Archive for November, 2008

In our weekly Redstone brokerage meeting the topic of capitalization rates (CR) came up as one of our brokers stated that in the Boston market CR’s have risen by 150 to 200 basis points under market pressures. This means that an investment property that might have been at a 6% CR a year ago may now be trading at 8% providing a lower selling price and perhaps a better value for the Buyer. But is this really the trend we might expect as other investments like the stock market continue their volatility?

Another view is that a solid real estate investment property would become more valuable as market risks continue and thus CR’s could hold or even be reduced as investors compete for more predictable returns through commercial property ownership. What trends might we expect to see? Is the Vermont market place different from what we are seeing elsewhere?

With the unpredictability of the stock market, more investors are exploring income producing real estate as an alternative investment.   A vehicle that may make sense is a self directed IRA.   This program allows one to direct funds from their individual IRA account to a real estate investment.  To learn more about self directed IRA’s go to  http://www.penscotrust.com.

INDUSTRIAL:  Growth for industrial space in Chittenden County expanded approximately 1% in 2008 while 2009 projections are similar.  At the moment the market is very healthy with an approximate 5% vacancy rate in Chittenden County.  We believe the vacancy rate in 2009 will be increasing with the accompaniment of  lower lease rates.  The 20 year vacancy average is 7.5%. Historically, 5%  vacancy rate would stimulate the market to build new product.  The recent financial uncertainty in the global markets has affected the local markets negatively, not due to a shortage of capital.  Local banks have funds and are willing to loan.  Based on these uncertain economic times many business owners are putting expansion plans on hold.  The relative high cost of construction has also limited the demand for new buildings in the market.  As recent construction volumes decrease, construction prices are coming down as a result of lower labor/profit margins.  The cost of raw materials, steel, wood, and concrete has been flat or has increased slightly.  With little new inventory being developed, existing renovated space continues to be absorbed.  Again, this abortion is expected to slow in 2009.  Industrial lease rates are projected to experience downward pressure.  New construction lease rates are $7.00 to $8.50/SF NNN while average grade industrial space is $4.50 to $6.50/SF NNN with tenants paying a proportionate share of property taxes, insurance and maintenance at $1.25 to $1.75/SF plus utilities.  Interest rates continue to be historically low and are believed to be trending downward for 2009.  Overall, 2008 has experienced record sale prices for small/mid-size industrial properties ranging from $70.00 to $98.00/SF.  It seems the top of the market has been reached for this cycle.

OFFICE:  The Chittenden County office vacancy rate has surged to over 10% in the last six months. The current vacancy rate is significantly higher than the 14 year average vacancy rate of 6.3%.  The  suburban “Class A” office market is the weakest and offers the highest vacancy.  Technology Park in South Burlington has approximately 130,000 SF of new product.  Pizzagalli Properties is finishing a 30,000 SF  building off of Hinesburg Road in South Burlington. The repositioning of The Champlain Mill in Winooski to office space is offering 120,000 SF  of new space to the marketplace. There is downward pressures on lease rates for this type of space.  The strongest office sector continues to be “Class A” space in downtown Burlington with a vacancy rate of 3%.  Lease rates for downtown space range from $12.00 to $17.00/SF NNN with tenants paying for property taxes, insurance, and common area maintenance at $4.50 to $6.00/SF. 

New “Class A” suburban office space is currently being offered at $13.00 to $17.00/SF NNN ($5.00 to $8.50 SF).  The suburban “Class B” office space is being offered at rents ranging from $7.00 to $13.00/SF NNN ($2.50 to $4.00/SF).