Cassidy Turley Northern California. www.ctbt.com
Observations about the Sacramento Region’s Office Market
Jim Gray, [email protected](916) 617-4255
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!
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%
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
Employment Growth
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
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
It’s More than “Just the Numbers”
1. Government
2. Complexity
3. Zombies
4. New Money
5. “Med-Ed”
6. Challenge of Creativity
Government Employment Sacramento
232,100 in Jan 2007 and 223,000 December 2012. Off nearly 4%.
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
Complexity
Dramatic increase
Huge societal and market changes
Examples
Patience, perseverance and expertise
Zombies
• Office buildings 50% vacant or more for longer than 1,000 Days
• Nearly 250 buildings
• Nearly 6 million square feet
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)
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
$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!
“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
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!
Education and Health Care Employment
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.
Student Loan Debt Unsustainable!
Creative Space
Not this But this
Sample Sacramento Office Google’s Office Menlo Park
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