The Commercial Market 2011 End of Year Report

Some good news in the Commercial Corner! The 2011 local commercial market has picked up pace and gained traction compared to 2010. MLS shows 10 commercial closings for 2011 totaling over $9m, but there are about 8 other commercial transactions that closed that were not listed in MLS with a volume of over $70MM! Additionally, 3 more commercial transactions already closed in 2012 for a volume over $4.5m! That’s a significant increase from 2010 and a strong start to 2012.

Almost all of these transactions were cash, or owner financed. The highest reported sale in 2011 was $3.35m and the highest unreported commercial transaction was over $50MM. According to reliable sources, the highest sale was the Four Seasons hotel in Teton Village for over $50MM. Several larger transactions over $2m and one as high as $10m traded around a consistent 6%-6½% CAP rate. The lease activity has also picked up pace. These recent transactions have given our commercial market more stability.

It goes without saying that Commercial markets would benefit from a stronger commercial lending environment. Banks still do not yet have a secondary market to sell commercial loans and lending regulations are still tight. Regulators still hold banks to strict lending guidelines for commercial loans. The result of this stricter commercial lending environment is a slow recovery.

Commercial Values Becoming More Stable
I reported in July 2011 that there was a trend toward stabilization and that property values started trading more consistently with a CAP rate around a 6%-6.5%. My analysis seems to have become more solid as several more properties traded within that same CAP rate.

A National Look at the Commercial Markets
According to Wells Fargo Economics Group, in an article “Optimism is Giving Way to Reality”, Mark Vitner, their Senior Economist writes,
“Renewed worries about sovereign debt, growing concerns about tackling US budget deficits and a sharp deterioration in consumer confidence that coincides with an unsettling slowdown in real income growth has altered the landscape for commercial real estate. Expectations for economic growth have been scaled back for 2012 and beyond, which means that the recovery in commercial real estate may take a little longer to unfold than previously thought”.

Consumer caution and election year politics will continue to slow the recovery. Consumers are cautious about their own job and income prospects which translates into lower overall consumer confidence.

Should the national commercial markets experience a slowdown, we may also feel that in our local markets. Weak financing together with the uncertainty of a national election may cause a slowdown in the local commercial markets in 2012.

Looking Forward
National regulatory agencies still need to loosen the regulations on banks and take some pressure off to open up available credit for the commercial sector.

Cash flowing properties continue to be valued by the income they produce. Locally, we have seen consistency as more commercial transactions trade between 6%-6.5% CAP rate. As more commercial deals close, confidence grows! Wyoming’s income tax laws continue to attract businesses to relocate to Jackson.

It is still more cost effective to buy existing commercial property than it is to build. Buyers will continue to purchase existing commercial real estate until it becomes more cost effective to build.

If you are looking for local commercial property, find an informed local commercial broker. Many commercial sales are closed outside of MLS. Contact me directly at MichaelPruett@JHREAssociates.com. or visit me online at www.MichaelPruett.com

Michael S. Pruett
Associate Broker, Commercial Real Estate
Mobile ~ (307) 413-2700
Email ~ MichaelPruett@JHREAssociates.com

*All statistics are supplied by sources that have been deemed reliable, but are not guaranteed.

*All statistics quoted in this newsletter are based on sales in 2010 compared to sales in 2011.

The next update will be July 25, 2012.

Commercial 2011 Mid-Year Report The Commercial Corner

THE COMMERCIAL CORNER: The local commercial market has picked up pace and gained a lot of traction since 2010. Although the number of sales have not increased dramatically, the lease activity, the level of
acquisition activity and the interest in commercial properties has picked up pace. Recent transactions have given our commercial market more stability.

MLS only shows 5 commercial closings for YTD 2011 but there are 3 more commercial transactions that have not hit MLS.

The average price per sqft for the commercial sales that closed in 2011 to date was approx $332. Of the pending commercial sales in MLS, the average price per sqft is approx. $346.
There is one pending commercial sale in MLS that due to the age of the existing structure, seems to be based more on the land than the structure. Based on the size of the land, this list price is approx. $135 per sqft.

A TREND TOWARD STABILIZATION? Some local commercial appraisers are beginning to see a trend for Cap Rates for income producing properties. As we have gotten more sales of commercial properties, the picture is becoming a little clearer. Several income properties have closed at or around a 6%-6.5% CAP rate. Generally speaking, rental rates are down for commercial properties bringing down the overall values. But the CAP rates that income producing properties are trading for is still trending around 6% to 6.5%.

There are a few commercial properties that are either under contract or “in play” that will not show up in MLS. There is one commercial office building that reportedly traded at about a 6% CAP rate and two local lodging facilities that are either under a LOI or under contract.

LOCALS CAPITALIZE ON COMMERCIAL MARKET: Several local owners and businesses have taken advantage of some real opportunities in our local real estate market. The Wort hotel is now the owner of the Roundup (the new Wort Plaza) and the adjacent Sundance Hotel. The reconfiguration of the Roundup into the Wort Plaza has attracted local businesses at strong lease rates. The Stagecoach property in town is under contract by a local property owner. Community Entry Services closed on 1⁄2 of the Pioneer property near the hospital for their business operations. The buyer of the Pearl at Jackson commercial space is two local professional businesses. A local resident recently acquired the Whole Grocer business. Leases are in place for the old Main Even location by a local business, Axis gymnastics and sports academy. The building on Pearl Street that is now under contract was leased to local businesses. A local gallery leased the space adjacent to Mountain High pizza. A new local bread & baking company, Persephone Bakery, was started by a local businessman who purchased commercial property for his business, and all of the available space in the Kmart Plaza was rented up in a very short period of time.

While there is still commercial office space available, much of the retail commercial lease inventory that was on the market early in the year has been filled.

So it seems to some degree that our local markets have benefited our local economy.

BANK FINANCING IS STILL DIFFICULT: Commercial sales would benefit from a stronger commercial lending environment. Banks still do not yet have a secondary market to sell commercial loans and lending regulations are still tight. Some banks are beginning to offer some in house financing for qualified buyers on commercial properties. The result of this stricter commercial lending environment is still evident in Teton County.

Government Regulations and their impact on Commercial Real Estate: National policies like the Dodd-Frank bill which is supposed to take effect in July (it is not likely that all regulations will be written or in place by then) may have some negative effects on financing of commercial real estate.

According to Realtor.com Magazine (July/August 2011), there are two sections that are most pertinent to the Dodd-Frank bill: The first is the part that deals with risk retention of
securitization, and the second is the Volker Rule, which limits affected banks from proprietary trading for their own accounts. Both of these provisions have the potential to reduce the amount of commercial real estate lending and to increase the cost of borrowing. While this may or may not pertain to small, private securitization, some banks may still require higher scrutiny of commercial loans.

WHAT DOES THIS MEAN? Starting to gain traction in the local commercial market With more sales booked or under contract, we are gaining more traction in the commercial
markets. As more sales close, appraisers have more data to evaluate properties. Buyers can feel more confident about the value of commercial properties and the CAP rates they are
getting and build confidence in local values.

Buyers are still looking for income producing properties that cash flow. Commercial Buyers that have been sitting on the sidelines looking for opportunities are making offers on
commercial properties they want to purchase. Buyers should be bold about putting Letters of Intent or Offers on properties to start a dialog. Sellers need a starting point to consider the possibility of a sale.

BUY VS. BUILT: Based on the sale price per sqft, it seems that it is still less expensive to buy existing commercial property than it is to build new.

In general, it is still less costly to purchase an existing building than it is to buy land and build. If a Buyer wants to own commercial property and is considering building, take a hard
look at the total cost. Even if the land is acquired at a reasonable price, other variables such as permitting and entitlements can be time consuming and costly. The permitting process in the Town and County are still difficult and construction costs, while they may have come down in some areas, are still high if you want to build quality.

CASH DEAL STILL HAVE STRENGTH: Cash is still king in this market. Cash Buyers can make more aggressive offers and can avoid traditional bank financing.

It is easier for cash buyers or buyers with large cash down payments and very strong credit to buy commercial property. The challenge is finding a willing Seller at today’s prices. In many cases, there is a “valuation gap” between the Buyers and Seller’s expectations. In these cases, a reasonable Seller and a Buyer willing to pay more than a valuation based purely on Net Income might get a sale done. As more commercial sales are closed, this “valuation gap” between expectations will become narrower. Creative options like Seller financing might contribute to the success of commercial sales in today’s market. If you own Commercial real estate and want to know a value of your property in today’s market, please email me at MichaelPruett@JHREAssociates.com and I will be happy to help you.

BE REALISTIC: For both Sellers and Buyers! As more commercial transactions close, valuations begin to become more clear. If you are selling your commercial property, find out its real value before considering selling. Be realistic with today’s market values and price your property accordingly. Consider getting a current appraisal or email me for a free market assessment at MichaelPruett@JHREAssociates.com. For Buyers, consider recent trends in the market and make your offer accordingly. Stronger cash positions will give you added strength in your offer and possibly allow you to purchase a property at a discount.

BE CREATIVE: Creativity in this environment can also offer new options for commercial property owners. If your lease is coming due, it might be a good time to consider re-locating your office to a better location or to renegotiate your lease as lease rates have dropped. As a Seller, consider offering owner financing to help close deals.

LOOKING FORWARD: Regulatory agencies still need to loosen the regulations on banks and take some pressure off to open up available credit for the commercial sector.

Cash flowing properties will continue to be valued by the income they produce. The higher the net operating income produces, the higher the possible property value.

It is more efficient to buy existing commercial property than it is to build. Buyers will continue to purchase existing commercial real estate until it becomes more cost effective to
build or the reason for building new outweighs the existing commercial property.

As more commercial deals close, confidence grows! Buyers looking to get a “steal” on properties will be less and less likely to find them.

Manage expectations! Seller’s, know what your property is worth in today’s market. You can save a lot of time if Buyers and Sellers expectations are not aligned.

Be specific about what you want when buying a commercial property. Are you looking for a specific return? If so, what is it? Is location (Jackson, Alpine, Pinedale…etc) important?
Ask questions. It is important to clearly define what a Buyer is looking for; if it is an income property, do they have a specific Cap Rate they are looking for? Is there flexibility in the
property? Can it be short term or long term rented? Can the property be sold as a whole or is it condominiumized where each unit can be sold individually?

If you have questions about the market or would like to discuss your property, please feel free to contact me directly, MichaelPruett@JHREAssociates.com.

Michael S. Pruett
Associate Broker, Commercial Real Estate
Mobile ~ (307) 413‐2700
Email ~ MichaelPruett@jhreassociates.com Web ~ www.MichaelPruett.com

Copyright 1995 – 2011 by David & Devon Viehman-Wheeldon, dba Jackson Hole Real Estate Associates, LLC. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without explicit written permission from David or Devon Viehman-Wheeldon.

* This report does not go into detail on every segment of the market, but is intended to offer an overview of general market conditions, changes in number of transactions and average sales prices.

* The values of individual properties will most likely vary from these graphs.

*All statistics are supplied by sources that have been deemed reliable but are not guaranteed.

*All statistics quoted in this newsletter are based on sales in the first six months of 2009 compared to the first six months of 2010.

*Median sale price is the cost of a property that has an equal number of sales above and below it on the price scale.
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*Average sale price is the total combined dollar volume divided by the number of sales.

*The term “Market Value” means; the value of a property in terms of what it can be sold for on the open market; current value.