Commercial Real Estate Blog

Under current law, only 2.5% of a improvement costs to a commercial (or residential) property could be written off in the first year. The new economic stimulus package now allows for up to 50% of the improvement costs to be written off the first year provided the work is started and completed this year.

This will likely spur some activity both on the leasing front as well as construction front as Landlords and Tenants both will seek to take advantage of the favorable tax treatment.

NREI is reporting that in January, not a single CMBS was priced in a one-month period. This is the first time in the 20-years since CMBS product was introduced that this has happened.

Also telling is that despite this lack of activity, some $37B in securitizations remain in the pipeline. In the face of this prices have seemed to remain resilient. Longer term though, it is difficult to see how prices will be able to withstand the financing conditions if they continue. Goldman Sachs analyst James Fotheringham doesn’t see it happening and has forecasted that commercial real estate prices might be susceptible to a drop of up to 26% in value through 2009.

In the past few years there has been a surge of TIC investments, particularly in the NNN leased investment market. There has been a lot of uncertainty in the area of TIC investments with regard to what commercial real estate brokers can and cannot broker.

On November 13, the SEC published a proposed rule governing the sale of TIC interests that will hopefully end the battle between brokers and securities broker-dealers. The rule, if finalized, would allow commercial real estate brokers to sell TIC interests under a certain set of rules. The rule is currently undergoing comments and review, and will likely be finalized during the middle of 2008.

The current set of rules are that commercial real estate brokers will be exempt from securities regulations if the following rules are followed:

• An agreement must be signed by the investor agreeing to have the broker provide advise on the TIC investment
• Securities broker-dealers will still need to decide if TICs are right for investors
• The investor would pay brokers a consulting fee, but the fee could be picked up by the securities broker-dealer or sponsor if the investor purchases the TIC investment
• Real estate brokers would not be allowed to advertise TIC investments

If the performance of the S&P Index during the first week of January is right again this year, the markets and the economy may be facing a bumpy ride ahead.

Below is the performance of the S&P 500 index over the last ten years; and 2008 has had the worst showing in a decade. We’ve been advising our clients to take a cautious approach and we believe that while the fundamentals in Silicon Valley remain strong, the pockets of weakness will expand and both tenants and investors should apporach any investment or lease with that in mind.