cassidy turley northern california. observations about the sacramento region’s office market jim...
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![Page 1: Cassidy Turley Northern California. Observations about the Sacramento Region’s Office Market Jim Gray, CCIM jgray@ctbt.com (916) 617-4255](https://reader035.vdocument.in/reader035/viewer/2022070409/56649e995503460f94b9bcdc/html5/thumbnails/1.jpg)
Cassidy Turley Northern California. www.ctbt.com
Observations about the Sacramento Region’s Office Market
Jim Gray, [email protected](916) 617-4255
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WWW.CTBT.COM/Research
• Garrick Brown heads up our research 14 staff and 400 brokers 43 northern California
regional reports Office and Industrial 8 reports –from our retail
division Terranomics Abby Friedman maintains
the Comp Exchange Network (916) 617-4266
• Go check them out!
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The Numbers
Positive2012 closed with the best showing in 7 years!Occupancy has increased by almost 1.5 million square feetVacancy has declined from 17.6% to 16.2%A number of large dealsModest employment growth Q4 2011= 920,500 Q4 2012 = 931,200
10.9% 9.8%
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The Numbers
NegativeAverage asking rents lower$1.63 full service 2012 vs. $1.67 2011 2% lower than last year18% lower than 2008
2007 2008 2009 2010 2011 2012
0%
4%
8%
12%
16%
20%
24%
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
13.10%14.10%
16.10%17.00%
17.60%16.2%
$1.89 $1.99 $1.91 $1.82 $1.71
$1.63
Vacancy Avg Asking Rate
Va
ca
nc
y
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Employment Growth
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11 Largest Leases in 2012
Healthcare Call Center
Health Insurance Telcom
Trade Schools
• 11 Leases • 20K to 295K• Average rent of $1.53
PSF, FSG
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10 Largest Sales
• Top four were portfolios• Healthnet - 9% cap rate, institutional buyer, long
term, strong quality tenant• Distress and REO a big part of market dynamics
($38 to $90 per square foot) • Value add with hopes for a quick flip or mid-term
cash flow
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It’s More than “Just the Numbers”
1. Government
2. Complexity
3. Zombies
4. New Money
5. “Med-Ed”
6. Challenge of Creativity
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Government Employment Sacramento
232,100 in Jan 2007 and 223,000 December 2012. Off nearly 4%.
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Government Insights
• Sacramento region identified as second most at risk market in the event of the Fiscal Cliff
• State leases termination clause• GSA seeking shorter terms• Passage of Proposition 30 brings relief and a
bottom
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Complexity
Dramatic increase
Huge societal and market changes
Examples
Patience, perseverance and expertise
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Zombies
• Office buildings 50% vacant or more for longer than 1,000 Days
• Nearly 250 buildings
• Nearly 6 million square feet
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New Money
• Acquire a building at market in 2007
• Paid $200/sf, 7.5% cap rate• 65% LTV, 6.25% rate, 25 years• Lose tenant in half the building
Purchase Price $ 10,000,000
Down Payment 35% $ 3,500,000
Balance 65% $ 6,500,000
Rate 6.25%
Amortization 300
Payment $ (42,879)
Occupied 25,000
Average Rent $ 1.85 $ 46,250
Operating Expenses $0.60 $ (15,000)
Net Income 1.25 $ 31,250
Vacant 25,000 $ -
Operating Expenses 0.45 $ (11,250)
Monthly Cash Flow 50% Vacant $ (22,879)
Annual Loss $ (274,542)
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What Do I Do?
• Broker brings a tenant• 5 year lease at $1.50• NO TI’s AS-IS• 6% commission for 5 years =
$135,000 • Net operating income =
$645,000• Building loses $2 million in
“value”• ROE 3.73%, ROA 1.3%• Loan comes due in 3 years • Kick down the road?
Monthly Cash Flow 50% Vacant $ (22,879)
Rent 50% @ $ 1.50 $ 37,500
Additional Operating Expense $ 0.15 $ (3,750)
Gross Rents $ 83,750
Operating Expenses $ 0.60 $ (30,000)
Debt Service/Amort $ (42,879)
Cash Flow $ 10,871
ROA 1.30%
ROE 3.73%
Net Operating Income $ 645,000 Value
Cap Rate 7% $ 9,214,286
8% $ 8,062,500
9% $ 7,166,667
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$30 in additional TI’s = $750,0005 months of free rent$1.40 FSG Rent Rent reduction for current tenant to $1.50/sf and a $6/sf refurbishment allowance. =$150,000Renewal commission at 5% = $105,000New Money = $1,140,000NOI = $510,000 @ 8% Cap Rate = $6,375,000Adj. NOI with 15% Vacancy @ 8% Cap Rate = $5,418,750Loan balance $6 to $6.5 MillionMore Zombies?
But It Can Get Worse!
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“ED-MED”
Healthcare and educational real estate have been a huge part of the marketRegion blessed with large systems.
Sutter, Dignity, UCDMC, Kaiser, AdventistSmaller: Marshall, Ride-out, North-Bay Hill Physicians, Radiological Associates, etc.
Real estate influence and trendsStrong demand on campus of hospitalsBig systems competition for capital
Pension liabilities, electronic health records, physician alignment
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Obamacare/Medicare
Greater coverageMore accessIncreased reliance on public fundingAccording to Congressional Budget Office, Medicare will cost a trillion dollars by 2020Average wage earner pays in $109,000 but will receive $343,000Healthcare delivery system will get bigger and bigger, more concentrated, complicated, and regulated!
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Education and Health Care Employment
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For Profit Colleges Losing Their Luster!
• California lawmakers this summer decreed that students at 154 schools—nearly all of them for-profit colleges—will no longer be eligible for the state's need-based Cal Grants, citing the schools' low graduation rates and students' heavy debt burdens.
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Student Loan Debt Unsustainable!
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Creative Space
Not this But this
Sample Sacramento Office Google’s Office Menlo Park
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More Than Design
• Sense of place• Mixed use• Ubiquitous connectivity – (Bring Your Own
Device)• Dynamic and collaborative workplace• Our industry and landlords need to compete for
a changing workforce and changing space needs