office
  individual property types. Competition among buyers for         $100
  the largest and best assets remained fierce. Condo                                                                                         Retail
                                                                   $50                                           $74          $76
  Converters were running strong during these years. The                                 $59       $65
  prices they paid for multi-family properties outpaced the          $0
  conservative business mind of the investor buyers.
                                                                                   2004         2005      2006         2007
                                                                                                                        Source: Real Capital Analytics

  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                                                                Source: Fannie Mae
  be a false “Prosperous Times” and this all led to...
                                                                   “You could do less than half the things right and still                                   7
                                                                          have an awesome year…” anonymous
                                        View other sections: www.crereview.com
Credit Crunch & Housing Market
After a short period of ―false‖ economic prosperity (See
Prosperous Times), Americans experienced an economic                                                     7.5                                                 $245




                                                                    U.S. Home Sale Units (in millions)
crisis. In 2008, the National Bureau of Economic Research                                                7.0
                                                                                                                                                             $225
                                                                                                         6.5
announced that we were officially in a recession.




                                                                                                                                                                    Median Home Price
                                                                                                         6.0                                                 $205
Unemployment rates sky-rocketed with well over a million jobs                                            5.5                                                 $185
                                                                                                         5.0
lost in 2008.                                                                                            4.5                                                 $165




                                                                                                                                                                          (000s)
                                                                                                         4.0                                                 $145
                                                                                                         3.5                                                 $125
                                                                                                         3.0
During the ―Housing Market Boom,‖ inflated confidence in                                                 2.5                                                 $105
prices led lenders to give mortgages to unqualified buyers,                                              2.0                                                 $85
                                                                                                         1.5                                                 $65
which led to spectacular short-term gains. These "subprime"                                              1.0
loans were packaged into groups that were traded like                                                    0.5                                                 $45
securities and purchased by some of the largest investment                                               0.0                                                 $25
                                                                                                               20002001 200220032004 20052006 200720082009
houses including Citigroup and Merrill Lynch.
                                                                                                                    U.S. Homesale Units     Median Home Price

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
 250,000                                                       In August 2007 on the commercial side of the business – as a
                                        CMBS Issuances         result of the subprime mortgage debacle – the securitized debt
 200,000                                                       markets became virtually non-existent. See CMBS Issuances Chart
 150,000
                                                               Credit became unavailable due to the global financial meltdown.
 100,000
                                                               As such, virtually every aspect of the commercial real estate
 50,000                                                        industry was impacted. Establishing current values was near
                                                               impossible due to lack of market activity, comparable sales and
       0                                                       short sales.
             2005      2006      2007      2008      2009
                                                               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                                                                     8
professionals were taking advantage of this new-found opportunity.
                                        View other sections: www.crereview.com
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          9
more information on building signs, business cards or property flyers; that a user can download directly to
their Smartphone.                        View other sections: www.crereview.com
Office 2001—2009

 5,000                                                      12%             200,000,000
                 Office Transactions & Avg Cap Rate                                                           Office Absorption
 4,000                                                      10%             150,000,000
                                                            8%
 3,000                                                                      100,000,000
                                                            6%
 2,000                                                                       50,000,000
                                                            4%
 1,000                                                      2%                               0
        0                                                   0%              -50,000,000           01' 02' 03' 04' 05' 06' 07' 08' 09'

Trans
             01' 02' 03' 04' 05' 06' 07' 08' 09'            CAP            -100,000,000
Source: Real Capital Analytics                                              Source: CoStar




 $250,000                                                   $500            $35.00                                                       16%
                      Office Volume & Price/SF                                                   Office Rental & Vacancy Rates
                                                                            $30.00
 $200,000                                                   $400
                                                                            $25.00                                                       12%
 $150,000                                                   $300            $20.00
                                                                                                                                         8%
 $100,000                                                   $200            $15.00
                                                                            $10.00                                                       4%
   $50,000                                                  $100
                                                                             $5.00
            $0                                              $0               $0.00                                                       0%
 Millions         01' 02' 03' 04' 05' 06' 07' 08' 09'        P/SF                        01' 02' 03' 04' 05' 06' 07' 08' 09' Vacancy
                                                                            Rental
Source: Real Capital Analytics                                              Source: CoStar




    Significant Transactions: CBD
    Name                         City, ST              SF           Price                    $/SF         Buyer                       Year
                                                                                                          Boston Properties JV Goldman
    General Motors Bldg          New York, NY          1,925,000 $2,853,000,000 $1,482                                                 2008
                                                                                                          Sachs JV Meraas Capital
    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



    Significant Transactions: Suburban
    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
                                                                                                    Source: Real Capital Analytics

             View next page for a breakdown of the Office Sector by year                                                                       10

                                              View other sections: www.crereview.com
Office Breakdown




                                                            11

                   View other sections: www.crereview.com
Retail 2001—2009

  5,000                                                          12%            50,000,000
                  Retail Transactions & Avg Cap Rate                                                                 Retail Absorption
                                                                 10%            40,000,000
  4,000
                                                                 8%             30,000,000
  3,000                                                                         20,000,000
                                                                 6%
  2,000                                                                         10,000,000
                                                                 4%
                                                                                               0
  1,000                                                          2%
                                                                                -10,000,000        00' 01' 02' 03' 04' 05' 06' 07' 08' 09'
         0                                                       0%             -20,000,000
 Trans            01' 02' 03' 04' 05' 06' 07' 08' 09'            CAP            -30,000,000
Source: Real Capital Analytics                                                  Source: Reis




  $80,000                                                        $250           $18.00                                                            12
                       Retail Volume & Price/SF                                                     Retail Rental & Vacancy Rates
  $70,000
                                                                 $200           $17.00                                                            10
  $60,000
  $50,000
                                                                                                                                                  8
                                                                 $150           $16.00
  $40,000                                                                                                                                         6
  $30,000                                                        $100           $15.00
                                                                                                                                                  4
  $20,000                                                                       $14.00
                                                                 $50                                                                              2
  $10,000
             $0                                                  $0             $13.00                                                            0
 Millions           01' 02' 03' 04' 05' 06' 07' 08' 09'          P/SF           Rental
                                                                                               01' 02' 03' 04' 05' 06' 07' 08' 09'Vacancy
Source: Real Capital Analytics                                              Source: Reis




     Significant Transactions: Strip Malls
     Name                             City, ST              SF          Price                  $/SF          Buyer                         Year
                                                                                                             LaSalle Bank JV Madison
     Bay Street Emeryville            Emeryville, CA        383,055     $234,000,000           $611          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


     Significant Transactions: Malls
     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
                                                                                                             Macerich JV Alaska Permanent
     Westfield North Bridge           Chicago, IL           680,933     $515,000,000           $756                                       2008
                                                                                                             Fund Corp
                                                                                                        Source: Real Capital Analytics
                  View next page for a breakdown of the Retail Sector by year                                                                          12

                                                    View other sections: www.crereview.com
Retail Breakdown




                                                            13

                   View other sections: www.crereview.com
Apartment 2001—2009

  7,000                                                        12%          120,000
                  Apart Transactions & Avg Cap Rate
  6,000                                                        10%
                                                                                                    Apartment Absorption
                                                                            100,000
  5,000
                                                               8%            80,000
  4,000
                                                               6%            60,000
  3,000
  2,000
                                                               4%            40,000

  1,000                                                        2%            20,000
         0                                                     0%                    0
 Trans        01' 02' 03' 04' 05' 06' 07' 08' 09'              CAP                          01' 02' 03' 04' 05' 06' 07' 08' 09'
                                                                            -20,000
Source: Real Capital Analytics                                              Source: Reis




  $120,000                                               $160,000           $1,050                                                          9
                      Apart Volume & Price/SF PPU                                               Apart Rental & Vacancy Rates                8
  $100,000                                                                  $1,000
                                                         $120,000                                                                           7
   $80,000                                                                   $950                                                           6
                                                                                                                                            5
   $60,000                                               $80,000             $900
                                                                                                                                            4
   $40,000                                                                   $850                                                           3
                                                         $40,000
   $20,000                                                                                                                                  2
                                                                             $800
                                                                                                                                            1
             $0                                          $0                  $750                                                           0
 Millions          01' 02' 03' 04' 05' 06' 07' 08' 09'         P/SF                         01' 02' 03' 04' 05' 06' 07' 08' 09'
                                                                            Rental                                           Vacancy
Source: Real Capital Analytics                                               Source: Reis




     Significant Transactions: Garden
     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



     Significant Transactions: High / Mid Rise
     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
                                                                                                    Source: Real Capital Analytics

              View next page for a breakdown of the Apartment Sector by year                                                                    14

                                                 View other sections: www.crereview.com
Apartment Breakdown




                                                         15

                View other sections: www.crereview.com
Industrial 2001—2009

 7,000                                                           12%       250,000,000
                 Industrial Transactions & Avg Cap Rate                                                         Industrial Absorption
 6,000                                                           10%       200,000,000
 5,000
                                                                 8%        150,000,000
 4,000
                                                                 6%        100,000,000
 3,000
                                                                 4%         50,000,000
 2,000
 1,000                                                           2%                        0
        0                                                        0%                              01' 02' 03' 04' 05' 06' 07' 08' 09'
                                                                            -50,000,000

Trans            01' 02' 03' 04' 05' 06' 07' 08' 09'             CAP      -100,000,000

Source: Real Capital Analytics                                              Source: CoStar (Flex & Warehouse combined)




 $60,000                                                         $100      $8.00                                                          12%
                       Industrial Volume & Price/SF                                      Industrial Rental & Vacancy Rates
 $50,000                                                         $80                                                                      10%
                                                                           $6.00
 $40,000                                                                                                                                  8%
                                                                 $60
 $30,000                                                                   $4.00                                                          6%
                                                                 $40
 $20,000                                                                                                                                  4%
                                                                           $2.00
 $10,000                                                         $20                                                                      2%

            $0                                                   $0        $0.00                                                          0%
 Millions          01' 02' 03' 04' 05' 06' 07' 08' 09'           P/SF      Rental
                                                                                        01' 02' 03' 04' 05' 06' 07' 08' 09' Vacancy
   Source: Real Capital Analytics                                               Source: CoStar (Flex & Warehouse combined)




     Significant Transactions: Flex
    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



     Significant Transactions: Warehouse
    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
                                                                                                       Source: Real Capital Analytics

                 View next page for a breakdown of the Industrial Sector by year                                                                16

                                                    View other sections: www.crereview.com
Industrial Breakdown




                                                           17

                  View other sections: www.crereview.com
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            18
    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 sellerssections: www.crereview.com results in many deals that fall through.
                                           View other are not in a position to offer it which
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
                                                                                                                           19

                                                     View other sections: www.crereview.com
About Coldwell Banker Commercial®




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.

            When working with a CBC professional, you are connected to a full range
                  of capabilities and expertise in every major property type.

    SERVICES
          Acquisition and Disposition Services                          Number of Companies                    220*
          Brokerage & Transaction Management
                                                                        Professionals                          2,200 +
          Corporate Services
          Capital Markets                                               Countries                              22
          Property and Facilities Management
          Project Management                                            # of Listings                          16,300 1
          Construction Management                                       Industry Leading Technologies
          Auction Services
          Investment Analysis                                           A wealth of commercial real estate
          Market Research & Analysis                                    experience
          Relocation Services
          Real Estate Owned Services

* Includes franchisees within the Coldwell Banker franchise
  system that are licensed to use the Coldwell Banker                        Find an Advisor or Search for Properties
  Commercial marks.
                                                                                                                                   20
1 - Displayed on CBCWorldwide.com May 2010
                                                View other sections: www.crereview.com
A Review of
Commercial Real Estate
  In the 21st Century
    800-222-2162
 www.cbcworldwide.com                    21

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A Review of Commercial Real Estate during the first decade of the 21st Century.

  • 1. A Review of Commercial Real Estate In the 21st Century 1 By: John Boyer View other sections: www.crereview.com
  • 2. Table of Contents 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 © 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 2 organization. View other sections: www.crereview.com
  • 3. 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. 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% 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. 3 View other sections: www.crereview.com
  • 4. 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 Future Effect spots like the Silicon Valley near San Francisco. Some companies engaged in lavish internal spending, such as elaborate business Recent research suggests, however, that as many as 50% of the facilities and luxury vacations for employees. 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- Then the bubble burst in March of 2000. Investors began selling off coms were small players who were able to weather the financial stock in large quantities, putting the market into a precipitous fall for markets storm. Also, much of the sublease inventory opened the next two years until it finally bottomed out. Billions of dollars the doors for tenants to enjoy Class A space at reduced rates. vanished and thousands lost their jobs. 2 Follow the complete timeline Web 2.0 Bubble? Commercial Real Estate Effect In 2007, new Internet technologies prompted another rush of Cities all over the US sought to become the "next‖ Silicon Valley by start-ups to tap the energy associated with Web 2.0 - wikis, building network-enabled office space to attract Internet blogs, podcasts, widgets and social media — to quickly extend entrepreneurs. There was false demand for commercial real estate their Internet real estate. that was fueled by the dot-com companies and their insatiable appetite for growth. Many professionals achieved great success But while the Web 2.0 phenomenon may have some things in quickly moving tenants into 100,000 SF facilities — much of which common with the Dot-Com bubble, experts note that there are was unneeded space. also differences, including the low cost of entry for companies launching blog, wiki or social networking businesses. The main In the beginning of the bubble, Data Centers — facilities housing difference, however, is that this time around, consumers are computers, servers, telecommunications and storage equipment, and driving the adoption of the technologies rather than companies systems to backup and protect data, power and cooling systems — trying to force their Internet sites onto users.5 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 Opportunities Today expensive. Over-committed tenants quickly dumped their unneeded space, quadrupling the available sublease inventory in the span of six The business need for Internet speed is rising exponentially in quarters to 146 million SF3. The flood of sublease space was the digital era of Google, Yahoo, Netflix, YouTube, Facebook, concentrated in technology hubs such as San Francisco, San Jose, Twitter, online gaming and smart phones. Such "cloud" data must be stored offsite at colossal data centers. Data center Seattle, Austin and Boston. property niche has been one of the few commercial real estate sectors to generate sizzle through the recession. Silicon Valley and San Francisco were hit the hardest. Rents plummeted in both areas. San Francisco's office demand in the 91- Granted, data center sales, leasing and development transactions block former industrial area known as South of Market, had 49% slowed considerably in 2008 and 2009 as construction and vacancy after the burst. The citywide office vacancy rate climbed to acquisition financing dried up. However, pent-up demand since 23% in the fourth quarter of 2001 from 1.8% in the third quarter of 2005 has sparked a new flurry of construction, acquisitions and 2000. Office space from failed companies such as Pets.com were equity raising activity by data center builders and investors, with turned into Apartments. Employment in Silicon Valley high-tech hundreds of thousands of square feet of new data center facilities were announced in 2009-2010.6 4 industries declined by about 17% and rent fell 30%. 4 View other sections: www.crereview.com
  • 5. 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 5 View other sections: www.crereview.com
  • 6. Base Realignment and Closure (BRAC) 2005 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 Major facilities slated for closure: Fort McPherson, Georgia Fort Gillem, Georgia Naval Submarine Base New London in Connecticut Effect on Commercial Real Estate & the Economy (removed from list August 24, 2005) When a military facility closes, the effects ripple throughout the Portsmouth Naval Shipyard in Kittery, Maine surrounding community as families lose their neighbors, businesses (removed from list August 26, 2005) lose their customers and workers lose their jobs. It also may affect Naval Air Station Brunswick in Maine transportation in many cities as workers are moved around to the Ellsworth Air Force Base in South Dakota (removed alignment. A positive impact is the ―buffer‖ space around the bases from list August 26, 2005) may become available for development. Cannon Air Force Base in New Mexico (temporarily removed from closure August 26, 2005) Fort Monmouth in New Jersey Although the report came out in 2005, the effects of it may not have Defense Finance and Accounting Service in New York been seen yet. Many of the bases scheduled to close either have been Fort Monroe, Virginia 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 Willow Grove Naval Air Station in Pennsylvania the years to come the economic impact of the BRAC 2005. Just to give Naval Station Ingleside, Texas you an idea of the effect of a BRAC, the closure of Norton Air Force Otis Air National Guard Base, Massachusetts Base in 1994 had a devastating impact especially to the City of San (removed from list August 26, 2005) Bernardino. There has been some redevelopment since then, however, Navy Supply Corps School the financial impact on the city is still being felt today. Major facilities slated for realignment: So what will communities do with the empty base space? These are massive spaces that had a very specific function, and are typically in Army Human Resource Command (HRC) in secure, remote areas. Several plans have been put into place as to Missouri, moving to the Fort Knox in Kentucky. what to do with the empty base space. These plans are guided by Walter Reed Army Medical in Washington, D.C. “Local Redevelopment Authorities.‖ These plans include city centers, Naval Station Great Lakes in Illinois green centers, biomedical research parks, residential and other Naval Air Station Oceana in Virginia (extent commercial uses. An issue to deal with is because of the security contingent on reopening the former Naval Air levels of some bases, the street grid and other necessary items are not Station Cecil Field in Florida) extended out into the community. So the challenge becomes finding a way, as the bases are redeveloped, to make those connections; new Grand Forks Air Force Base in North Dakota roads, removal of security gates, etc. 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 6 View other sections: www.crereview.com
  • 7. Prosperous Times Prosperous Times CRE Sales Volume 2004-2007 ($5m+) There was a period in the first decade of the 2000s, during 2005-2007, which one can refer to as ―Prosperous Times;‖ $250,000 Millions where it seemed like everyone was prospering within commercial real estate. As shown in the graphs to the right $200,000 or in the later part of this document, across all property types, sales were up, vacancies were down, CAP rates were $150,000 Industrial at historic lows and rents were rising. Development was Office fast paced – construction and other bridge financing was $100,000 Retail readily available and inexpensive – the market was Apartment enjoying quite a ride. $50,000 $0 Debt capital was abundant. Not only for home purchases, 2004 2005 2006 2007 refinances and other real estate related financial Source: Real Capital Analytics 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 In 2007 $423B of commercial real estate were unsound. assets traded hands. Leverage buy-outs were abundant—the large banks, Wall Street and pension fiduciaries were spending into the CRE Avg. Price/SF 2004-2007 economy like they had not done in the recent past. $300 Things were really good! $271 $250 $225 $200 $196 Virtually all of the significant transactions (displayed on $175 $187 the following pages) were completed during this time. In $175 Industrial $150 $145 $155 fact, there were several record-setting quarters for the Office individual property types. Competition among buyers for $100 the largest and best assets remained fierce. Condo Retail $50 $74 $76 Converters were running strong during these years. The $59 $65 prices they paid for multi-family properties outpaced the $0 conservative business mind of the investor buyers. 2004 2005 2006 2007 Source: Real Capital Analytics 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 Source: Fannie Mae be a false “Prosperous Times” and this all led to... “You could do less than half the things right and still 7 have an awesome year…” anonymous View other sections: www.crereview.com
  • 8. Credit Crunch & Housing Market After a short period of ―false‖ economic prosperity (See Prosperous Times), Americans experienced an economic 7.5 $245 U.S. Home Sale Units (in millions) crisis. In 2008, the National Bureau of Economic Research 7.0 $225 6.5 announced that we were officially in a recession. Median Home Price 6.0 $205 Unemployment rates sky-rocketed with well over a million jobs 5.5 $185 5.0 lost in 2008. 4.5 $165 (000s) 4.0 $145 3.5 $125 3.0 During the ―Housing Market Boom,‖ inflated confidence in 2.5 $105 prices led lenders to give mortgages to unqualified buyers, 2.0 $85 1.5 $65 which led to spectacular short-term gains. These "subprime" 1.0 loans were packaged into groups that were traded like 0.5 $45 securities and purchased by some of the largest investment 0.0 $25 20002001 200220032004 20052006 200720082009 houses including Citigroup and Merrill Lynch. U.S. Homesale Units Median Home Price 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 250,000 In August 2007 on the commercial side of the business – as a CMBS Issuances result of the subprime mortgage debacle – the securitized debt 200,000 markets became virtually non-existent. See CMBS Issuances Chart 150,000 Credit became unavailable due to the global financial meltdown. 100,000 As such, virtually every aspect of the commercial real estate 50,000 industry was impacted. Establishing current values was near impossible due to lack of market activity, comparable sales and 0 short sales. 2005 2006 2007 2008 2009 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 8 professionals were taking advantage of this new-found opportunity. View other sections: www.crereview.com
  • 9. 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 9 more information on building signs, business cards or property flyers; that a user can download directly to their Smartphone. View other sections: www.crereview.com
  • 10. Office 2001—2009 5,000 12% 200,000,000 Office Transactions & Avg Cap Rate Office Absorption 4,000 10% 150,000,000 8% 3,000 100,000,000 6% 2,000 50,000,000 4% 1,000 2% 0 0 0% -50,000,000 01' 02' 03' 04' 05' 06' 07' 08' 09' Trans 01' 02' 03' 04' 05' 06' 07' 08' 09' CAP -100,000,000 Source: Real Capital Analytics Source: CoStar $250,000 $500 $35.00 16% Office Volume & Price/SF Office Rental & Vacancy Rates $30.00 $200,000 $400 $25.00 12% $150,000 $300 $20.00 8% $100,000 $200 $15.00 $10.00 4% $50,000 $100 $5.00 $0 $0 $0.00 0% Millions 01' 02' 03' 04' 05' 06' 07' 08' 09' P/SF 01' 02' 03' 04' 05' 06' 07' 08' 09' Vacancy Rental Source: Real Capital Analytics Source: CoStar Significant Transactions: CBD Name City, ST SF Price $/SF Buyer Year Boston Properties JV Goldman General Motors Bldg New York, NY 1,925,000 $2,853,000,000 $1,482 2008 Sachs JV Meraas Capital 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 Significant Transactions: Suburban 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 Source: Real Capital Analytics View next page for a breakdown of the Office Sector by year 10 View other sections: www.crereview.com
  • 11. Office Breakdown 11 View other sections: www.crereview.com
  • 12. Retail 2001—2009 5,000 12% 50,000,000 Retail Transactions & Avg Cap Rate Retail Absorption 10% 40,000,000 4,000 8% 30,000,000 3,000 20,000,000 6% 2,000 10,000,000 4% 0 1,000 2% -10,000,000 00' 01' 02' 03' 04' 05' 06' 07' 08' 09' 0 0% -20,000,000 Trans 01' 02' 03' 04' 05' 06' 07' 08' 09' CAP -30,000,000 Source: Real Capital Analytics Source: Reis $80,000 $250 $18.00 12 Retail Volume & Price/SF Retail Rental & Vacancy Rates $70,000 $200 $17.00 10 $60,000 $50,000 8 $150 $16.00 $40,000 6 $30,000 $100 $15.00 4 $20,000 $14.00 $50 2 $10,000 $0 $0 $13.00 0 Millions 01' 02' 03' 04' 05' 06' 07' 08' 09' P/SF Rental 01' 02' 03' 04' 05' 06' 07' 08' 09'Vacancy Source: Real Capital Analytics Source: Reis Significant Transactions: Strip Malls Name City, ST SF Price $/SF Buyer Year LaSalle Bank JV Madison Bay Street Emeryville Emeryville, CA 383,055 $234,000,000 $611 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 Significant Transactions: Malls 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 Macerich JV Alaska Permanent Westfield North Bridge Chicago, IL 680,933 $515,000,000 $756 2008 Fund Corp Source: Real Capital Analytics View next page for a breakdown of the Retail Sector by year 12 View other sections: www.crereview.com
  • 13. Retail Breakdown 13 View other sections: www.crereview.com
  • 14. Apartment 2001—2009 7,000 12% 120,000 Apart Transactions & Avg Cap Rate 6,000 10% Apartment Absorption 100,000 5,000 8% 80,000 4,000 6% 60,000 3,000 2,000 4% 40,000 1,000 2% 20,000 0 0% 0 Trans 01' 02' 03' 04' 05' 06' 07' 08' 09' CAP 01' 02' 03' 04' 05' 06' 07' 08' 09' -20,000 Source: Real Capital Analytics Source: Reis $120,000 $160,000 $1,050 9 Apart Volume & Price/SF PPU Apart Rental & Vacancy Rates 8 $100,000 $1,000 $120,000 7 $80,000 $950 6 5 $60,000 $80,000 $900 4 $40,000 $850 3 $40,000 $20,000 2 $800 1 $0 $0 $750 0 Millions 01' 02' 03' 04' 05' 06' 07' 08' 09' P/SF 01' 02' 03' 04' 05' 06' 07' 08' 09' Rental Vacancy Source: Real Capital Analytics Source: Reis Significant Transactions: Garden 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 Significant Transactions: High / Mid Rise 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 Source: Real Capital Analytics View next page for a breakdown of the Apartment Sector by year 14 View other sections: www.crereview.com
  • 15. Apartment Breakdown 15 View other sections: www.crereview.com
  • 16. Industrial 2001—2009 7,000 12% 250,000,000 Industrial Transactions & Avg Cap Rate Industrial Absorption 6,000 10% 200,000,000 5,000 8% 150,000,000 4,000 6% 100,000,000 3,000 4% 50,000,000 2,000 1,000 2% 0 0 0% 01' 02' 03' 04' 05' 06' 07' 08' 09' -50,000,000 Trans 01' 02' 03' 04' 05' 06' 07' 08' 09' CAP -100,000,000 Source: Real Capital Analytics Source: CoStar (Flex & Warehouse combined) $60,000 $100 $8.00 12% Industrial Volume & Price/SF Industrial Rental & Vacancy Rates $50,000 $80 10% $6.00 $40,000 8% $60 $30,000 $4.00 6% $40 $20,000 4% $2.00 $10,000 $20 2% $0 $0 $0.00 0% Millions 01' 02' 03' 04' 05' 06' 07' 08' 09' P/SF Rental 01' 02' 03' 04' 05' 06' 07' 08' 09' Vacancy Source: Real Capital Analytics Source: CoStar (Flex & Warehouse combined) Significant Transactions: Flex 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 Significant Transactions: Warehouse 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 Source: Real Capital Analytics View next page for a breakdown of the Industrial Sector by year 16 View other sections: www.crereview.com
  • 17. Industrial Breakdown 17 View other sections: www.crereview.com
  • 18. 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 18 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 sellerssections: www.crereview.com results in many deals that fall through. View other are not in a position to offer it which
  • 19. 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 19 View other sections: www.crereview.com
  • 20. About Coldwell Banker Commercial® 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. When working with a CBC professional, you are connected to a full range of capabilities and expertise in every major property type. SERVICES Acquisition and Disposition Services Number of Companies 220* Brokerage & Transaction Management Professionals 2,200 + Corporate Services Capital Markets Countries 22 Property and Facilities Management Project Management # of Listings 16,300 1 Construction Management Industry Leading Technologies Auction Services Investment Analysis A wealth of commercial real estate Market Research & Analysis experience Relocation Services Real Estate Owned Services * Includes franchisees within the Coldwell Banker franchise system that are licensed to use the Coldwell Banker Find an Advisor or Search for Properties Commercial marks. 20 1 - Displayed on CBCWorldwide.com May 2010 View other sections: www.crereview.com
  • 21. A Review of Commercial Real Estate In the 21st Century 800-222-2162 www.cbcworldwide.com 21 View other sections: www.crereview.com