The Outlook on Local Real Estate
Optimism and confidence are up but a few concerns linger
Anytime someone buys a building it helps the economy, reflects Blake George, principal at commercial real estate firm Lee & Associates. “They have to buy paint, furniture, paper, pens … If they hold up the transaction, it slows the recovery.”
That’s one way to look at the real estate market, and Kim Machotka, president of BankMarketplace.com, goes further. “Banks and credit unions lend money to consumers and businesses. Consumers buy goods and services with the money they borrow and businesses buy equipment, expand, make acquisitions and create jobs,” she says.
“Banks and credit unions need capital in order to lend money and when their capital is tied up in bank-owned property, they’re not able to lend as much money to consumers and businesses,” she continues. “With more and faster sales of these properties, financial institutions can lend more money and thereby help the economy recover faster.”
Machotka’s business helps speed those very sales, but more on that later. The point is, commerce does help the economy, but as we all know, real estate suffered a dramatic slowdown in recent years. Things are easing a bit, local experts say.
“We’re seeing three main demand drivers in commercial real estate, especially in Dane County,” notes Todd Cegelski a commercial banker at Johnson Bank. “Health care-related expansion, multifamily apartment construction —vacancy is very low—and university-related projects are still moving along at the UW and Madison College.”
Vern Jesse, a shareholder at law firm Murphy Desmond S.C., cites an improved lending landscape. “There’s a perception—and it’s a fact—that banks are now lending money. The perception in the recent past, right or wrong, was that they weren’t.”
Clinton Krell, P.E., a sales representative at Spancrete, innovator of precast building solutions, observes the same. “Financing is becoming more available, enabling projects that were on hold to move forward.”
Cresa, which represents tenants, is also seeing projects proceed as the economy shows signs of improvement. “Decision makers have been more proactive with executing their expansion plans,” says Tim Rikkers, managing principal.
And many bad loans and stressed property situations have been resolved, in both residential and commercial real estate, Jesse adds. “There’s still a lot more work to do, but we have a lot behind us.”
It remains a buyer’s market. “Interest rates are favorable and prices are good, and anybody in a strong financial position is taking the opportunity to purchase,” says Shelly Sprinkman, with Restaino & Associates’ Sprinkman Real Estate Team. “And we’ve had an increasing number of relocating
buyers coming into the market in the last few years.”
First Business Bank is seeing more activity, albeit limited, in commercial real estate loans. It recently completed two loans of over $15 million for high-profile projects in Madison.
“There’s competition for good loans,” says Brian Hagen, the bank’s vice president of commercial real estate. “Banks that maintained their credit quality and capital are in a great position to lend to quality projects. There are a lot of banks with good liquidity looking to lend,”
He’s also seeing some activity pick up in the secondary markets, mostly insurance companies with stabilized apartment projects. “That market had died a few years ago. It takes business away from us, but it’s a good harbinger.”
Leasing activity remains strong as well. “For people who don’t qualify to buy—they may have lower credit quality or no down payment—there are some great deals,” says George. “There’s still a lot of vacancy in office space.”
The activity is across the board, reports Mike Herl, partner and vice president of broker services at Inland Companies. “There are huge opportunities to represent tenants with the tremendous vacancy rates. And people, including cash buyers, are looking for troubled properties.”
Buyers are becoming more comfortable with their personal financial situations with respect to the economy, observes Debby Dines, broker/owner at Dines Inc., which focuses exclusively on urban, downtown real estate. “There’s a lot of growth in that market,” she says.
“We saw substantial sales increases in the downtown condominium market in 2011,” she continues. “Unit sales were up 22 percent and dollar sales were up 19 percent from the prior year.”
The most important driver of improvements in commercial real estate is increased buyer confidence, notes Eric Schwartz, president of Sara Investment Real Estate. “Over the last few years, I’ve had a lot of meetings with people where they describe what they want to do ‘when the economy recovers.’ In my meetings now, instead of talking about that, people are talking about what they want to do tomorrow—expand, build, invest. Maybe they’re just tired of waiting, but either way, this confidence is extremely important.”
There are still some factors holding back increased market activity. “Lending criteria are still very tight, as banks try to get a handle on their portfolios and determine what segments of the commercial market they’re comfortable lending to,” says George.
“While the lending gates have reopened, the money isn’t flowing,” agrees Matt Apter, managing principal at Cresa. “Along with increased underwriting requirements, banks aren’t providing loans for speculative development. Lenders have higher pre-leasing requirements for new developments and require significantly more equity in every project than in previous years.”
Machotka cites equity requirements, too. “You have to have huge down payments now to get credit—like 25 percent for a home—where five or 10 years ago you didn’t need any money down.”
And although consumer confidence has increased, there’s still fear in the residential markets, especially outside Dane County. “We work with several homebuilders in the area that feel there’s got to be pent up demand, but consumers are concerned about their jobs and think they can’t get loans,” Hagen says. “People are looking at open houses, kicking the tires, but hesitating to write offers. There’s an uptick in activity in the last few months, but it’s too early to say if it translates to sales.”
When people do write offers, they’re generally contingent on the sale of their properties. “Some clients still have apprehension as to what the future holds,” explains Sprinkman. “In years past, they’d write offers knowing they could sell their old homes.”
There’s hesitation in the commercial world as well. “We need a stronger turnaround in real estate values and stronger appreciation,” says Schwartz. “That will lead to higher transaction volumes, because buyers will have confidence in the market and sellers can realize a big enough margin to motivate them to sell. Appreciation will come from an increased demand, as higher demand means higher rents and higher rents mean higher property values.
On the leasing front, people occupying buildings are also hesitating, trying to get clear signals about whether they should expand their businesses. “That’s abated over the last year, though,” says George.
“People with leases coming due have made the necessary cuts—reducing operating costs, staff and inventory, managing vendors more efficiently—and are preparing to make decisions,” he adds. “It’s taken companies a couple years to stabilize.”
And the market needs to absorb excess vacancy before new projects get built. “It’s worse in certain areas of the county. In the outlying suburbs there’s a lot of vacancy in class A and B office space,” says Cegelski, “whereas, downtown, class A office space is particularly strong.”
For Dines Inc., the perception that downtown is overbuilt is an issue. “Even though we’re almost completely sold out of some inventory in certain price segments, particularly in the luxury/lakefront market, banks are very hesitant to loan on any new condominium projects at this point,” Dines says. “We opened 2012 with just under two years of condominium supply downtown and it will likely take three to five years for any new projects to be ready for occupancy.”
And although historically low prices are a boon for buyers, that’s not so for sellers or landlords. “Supply continues to outweigh demand and unemployment rates remain stubbornly high,” says Machotka. “It all points to a slow recovery for real estate.”
That perception of very slow improvement makes people act very conservatively. “A lot of people who have lost properties through foreclosures or other distressed situations won’t be back in the market for a while, so that pool of buyers is gone,” Jesse says.
People need job security to make big purchases like real estate. And they need a place where they can get a loan, whether it’s for a home, a business or a commercial investment, Schwartz notes. “The more reliable this support network becomes, the more recovery we’ll see.”
The Real Deals
But for now, there are genuine values to be found. “If you can qualify for credit, building prices are low—a bargain compared to three to five years ago,” says George.
Interestingly, rates are historically low and regulations are less stringent for Small Business Administration (SBA) loans. “It seems they’re almost the same as standard commercial loans, with lots of documents and questions to answer,” George says. “If you can’t afford 20 percent down, you can qualify for 10 percent down on SBA loans. It’s a good thing that government is funding more money through the SBA.”
In terms of leasing, people can find deals in commitment, says Schwartz. “We can do a lot more for a client who will sign a five-year lease than someone who will sign on for 12 months.”
And Cresa has seen a flight to Class A office space at competitive rates, reports TJ Blitz, managing principal. “There’s also a surplus of office furniture that allows for plug-and-play opportunities where a tenant can move into a space with very little out of pocket expenses.
“The Class B and C office space market is still very soft, with significant vacancies, allowing for very aggressive rental terms,” he continues. “In all office product types we’ve been able to help our clients obtain aggressive rental concessions of free rent, generous tenant improvement packages and low escalation rates.”
Hagen is seeing a slight disconnect between buyers and sellers on the commercial side. “There aren’t as many transactions among existing properties as we’d expect,” he says. “People are holding on to apartment buildings, for instance. A lot of buyers think everything is on sale right now, but sellers may not be willing to bring the price down to what the buyer is looking for.”
Many home buyers and real estate investors have found bank-owned property, short sales, foreclosures and auctions to be good places to find distressed properties. “And they’re selling for well-below-market prices, Machotka says.
Lakefront homes have been particularly hard hit by the bargain bonanza. “It’s a lifestyle choice many people are choosing not to pay for,” Sprinkman says. “The price points and property taxes are higher and it’s more expensive to live there. But for people who appreciate the lifestyle there are some phenomenal values.”
There are distressed owners and properties in financial difficulties across both the commercial and residential markets,” says Jesse. “There are real values if you’re a buyer with access to credit.”
Sara Investment, with more liquidity than good deals in the pipeline, invests in bank-owned properties. “Sellers of commercial investment properties are a lot less motivated for a variety of reasons,” says Schwartz. “People want to hold on to cash-flowing properties. Or they may be waiting for property values to rebound to avoid selling at a loss. Or they may be using cash flows from a performing property to offset struggling properties.
“For these reasons, banks are offering the best deals out there,” he continues. “They’re motivated to get foreclosed properties off their books, and the favorable interest rates help the cash flows on investment properties. Four out of the last five purchases we’ve made have been from banks and they’re all providing solid returns to investors.”
Although, notes Cegelski, compared to other regions there aren’t a lot of distressed property sales in Dane County. “We came through the recession better than most of the country,” he says.
At Your Service
Our experts have each honed their unique strategies for assisting consumers and businesses with their real estate needs. First Business Bank is actively looking for new clients.
“We’re open for business,” says Hagen. “We work with a lot of existing businesses and also lend to new commercial real estate clients. As projects come in and go through underwriting, we may see things we have questions about, and we sit down with the businesspeople and talk through it, so they can see how we underwrite projects and structure their plans accordingly. Relationships are key.”
Johnson Bank has recently provided acquisition, construction and expansion financing to customers. “We help people take advantage of market opportunities and our lending continues to surpass expectations,” Cegelski marvels. “In 2011 we surpassed $1 billion-plus in closed mortgage loans for the second year in a row. About 70 percent of them were refinances that helped customers reduce their interest rates and monthly payments.”
He’s glad to see new home construction and purchase activity in 2012. “Johnson Bank is a privately held Wisconsin business,” he says. “We understand owning and running a family business and we make decisions with customers’ best interests in mind. We want to see the city grow and support customers through growth and business succession.”
Inland Companies is working with several banks on foreclosed properties. “Our level of tenant representation has never been higher,” says Herl. “They’re looking at properties they never thought they’d have access to. Landlords have to make serious concessions to get people to stay and sales of troubled properties are still high. Rather than investment sales, we’re assisting mainly cash buyers waiting for troubled properties.”
Murphy Desmond is involved in all aspects of real estate markets. “We represent buyers, sellers, landlords, tenants and banks. Our attorneys also work with debtors and creditors on bankruptcy and workout scenarios,” Jesse explains. “Many transactions these days involve either a distressed seller or bank-owned property, and there are fewer ‘typical’ transactions with just a buyer and a seller involved.”
Lee & Associates, too, spans the market spectrum. “We do our best to match qualified buyers with lending sources, whether it’s an SBA or a traditional loan, along with tax credits and other sources of funds that can help facilitate purchases,” says George. “On the leasing side we use the benefit of the market to represent tenants—where three places might have fit your needs in past years now there are six or seven. Tenants have the luxury of being more aggressive in negotiations.
“In working with landlords, we help them understand where their properties fit in the market,” he adds. “We do enough leasing and sales that we can educate tenants, landlords, sellers and buyers. Some prospective tenants want to go out and ask for the moon, and we can help them reach good, realistic deals. Our strength is that we can provide a tremendous amount of data so people can make very educated decisions.”
Cresa takes a different approach, representing only tenants. “We’re conflict-free,” declares Rikkers. “Much like an attorney only represents one party in a transaction, we believe representing both sides is a conflict of interest.”
Cresa strives to remind clients that their tenancy is a valuable commodity, one that can be leveraged to their advantage. “To be sure, there’s an art to this process, but a good real estate professional—provided they’re operating from a conflict-free position—can create an environment where landlords
compete for a tenant’s business and where, ultimately, the tenant can make a fully informed, fully quantifiable business decision regarding their space needs,” Apter adds.
Sara Investment prides itself on being accommodating when it comes to getting people into its space. “If they’re willing to pay market rent and sign on for a few years, we can offer some very attractive incentives in terms of tenant improvement allowance, build-out, signage and even free rent,” says Schwartz. “We can also provide loans to clients unable to obtain financing from a bank. Then we amortize the loan over the initial term of the lease so they pay it along with their rent every month. I encourage my brokerage department to get really creative with leasing because each deal is different.”
Dines Inc. demonstrates the strength of the downtown market to potential customers. “We spend a lot of time working through analysis and statistics to better inform our buyers and sellers,” Dines says. “We hope 2012 is as good as 2011—our dollar sales were up 86 percent last year versus the prior year—and though it’s early, we’re seeing very positive momentum again this year.”
The Sprinkman Real Estate Team knows it’s vitally important, especially for relocating buyers, to evaluate their lifestyles. The team specializes in helping them do so. “We listen to what they enjoy and find the right community for them,” says Sprinkman.
“Also, our website is very community oriented. You can visit it and find out about neighborhoods as well as houses,” she continues. “It’s important to learn about a community before selecting a house. We’ve worked very hard to make our marketing and our website great resources for buyers, or for homeowners looking for a roofer or another service provider. It’s a one- stop-shop.”
Spancrete’s customers are mostly general contractors and Krell serves the area west of Waukesha, including greater Madison. “We design and manufacture our product to ensure we’re using materials in the most efficient way possible,” he says. “We’re seeing efficiency play more of a role in decisions to move forward with projects. Owners want reassurance that they’re getting the most value for their investment, so we assemble the right resources in the infancy of projects to give owners the confidence to move forward. We’ve also driven out waste in our internal processes to benefit owners.”
This year has started similarly to 2011, Krell indicates. “Things have improved, but we’re seeing more optimism and expect an uptick toward the second half of the year. There’s more confidence and less uncertainty in the market.”
On The Horizon
Several factors are changing the demand for real estate, including demographics, regional economic conditions, regional supply of real estate and unemployment levels, Machotka indicates. “Real estate located in areas where baby boomers are retiring, the economy is improving and jobs are being created, like in the states of Texas and North Dakota, will recover sooner and faster.”
Jesse foresees a continuation of current trends as the year goes on. “A general perception of modest improvements in the economy should translate to people having increased confidence in the market,” he says. “Lenders have money for real estate deals, and will have continued loan workout transactions and distressed properties, but we hope the ratio of distressed to typical transactions improves.”
Cegelski is seeing positive signs of what he believes will be a slow and steady recovery of the commercial real estate market in Dane County. “There are large projects on the drawing board, like UW Hospital’s new clinic and several projects on city property on East Washington,” he says.
Most construction activity in Madison will be tied to government or university projects, Hagen predicts. “If you drive through the Isthmus and look for the cranes, most are around campus.”
Apartment construction is very active, too, because of population growth in the slow housing market. “I’m actually concerned the apartment market is getting oversupplied,” says Hagen. “I see a lot of projects in predevelopment stage, and if they all get built, vacancy would increase and exacerbate problems with the housing market returning to normal.”
Blitz expects to see continued right-sizing of office space. “Some people have too much space, some have too little,” he says. “Or they have enough but are using it inefficiently. A professional might be able to help them grow within the same space, get the rent lowered or move to space that better fits their needs.
“Office users are taking advantage of advancements in mobility technology, cloud computing, systems furniture, video conferencing and collaborative work environments,” he adds “That will have a very real impact on the amount of space companies require.”
Many consumers are downshifting to smaller, more efficient homes, Sprinkman finds. “There’s less desire for McMansions and people want to be closer to the center of Madison, where they can walk to stores and restaurants,” she says. “There’s a strong community orientation, with more people moving back into established neighborhoods from the suburbs.”
Dines foresees another surge in downtown interest as people make the move from home to condo. “We’re also seeing very high demand for luxury rental properties in the downtown area,” she says. “I’m currently listing a Lake Monona-facing development site on Wilson Street, two blocks from the Square, which would be a perfect candidate for a luxury condo or apartment development.”
Financing might be a challenge, Hagen notes. “Existing condos are mostly rented out or sold, but we’re not seeing new construction. “If someone came to us with a proposed condo project, it would be a pretty tough sell unless they had it pre-rented.”
Schwartz believes interest rates will likely stay favorable a while longer. “Everyone should be taking advantage of this,” he says. “We’ve been refinancing our buildings at interest rates that will further solidify the success of our investments. And if your bank won’t refinance, consider moving your loan to another one.”
Herl is concerned about nonrecourse loans (loans secured by the property, where if the buyer defaults, the lender’s recovery is limited to seizing the property). “A lot of them are coming due and banks are getting ready,” he says. “On the other hand, we have cash buyers lined up out the door and they’re pretty savvy. They know they can play a waiting game and get prices knocked down further.”
Companies are challenging themselves to do more with less, and real estate professionals can help. “They’re looking for ways to reduce expenses without interrupting efficiencies,” says Blitz. “Oftentimes, decision makers aren’t aware of available opportunities with regard to their commercial leases. Hiring a real estate professional like Cresa can offer significant financial benefits with no out of pocket expense.
And finally, Schwartz offers a few thoughts on how certain trends affect real estate:
• The inflation we expect to see will create a drive toward physical assets, so investment in real estate will act as a hedge against rising prices.
• Rising commodity prices increase construction costs, so building new becomes more expensive and buying used buildings becomes more attractive.
• There has been very little private sector development since 2008, so as the economy recovers, there will be a fight for existing space from both tenants and from buyers.
- Judy Dahl
The Rise of the Entrepreneur
Because the economic downturn has lasted so long, businesses have learned to do tremendously more with less. “They use technology and staff more efficiently, and that is likely to continue,” says Blake George, principal at commercial real estate firm Lee & Associates. “The sad thing is that some people who have lost jobs won’t get back to work as quickly. It’s part of the reason we’re not seeing as much recovery on the jobs side as on the profit side. The exciting thing is that entrepreneurs, particularly in Dane County, are
opening businesses that hopefully in 10 years will be the next Epics.” People have spent the last two or three years dreaming and wanting to go into business, agrees Mike Herl, partner and vice president of broker services at Inland Companies. “Now they’re saying, ‘Let’s do this.’” “Much of my business is mom-and-pop startups,” he adds. “Nationally, they’re taking advantage of the market right now and we’re working with many companies looking for five- or 10-year leases. I haven’t seen this level of startups in six or seven years.”
A Recession-Spawned Start-Up
BankMarketplace.com launched January 4, 2012, to meet a distinct market need. “I started the business because banks had inventories of foreclosed homes, and they’re so expensive to maintain and heat,” says founder Kim Machotka. “There isn’t another business like this. It’s a marketplace that gives consumers one place to go to find everything owned by banks.”
The website had over 140,000 hits in its first two months and inquiries from roughly 15 countries. “Banks want to liquidate their inventories, so they list them on our site and consumers can negotiate directly with the banks or their brokers,” Machotka explains. “I don’t have anything to do with the negotiations. It’s a clearinghouse. Banks become members and purchase listing packages, and then renew monthly. Consumers get free access and can check in on our recent listings tab.”
She’s marketing in Wisconsin and then plans to expand state by state. She also advertises on Google. “If someone searches ‘foreclosure,’ our business comes up,” she says. “BankMarketplace.com offers the public free and direct access to bank-owned property listings including real estate, cars, trucks, equipment, watercraft and more.”
Green is still the word
In building, green has gone from fad to reality. “Green building has gotten affordable enough that people who want to make a statement can do it,” says Blake George, principal at commercial real estate firm Lee & Associates. “Some paybacks are still 30, 40 or 50 years, but people are attuned enough to want to do it even without an immediate payback. It’s a stewardship thing. We see it with our clients.”
Sustainability is always part of the conversation, agrees Clinton Krell, P.E., a sales representative at Spancrete, , innovator of precast building solutions. “People are building wiser and integrating sustainable practices in the designs of buildings,” he says.
“There are more opportunities for design/build partnerships, and that philosophy expedites the time to design a structure and get it constructed,” he continues. “More people are realizing the advantages of the process.”
Building owners are realizing cost savings as compared to the traditional process of completing a design and then getting bids for builders. “For instance, if you don’t get a precast concrete manufacturer involved up front, you lose project efficiency and add time. When we’re involved early, we can compress the timeframe of a project, design for optimal building performance, and ultimately it allows the owner to take control of the building sooner, resulting in substantial cost savings.”
Krell’s product is sustainable. “It has excellent performance over the lifecycle of a structure,” he says. “It’s very durable and performs well in environments with seasonal fluctuations and daily temperature changes. It contains some recycled materials and as a company we’ve been improving our sustainable operational practices for over five years. Our commitment to sustainability and lean production practices can be seen in everything we do.”
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