Spring brings signs of market activity

Spring is here, and the weather is as wacky as the economy, the real estate markets and the presidential campaign.Hopefully, spring will bring sunshine, warmth and rising spirits. We have seen a measurable rise in activity and interest. We recently listed a former bank branch in Durham and the phone has been ringing off the hook (well, some were e-mails). We are 3 1/2 years into this “Great Recession,” so people are finally deciding that they are going to have to get on with things.Leases have terms, so every year a certain number come up for renewal. These tenants test the market, see what spaces are available at what rates and then decide if they will stay where they are or move to new space. In a very competitive market such as we are experiencing now, these decisions can be prolonged. We recently assisted a tenant in leasing 4,000 square feet for an initial three-year term. They were successful in getting the landlord to invest $12 per square-foot in the space, which is essentially equal to the first year’s rent.Why? First, the space has been vacant for two years. Second, the space is old and tired and no one is going to rent it “as is”. So this landlord is ready to bite the bullet and secure a tenant for three years (with two two-year options to extend). The tenant will be paying for real estate taxes, utilities and their share of the maintenance. So this 4,000 square feet will go from minus $5 per square-foot (real estate taxes, minimal utilities and some maintenance) to plus $12 per square-foot, which equates to a $17 per square-foot swing on a cash flow basis. That makes the initial $12 per square-foot tenant improvement contribution less than a one-year payback.Now five years ago, this same landlord would have told us to take a hike, but that was then and this is now. Ben Bernanke has pegged interest rates for the next two years and any improvements in the economy are anemic at best. So landlords who are securing tenants for three more years are doing the right thing. Empty space costs money while occupied space covers expenses and provides positive cash flow.Appraisal wild cardOn the buying and selling side, we are seeing the significant gap between “bid and ask” begin to narrow. Some businesses need space and cannot wait for ongoing price contractions. Borrowing rates are very low, and financially sound borrowers are able to secure financing, as banks and other lenders have plenty of dollars to deploy.Lenders are back to industry norms in terms of loan-to-value and debt coverage ratios. The wild card is appraisals. With so few arm’s-length sales in recent years, it is very challenging to get sufficient comparable sales to peg current fair market value.We are consulting on the potential sale of a hospitality property, and there have been no market sales of reasonably comparable properties in more than three years! There have been several foreclosures, and short sales but no true arm’s-length market sales. This could take several more years to resolve. Appraisers are struggling to complete two distinct valuation methods in their analysis.While there is a strong sense we have been through the worst, there is concern that $5 gasoline, or Israel attacking Iran, or Greek, Spanish, Portuguese or Irish debt collapse in Europe could drive the economy into a tailspin.So, our focus for our transactional business (leases and sales of commercial property) focuses on tenants who must move (or renew) and properties that will sell soon because of a motivated seller or motivated buyer (or ideally both).We do not take listings at “pie in the sky” prices, nor do we work with tenants that do not have to move. We continue to see buyers strongly motivated by 1031 tax-deferred exchanges. This has to happen within 180 days to achieve the tax deferral, so real estate brokers love these buyers, as they are highly motivated to close to avoid the capital gains taxes.Bill Norton, president of Norton Asset Management, Manchester, is a Counselor of Real Estate (CRE) and a Fellow of the Royal Institution of Chartered Surveyors (FRICS). He can be reached at wbn@nortonnewengland.com.