What are the most important factors for Worcester, MA area landlords and commercial real estate investors to stay on top of this year?Where is the local market headed, where are the best investment opportunities, how can you capitalize on current market conditions and should you be buying or selling commercial real estate this year?
1. The Curve
The general consensus by analysts is that the nation’s commercial real estate market is finally entering recovery territory in the footsteps of the residential housing market. Experts from the Commercial Investment Real Estate Magazine report that the correction is now fully priced in and the market is on a firm foundation on which to begin rebuilding, though the expectations for growth are modest given the sluggish economy.Obviously all real estate is local, so the question for Worcester, Mass. landlords and investors is where is the local market on the curve and what the outlook for the future is like.
According to the latest round of data from LoopNet for Worcester, MA:
- Asking prices for retail and multifamily properties began to turn around in early 2012
- Asking prices for office and industrial properties began to rise in mid-2012
- The pivot point for actual multifamily and office sales prices was seen in 1st quarter 2012
- Multifamily and office property sales prices were up around 25% by December
- Industrial sales prices are also trending up, while retail continues to falter
- Asking rents for office, industrial and retail rose sharply in mid-2012, beating state averages
The Massachusetts Association of Realtors reports local Realtor confidence tripling from the end of 2011 to December 2012.
The hard fundamentals have been improving across the board for all sectors and the New England Market Outlook 2013 from CBRE reveals continued modest growth in Massachusetts home prices, while unemployment continues to drop and per capita income increases. The report indicates employment will continue to be one of the state’s strong suits, already replacing 87% of the jobs lots during the downturn. Healthcare and technology fields are seeing the largest increases in jobs being added, with a hungry venture capital base pushing to invest in local startups.
2. Returns Shift to Secondary Markets
It is now widely recognized that the best investment opportunities, highest returns and maximum growth potential is to be found in secondary and tertiary markets like Worcester, MA.
This creates incredible growth prospects for those current invested in the local market and that are early to get in during the first quarter of 2013. Worcester’s real estate markets have often been seen to deliver exaggerated echoes of state and national trends; diving lower in hard times and bouncing back higher in the good, and the same is expected to evolve in this new up-cycle.
3. Growing Competition
Of course these trends are no secret and with a recent survey of global real estate investors showing over 80% naming the U.S. as their top choice for investment this year, and the majority saying they plan to increase their investment volume the competition will heat up.
Interviews with commercial real estate brokers in the last issue of CIRE Magazine show many of these foreign investors are focused on single tenant net-leased properties and the largest possible Class A deals, as private equity funds will be too. However, this leaves plenty of opportunity for local landlords to expand their portfolios in other properties and benefit from the overall lift to the market. However, key to realizing the best yields and consistent cash flow will certainly be recognizing what turns today’s tenant on and checks all the boxes for them.
4. What Business Tenants Want
Worcester landlords seeking to keep and attract the best business tenants and demand the highest rents need to understand what it is that they want most.
- Fast internet
- Healthier and more productive workspaces
- Financially stable landlords
- Reliable traffic
- Good building maintenance
5. What Residential Tenants Want
Those leasing multifamily property in Worcester County, Mass. will find the best yields, highest rents and lowest liability in attracting the best tenants by serving up more of what they want.Recent surveys of home buyers and trends in demands by renters show they are looking for:
- Quality neighborhoods and communities
- Housing which feeds their ego
- Easy entry with less hoops to jump through
- Well maintained properties
- More convenient payment method
Mortgage rates may have already begun to creep up in the New Year, but are expected to remain at attractive lows at least until next year. Still, access to mortgage credit and tight underwriting has remained the single biggest roadblock to faster recovery in all real estate markets.
Fortunately the underlying currents are changing in this regard. Major banks and lenders are adding or re-assigning thousands of staff members to assist with new mortgage originations. Now that the commercial real estate market is rebounding and seen as safe to enter more money is being diverted to it, with large firms like Morgan Stanley saying they plan to increase their holdings in the sector. Analysts are also already claiming to see a softening in commercial financing underwriting standards, which will help investors to fuel more acquisitions.
New data from the Trepp report on U.S. CBMS in February 2013 also shows commercial mortgage delinquencies continuing to fall, while payoffs keep rising. Almost 62% of CMBS are now being paid off on time as they mature. This mean more liquidity in the commercial loan arena which must be loaned and a confidence boost to lenders which will certainly drive lending appetite.
7. Distressed Tenants are preparing to Take Action
Despite the brighter outlook for the market many business tenants are finding themselves in a tough spot and are preparing to take big actions.
The biggest issue they face is being in properties where the landlords are going into default. This results in a lack of building maintenance, waning traffic and uncertainty.
Some are beginning to withhold rent, others are ready to be seduced into new leases elsewhere and others are actively looking to buy the properties they currently house. So whether you are a distressed landlord, looking to expand your portfolio or are hunting for new tenants, recognize these groups and capitalize on them.
Note that in addition to the large pool of bank owned REOs there are $2.7 billion in newly delinquent commercial mortgage loans as of February, in addition to $119 billion in CMBS maturing this year; a good number of which will not be worked out and leave the door open for those actively seeking acquisition opportunities.
While competition may be stiffer for some properties real estate companies are still reporting commercial properties being picked up for as little as 50 to 60 cents on the dollar over the last year, especially in the case of those seizing on the opportunity to take choice properties out as notes from banks.
8. Where the Real Gold Lays
While many investors may just be happy to put their capital in a safe property and will rejoice at any reasonable yields they can find those looking for bargains and the real gold need to know how to spot and pan for it.
5 ways to find bigger commercial real estate profits’
- Look for opportunities in distressed debt and non-performing loans
- Recognize the huge disparity in local rents and acquire with intent to raise them
- Consider filing a property tax grievance to reduce tax bills and build in more yield
- Leverage PR opportunities
- Increase local business networking participation
9. Time to Buy or Sell?
While this may be one of the best times to buy commercial property in Worcester, MA, those who come late to the party will certainly miss much of the gains to be had. The first half of this year will certainly boast the biggest opportunities.
However, with interest rates set to rise along with prices cap rates will become less appetizing, making this also an optimal time to sell commercial real estate, especially for aging owners of family owned rental properties.
10. The Opportunity is only as Good as the Execution
The current Quarterly Commercial Real Estate Forecast from the National Association of Realtors (NAR) paints a rosy picture for landlords ahead.
NAR predicts vacancy rates to decline in the office, retail and multifamily housing sectors with rent increases ramping up in multifamily as supply isn’t keeping up pace with demand.
According to NAR office rents are expected to rise 2.6% 2013 and almost 5% for multifamily rents per year for 2013 and 2014, though many areas have seen rents rocketing at three times that that rate recently.
Multifamily vacancy rates are expected to drop slightly to 3.9% by the end of the year, putting us firmly in ‘landlords’ market’ territory. This not only positions Worcester landlords to demand more rent but also better tenants, which in turn delivers consistency and predictability of cash flow and overall returns.
Still, the bottom line is that regardless of how great the current market is or prospects for raising rents and attracting great new tenants are each opportunity is only as good or profitable as the execution. When it comes to leasing multifamily, office space and industrial or retail units this all comes down to superior property management.
Are you leading in property management or is it letting you and your returns down?