2011 showed gains in the development and construction of office, industrial and retail buildings. That was the first year since our recession began in 2007 that there were improvements in the commercial real estate development and construction market. “The total economic impact of the development (pre-construction, construction and post-construction) of commercial real estate during 2011 added $261.6 billion to the GDP, compared to $231.7 billion in 2010, a 13 percent increase, according to the report. Construction spending on commercial real estate totaled $92.3 billion, a more than 12 percent increase over 2010. This spending supported nearly 2 million jobs nationally.” Hopefully, commercial real estate development and construction will continue to improve throughout this year.

Excerpt taken from Market Watch: Commercial Real Estate Development and Construction Rebounds in 2011 Released 5/1/12

CityBiz Real Estate released the following news article on April 10, 2011

The Maryland House of Delegates concurred with amendments approved by the Senate last week and Maryland has become the first state in the country to approve the International Green Construction Code (IGCC).

HB 972, sponsored by Delegate Dana Stein (Dem, Baltimore County) enables the Maryland Department of Housing and Community Development to adopt the IGCC, and adoption of the IGCC by local governments in Maryland.

The adoption of green building codes fundamentally advances and transforms the way buildings are designed, built and operated.

“This is the most significant environmental legislation adopted in Maryland this year”, said Stuart Kaplow, Chair of the U.S. Green Building Council Maryland. Kaplow went on to say, “The IGCC is at the confluence of pro business and pro environment … it is what is best about the modern environmental movement.”

The IGCC has been developed by the International Code Council, in conjunction with the American Institute of Architects; ASTM International; the American Society of Heating, Refrigerating and Air-Conditioning Engineers; the U.S. Green Building Council; and the Illuminating Engineering Society to establish a model code focused on new and existing commercial buildings addressing green building design and performance.

Buildings in the U.S. are responsible for 40% of energy consumption, 39% of CO2 emissions, 13% water consumption and 15% of GDP per year, making green building a source of significant economic and environmental opportunity. Green buildings can and do reduce energy use by up to 50%, reduce CO2 emissions by as much as 39%, use 40% less potable water, and eliminate almost 70% of solid waste.

Here’s a re-post of a relevant Washington Post article from the weekly blast called the Knowledge Edge from Rodgers Consulting:

Homebuilders have yet to see a turnaround in the housing market after the worst year for new-home sales in a half-century. The National Association of Home Builders said Tuesday that its index of builder sentiment for February remained unchanged for the fourth straight month at 16.

Any reading below 50 indicates negative sentiment about the market. The index hasn’t been above that level since April 2006. Homebuilders are struggling to compete with millions of foreclosures that are forcing home prices down. Last year was also the worst in more than a decade for sales of existing homes.

Falling Residential Real Estate Resale Prices from Short Sales and Foreclosures impacting New Home Values

New home sales in 2010 made for one of the worst years yet for many local builders according to Stuart Terl, Area Manager for the Maryland/Virginia Division of Drees Homes. 

The combination of high unemployment, mounting foreclosures and “short sales” kept many home buyers away from a new home purchase he said. 

While the residential real estate market is flushing itself out of what the January 21, 2011 issue of the Kiplinger Letter called the “shadow inventory [of] homes in or headed to foreclosure,” the impact on the home building industry is that buyers are being much more aggressive with offers to purchase.

Nationwide just about 4 million home loans are over 90 days delinquent verses about one million just prior to the recession. “About 2 million of those are sure to wind up in foreclosure,” according to Kiplinger.

“Buyers are trying to get fire sale deals” says Terl, as they play buying opportunities in the defaulted mortgage market against new homes.

The Wall Street Journal reported this past Monday that “sales of foreclosed homes are partly responsible for reducing home values because banks tend to reduce prices quickly to sell the homes. Sales of foreclosures slowed in some markets at the end of last year as document-handling problems raised questions about the integrity of their foreclosure processes. But that could change as banks pick up the pace of foreclosures.”

While the term foreclosure has been the buzz word for years on how banks shed their mortgage default problems, the process of ridding this shadow inventory through “short sales” is rapidly becoming a preferred method.

If you’re not familiar to what all this “short sale” stuff is all about, get ready, because, while it’s been very active for the last 4 years, it’s likely to intensify.

What is a short sale, you ask?  Simply put it is when a lender allows a house to be sold for less than the amount of the current loan or loans encumbering the property. 

But there is nothing simple about it.  For years residential real estate agents have been complaining about the complexity and time it takes to process these transactions.

Things are changing:  According to a recent report by Darci Marchese with WTOP Radio, “…the bank would rather work out a deal to keep a homeowner in the home through a short sale or loan modification [because] foreclosures are expensive [and] … In fact … banks are better equipped to work through a short sale more quickly, even compared to just six months ago.”

The good news for builders is that a more active short sale market may not have as much of a negative impact on falling home values, as would that of foreclosures, since the latter typically ends with an auction.

Falling prices have actually caused some home builders to shut down some of their projects.  Recently just across the Potomac River from Frederick, Maryland in West Virginia, Drees had two new homes that they offered at prices in the low $200,000 — what they considered real bargain basement deals.  After conferring with their Realtor, they saw that “shadow inventory” distressed sales of comparable homes had pulled values to below $160,000. 

The end result was that Drees sold the two houses at around better than bargain basement prices.  They then informed the land developer that they will not be purchasing any more building lots from the project until the market improves.  There is no sense in building a product that you know you’ll loose money on stated Terl.

With all that said, Drees is cautiously optimistic about their opportunities in Frederick County with hopes that the volume of sales in 2011 will increase about 10% over last year.

The author: Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland.  He also writes for TheTentacle.com and Want2Dish.com

In a real estate market near its bottom, how does an appraiser justify that strong demand out weighs comparable sales?

The example provided here is based upon an actual transaction.  Since it is fairly recent, I’ve changed numbers to protect the parties involved!

Here’s the issue: 

A Seller owned a well located 25 year old improved property.  It is very unique with versatile potential uses making it very attractive to a number of prospective purchasers.  What makes it even more unique is that with its zoning designation there were very few competitive properties on the market at the time.  

The owner contacted his commercial real estate professional.

The broker researched the market and founda handful of somewhat comparable sales.  The seller dusted off a year old appraisal that put the value at $3.8 million.  All this information gave the impression that the market value was in decline since then.

The broker also contacted commercial building contractors to get an estimate on a replacement cost for the improvements.  The market for available raw land was studied.  Although very few properties were found to be available, a total building/development package for  a new facility summed up to be $4.5 million.  That’s as if new.  In our case, after accounting for the fact that the subject’s improvements had aged 25 years, a significant amount of depreciation required a negative adjustment to that figure. 

The conclusion was that after considering all past transactional information, ”on paper” a value range of $3,600,000 to $3,800,00 seemed to be the place. 

With all that analysis and despite what appeared to be insurmountable odds, the broker went out on a limb and stated that the circumstances were such that a higher figure should be achieved.  Due to the condition of the property and the scarcity of similar product  in the immediate market, it was believed that even a well educated buyer would pay a healthy premium for this gem.

The decision was made to ”ask” a figure of $5.6 million – a good 55% higher the “on paper” value.  Since it was such a unique property, it was the broker’s opinion that this asking price would not scare away serious buyers.

After one week on the market the assumption proved correct.  An offer was presented for $4.4 million from a very qualified buyer who had studied the real estate market.  That’s 32% above comparable value!  Then, within a week, and while still contemplating the first offer, another qualified proposal came forth at $4.2 million. 

All this … in a supposedly declining market?

Of course this was very exciting, but they did have a dilemma!  

You may be asking: “A deal at $4,400,000!  Where’s the problem?”

Not so fast, Amigo! 

There’s another player in both offers.  This guy is as much about  “Show Me the Money” as he is “Show Me the Value.”  Both buyers included in their proposals that they will be seeking loans of no greater 65% of the purchase price.  So, yes the third wheel in the deal is the friendly banker, who required an appraisal of the property … and both buyers verbally stated stated that they would not pay more than appraised value.  

… and now that the seller has seen two offers in the $4 mil range, he is not about to sell it for less!

The question for our appraisers out there is what other considerations would you follow in this real estate market to arrive at a true fair market value?  Is it possible that this property could actually appraise for over $4 million?  If so how can that be justified?  What is missing here?

One well respected appraiser will give us his professional opinion next week!  Stay tuned for thoughts from Michael Pugh, Certified General Real Estate Appraiser with the Pugh Real Estate Group, LLC., in Frederick, Maryland.

Interesting piece in the Wall Street Journal today regarding the Fed’s response to the acknowledged housing bubble before prices peaked:

WASHINGTON—Federal Reserve officials acknowledged a housing-market bubble more than a year before U.S. house prices peaked, but they showed little inclination to address it, according to transcripts of their 2005 meetings released Friday.

During 2005, the Fed raised interest rates a quarter-percentage point at every meeting, unwinding the ultra-loose policy it pursued earlier in the decade to address deflation worries after the 2001 recession. The economy at the time was growing at a healthy pace with few signs of overheating. But with reports across the U.S. indicating a bubble in the housing market, the Federal Open Market Committee spent time assessing the appreciation in home prices and what, if anything, the Fed could do about it. Fed staff economists had found that housing might be overvalued by as much as 20%, based on the historical relationship between prices and rents.

But Fed officials appeared hamstrung because they believed their most important tool—interest rates—could not address frothy housing markets alone without influencing the broader economy …To view the entire article click here: Fed Felt Hamstrung By 2005 Housing Bubble WSJ

An update on the economy’s impact on land and commercial real estate and what’s ahead in 2011.

Last week I was given the opportunity from my friends at BB&T to attend the Maryland Bankers Association 4th Annual “First Friday” Economic Outlook Forum held at the Baltimore Marriott Waterfront Hotel.

With nearly 800 bankers and guests in attendance, the four hour symposium featured several well known economists. Baltimore’s Anirban Basu, Chairman and CEO of Sage Policy Group and Chief Economic Advisor for the Maryland Bankers Association gave a presentation.  He then moderated a panel with Michael S. Hanson, Director and Senior Economist with Bank of America/Merrill Lynch; Gary Keith, Vice President and Regional Economist for M&T Bank; and Jeffery J. Schappe, CFA, Managing Director and Chief Investment Officer for Sterling Capital Management, LLC.

In addition the final speaker was Elizabeth A. Duke, Governor of the Federal Reserve System.

So there were a lot of very smart people in the room who provided some great insight on where the US economy has been the last year as well as an interesting perspective on what lies ahead.

The MacRo Report Blog puts its focus on land and commercial real estate; so I thought I’d offer up a brief summary of what I took away from the meeting and provide our readers with some links that will provide you some additional reading.

In sum there is positive news, but lots of caution.

The consensus seemed to be that the US economy is creeping back with the stock market leading the way. Messer’s Hanson and Schappe forecast a likely market correction sometime between March and May of this year with a steady rebound into the summer.

The unemployment rate has experienced a very slight improvement, and the prospects are that it will fall into the mid 9% range by year end. It is likely that this trend will continue to where it reaches the low mid eight percents by the end of 2012. While this is a positive sign, the Fed says that until that rate reaches what they define as normal – that being 5% – things will be sluggish. There appears a delicate balance between minimal inflation, potential deflation, eroded skills of the long term unemployed and business output growth, which will likely mean that reaching that normal could take another four to five years. 

As Anirban Basu put it: the concern for this recovery is that “the unemployment rate will be too high for too long and inflation will be too low for too long.”   Locally in Maryland he sees the unemployment rate to fall from it’s current  7.4% to possibily 6.5% by year end. The Frederick, Maryland market has enjoyed normal unemployment rates in and around 3%.

He says that the banks will get good news this year, as he sees a “good yield curve for 2011.”

“So what do you see on the horizon for land and commercial real estate?” I asked the panel.

Development land for new construction is beginning to see some signs of life, but with inventories still high and housing still seeking its bottom in some markets, it is still very much a buyer’s market for those homebuilders looking for land.

The office and industrial markets are also seeing slight pick ups in filling double digit vacancies. The experts see last year as a likely peak for the high rates, but will only reach acceptable levels in direct relationship to a drop in the unemployment rate.

On a local note, MacRo, Ltd. has been experiencing a marked increase in interest in improved available office and industrial properties, as well as conveniently located rural building lots. We have been hearing the same from other commercial real estate brokers in the region as well.

Here are a few interesting related links to articles and presentation that our readers may want to read through:

Basu predicts 6.5 percent unemployment in Maryland in a year: Baltimore Business Journal

Economic Analysis Bank of America/Merrill Lynch January 7, 2011

Federal Reserve Board: Testimony–Bernanke, Statement–January 7, 2011

‘Saving’ the Housing Market – Thomas Sowell – Townhall Conservative (article referenced at the conference)

Basu Presentation to the Homebuilders Association of Maryland: December 2, 2010 (many of the same chart and graphs used in his Maryland Bankers presentation)

The author: Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland.  He also writes for TheTentacle.com and Want2Dish.com

A U.S. housing market update from some smart people

I had the opportunity today to sit with some very smart analysts with General Re-New England Asset Management, Inc.  Known as GR-NEAM, they are a global investment advisory company that specializes in offering capital and investment management services primarily to the insurance industry.  Currently their “global total unaffiliated assets under management” are about $62 billion.  A small percentage of that figure is the investment portfolio of Frederick Mutual Insurance Company, Inc., a firm that I have had the pleasure of serving as a board member for about 20 years. 

After reviewing the investment performance of the company, our committee is typically given an overview of what the GR-NEAM number crunchers see ahead for the national, as well as the international economies.  Part of their overview today included a summary of what they see ahead in the housing market, specifically the “serious excess in housing construction” and the impact that this will have on values as the market “digests” the inventory.  While the U.S. is feeling the pain, they showed how the excess problem in residential real estate problem is much worse in European countries such as Ireland – but that is not the focus of this piece; so I’ll still with this country!

The bottom line that comes from their crystal ball that was communicated to us is well summed up in the GR-NEAM October 2010 publication Reflections:

“The housing market in the U.S. is not getting better and is likely to get worse … [due to] serious excesses in housing construction … the U.S. is probably two to three years into a six to seven year process of digesting [its] housing inventory, with further pain to come for American households in the form of weak house prices.”

Their newsletter provides some eye opening historical graphs of Homeownership Rates compared to Housing Starts, Mortgage Borrowing and absorption predictions.  An interesting statistic they bring to light is that currently there are “about 110 million households in the U.S. and 130 million housing units.” This alone tells us something.

My personal opinion is that since our local real estate market is part of the Metropolitan Washington DC area, and it has been historically more insulated from extreme fluctuations in the real estate cycles, we are likely to experience somewhat less of the serious predictions this group forecasts.

Ed Waters, a long time writer for the Frederick News Post, has written a front page piece in today’s paper that has  captured a very clear picture of the difficulty placed on the building community in Frederick County.  We discussed this back in May in many posts regarding what we see as a flaw in the county’s Comprehensive Planning process.

We do not dispute the number homes needed to meet the adopted plan — it actually could be too high, but in any event we don’t know where the lots are going to come from.

Some of our current and hopeful County Commissioners continue to put their head in the sand over this matter, blaming the industry’s complaints on the economy.  What is really going on is that they continue to use the building and development community as a whipping boy to move a flawed political agenda.  The fact is that serious problems in the lack of approved lots and very expensive regulations have — even in this economy — put a burden on the industry that makes it very difficult to just build an affordable house.

While land prices have suffered miserably in the current economic climate, it is very likely that they will eventually soar due to a extreme lack of supply once a recovery regains its footings.  While good for land owners, it is not good for housing affordability in Frederick County, as it will push more an more people out of the county … which will congest our roads, etcetera, etcetera!

Please take the time to read Ed’s article.