How Long Can A Good Thing Last? – A Market Update

How Long Can A Good Thing Last? - A Market Update

How long can a good thing last?? Our nation has enjoyed a bull market for nine years—the second-longest stretch since World War II! With such a mix of things to consider these days—low unemployment, increased wages, the impact of new tariffs, new tax laws—individuals and businesses alike are figuratively holding their breath as they wonder how long it can go.

Predictions for the continuation of the bull market were carefully made in LPL’s March 5, 2018 and March 12, 2018 publications. (Note: These predictions were made just as the tariffs on steel were being announced, and before the announcement of trade tariffs on competing countries, so the market fluctuation experienced in the past few weeks due to these tariffs are NOT considered in their analyzation. It will be interesting to see how these changes play out among the indicators by the time of LPL’s next analysis.) To make their predictions, LPL analyzed and explained what they call the “Five Forecasters”: the Conference Board’s Leading Economic Index (LEI), the US Treasury’s Yield Curve, market breadth, market valuation, and the Purchasing Managers’ Index (PMI).

The LEI is a grouping of ten different economic indicators, “including data on employment, manufacturing, housing, bond yields, the stock market, consumer expectations, and housing permits”. In part because it is so diverse, it gives a solid snapshot of the economy’s general health, and has proved to be quite reliable in predicting early warnings of a recession. As of the latest reading, conducted in January 2018, LPL asserts there is a “low probability” of the US going into a recession over the next twelve months.

The US Treasury’s Yield Curve is said by LPL to be “one of the most reliable leading indicators” of an impending recession, as for the last 50 years, the curve has batted .1000 in this arena. When the Federal Reserve raises the short-term interest rates above the long-term interest rates, it creates what’s known as an “inverted yield curve”, and every time this has happened in the last 50 years, a recession has begun within 5-16 months. Right now, the curve is still “fairly steep”, and the estimation is that it could be at least two years before the Feds could raise the short-term rates high enough to trigger the inversion, suggesting the bull market may have quite a ways to go before it is finished.

Market breadth is measured by the number of stocks climbing in value as opposed to falling. As of LPL’s latest analysis in early March, there were no “major warning signs or any concerning divergences” between the breadth and the NYSE Composite Index, which is the comparison for this particular analysis tool.

The Purchasing Managers’ Index (PMI) is based on the “front lines” of manufacturing, despite the fact that manufacturing does not make up a large portion of our economy when measured by GDP. Why? Because the “demand for manufactured goods has been a timely barometer for all types of economic activity in recent decades. In the past, the peak of manufacturing has preceded recession by a period of nearly four years. LPL attests the PMI shows there is “no sign yet of a meaningful peak” in manufacturing, indicating the bull market is still running strong.

Market valuation—though not effective as either short-term or intermediate investment timing tools—have been “solid indicators of long-term stock returns”, and are therefore strategically quite useful. This indicator is the ONLY one of the five indicates a bear market may be coming soon. The reasoning is that price-to-earnings ratios are typically high at the end of a bull market, and that is the case at this point in time. However, as earnings estimates rise—as they have done “significantly” in 2018—this ratio becomes more stable and nearer the long-term averages, thus removing any cause for an earlier-than-anticipated end to the bull market.

Now, what does all of this financial mumbo-jumbo mean in terms of commercial real estate? If you’re a CEO or a Developer, it means you need to strongly—and perhaps quickly—consider your growth plans. Although purchase prices are up from the “dirt cheap” prices of years past, the market is still on an incline and property values have not yet hit their high point, so it’s reasonable to expect prices to continue rising until the market officially shifts to a bear market. All things considered, it’s still a reasonably good time for land transactions.

We look forward to working with you!

Understanding Capitalization Rates and Debt Coverage Ratios

Understanding Capitalization Rates and Debt Coverage Ratios

Capitalization Rates or “Cap Rates” and Debt Coverage Ratios or “DCRs” are highly effective and popular commercial real estate metrics that can be used for valuation analysis of real estate, property trends, and to help make purchasing decisions. Provided below is a basic overview of how Cap Rates and DCRs are utilized.

First, what is the definition of a cap rate and what is the formula for determining a cap rate? The definition of a cap rate is the ratio of Net Operating Income to the Asset Value. To obtain the cap rate, simply use the following formula: Cap Rate = annual net operating income/cost (or value). For example, if a property is on the market for $1,000,000 and the net operating income is $150,000, the cap rate is 15. Using another example where the net operating income is $7,000 and the property is listed for $100,000, the cap rate is 7.

cap rate definitionSo what can we learn from using cap rates and what do they tell us about a potential real estate investment? One thing we learn from the cap rate is the return on investment an investor can expect to earn on a purchase using all cash. The examples in the above paragraph would, therefore, yield returns of 15% and 7% respectively. Another thing a cap rate is helpful for is evaluating risk. For example, two equally sized office buildings in the same neighborhood can be evaluated for risk based upon cap rates, all other things being equal. The higher the cap rate between the buildings, the greater the risk premium. Investors often use cap rates to evaluate the risk of certain investments in making decisions about their portfolios.

Cap rates can also help to identify trends in a particular market over time. For instance, if cap rates are trending lower in a market over a period of a few years, the market is growing more competitive. Whereas, higher cap rates over the same period indicate less competition for that particular product. This, therefore, provides some insight into the performance of the particular markets over this time period. Utilizing this simple analysis can help to evaluate risk for the purchaser.

It is important to remember that cap rates are much more accurate an indicator of property performance when the source of Net Operating Income is relatively steady. A discounted cash flow analysis may need to be used when a Net Operating Income stream is complex and/or irregular.

Another example of important real estate investment metrics is the debt coverage ratio or DCR. Examples of how the DCR is utilized are outlined below.

The Debt Coverage Ratio (DCR) is used to determine the ability of an income stream from a property to pay its operating expenses and mortgage payments. Banks and investors will set a limit on their tolerance for this ratio and expect a particular project to remain at or above this ratio for the duration of the loan or investment term.

The larger the DCR the better the investment is covering its debt service. A DCR of 1 means that the investment is meeting its obligations to the bank or investor but with no free cash flow left over. Therefore, it is not unusual for a bank or investor to require a DCR of 1.25. This provides 25% of each dollar in excess of expenses as a cushion for the bank or investor. To calculate the DCR, simply add all operating expenses and debt service, including interest, and subtract them from gross revenue. This leaves Net Operating Income. An example of a DCR of 1.25 would be Net Operating Income of $150,000 on Debt Service of $120,000 ($150,000/$120,000 = 1.25). This simple calculation can be critical when pre-qualifying your investment to ensure you are heading down the correct path. As interest rate and amortization are functions of this ratio, these are important to consider when calculating your DCR.

Utilizing Cap Rates and Debt Coverage Ratios will often be the first things your commercial real estate broker will do for you when assisting you with your project. Therefore, it is important to utilize a professional when determining the best plan of action for your commercial sale or purchase.

We look forward to working with you!

From Downtown to Midtown in Raleigh

From Downtown to Midtown in Raleigh

 

With the addition of Troutman Sanders to the top floor of Midtown Plaza in North Hills, the movement from Downtown to Midtown continues. Joining Allscripts and SunTrust Bank, the law firm and its in-house lobbying group will make the move from its current downtown location at Two Hanover Square in January taking just under 17,000 square feet on the top floor.

1-1896218This move seems to continue the migration of businesses from downtown to Midtown as Class A office space expands in Midtown. This move will bring the occupancy level at Midtown Plaza to 94%, according to Kane Realty Corp.

The attraction of Midtown Raleigh has become a force to be reckoned with as cranes fill the sky line and new restaurants, hotels, and office buildings fill the area around North Hills and I-440. North Hills has grown exceptionally well since its humble beginnings and has been on the fast track ever since the original North Hills Mall was redeveloped. This has made the Midtown area prime for office expansion. Current existing office products include the Bank of America Tower at 300,000 RSF, the Captrust Tower at 300,000 RSF and Midtown Plaza at 329,000 RSF. Coming soon is Tower 4 which, at 28 stories and 450,000 RSF, will be the tallest building at Six Forks and the I-440 beltline. Tower 4 will be a mixed use Class A office building anchoring North Hills. Tower 4 will consist of 18 stories of Class A office space over a 9 level parking deck and street level retail.

Driving this growth is the densest live, work, shop, play and stay area in the city offering retail, apartments, office and hotels. In addition, there is never a dull moment as there are constant activities including the Midtown Beach Music Series. And if you are from out of town traveling for work or pleasure, three hotels (Hyatt House, AC, and The Renaissance) provide great options for accommodations close to excellent restaurants, shopping, and entertainment. The Renaissance offers 4 Star amenities with 222 rooms all adjacent to over 130 shops and restaurants within walking distance. The Hyatt House offers a more “at home” feel to your stay and is directly adjacent to the office towers. The new AC Hotel is European inspired with a modern flare.

Midtown has become a destination center for not only shopping and dining but for working as well. Further, given its location, people and businesses are flocking to be a part of Midtown Raleigh. There is no end in sight to the creativity and development diversity at Six Forks Road and I-440.

If you have any commercial real estate needs in the Raleigh/Durham/Wake Forest area, please give us a call to let us know how we can help you! We can be reached via our company website which is: www.kimacommercial.com and/or reach our commercial real estate agent Dan Tilley. From land to leasing to multi-family and commercial development – even design/build – we’d love the opportunity to help you with your commercial real estate needs!

Be sure to keep up with us on Facebook at Facebook.com/KimaCommercial to stay in the loop on what’s going on in the Triangle when it comes to commercial real estate, to see our featured listings and more!

We look forward to hearing from you soon to find out how we can best be of assistance.

 

 

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Keller Williams Preferred Realty, 7751 Brier Creek Parkway, Suite 100, Raleigh, NC

919-336-1700

Peter@KimaCommercial.com

We look forward to working with you!

K-FLEX Expansion Update

Last fall, we told you about Kima Commercial’s role is a historic land deal involving the expansion for a Youngsville, NC company – K-Flex. Then Governor Pat McCrory was on hand for the event and made the announcement that K-Flex USA would continue to not only manufacturer, but also deliver their product based right here locally. K-Flex USA would continue their operations here and, through Kima Commercial, they purchased the land next to their existing building to take their current 350,000+ square feet building and have the availability to build an additional 360,000 square feet.

We’re happy to share an arial video update of the project with you.

 

K-Flex USA Expansion – Late May 2017 from Focus Design Builders, LLC on Vimeo.

 

K-FLEX USA is a truly innovative and leading manufacturer of elastomeric, closed cell insulation products. They strive to provide solutions for demanding insulation applications and are extremely committed to their customers, associates, the environment and community.

Kima Commercial continues to partner with people and companies that make an impact in the community. If you have any commercial real estate needs anywhere in North Carolina, we can help you.

 

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Keller Williams Preferred Realty, 7751 Brier Creek Parkway, Suite 100, Raleigh, NC

919-336-1700

Peter@KimaCommercial.com

We look forward to working with you!