Why NAR overcounting U.S. home sales shouldn’t matter to us

It was widely reported that the National Association of Realtors (NAR) may have overcounted the number of U.S. home sales since 2007. If emotions weren’t involved, the impact to residential and commercial real estate for the vast majority of us would be negligible at best. The actual number of home sales isn’t what defines the market, it is the trends those numbers reveal to us that give the numbers meaning. The emotions that are evoked by lowering the number of used home sales, even without changing the trend, will probably cause some homeowners to either lower their asking prices or accept lower offers.

How the mistake was made:
The NAR uses many Multiple Listing Services (MLS) to count used home sales. Many of these services have been expandiing into new territory. This has caused some used home sales to be included in multiple MLS services. These duplicates drove the NAR’s numbers up.

How the mistake was found:
CoreLogic, a real-estate analytics firm, uses property records from local courthouses to determine the number of used home sales. CoreLogic’s numbers are about 20% lower than the numbers NAR has been providing.

What does this mean to the commercial real estate industry?
Not much. The NAR should adjust their method of determining the number of used home sales. Since the trend of used U.S. home sales didn’t change, the revised numbers shouldn’t change our outlook for real estate.

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Cities with the Top Ten Overall Crime Rates in the United States

Onboard Informatics recently provided the overall crime rates for cities. This includes not only violent crimes, but also property crimes.

10 Cleveland and Minneapolis tied at 331

9 Kansas City, Missouri 337

8 Baltimore 339

7 Miami 346

6 Memphis 361

5 Detroit 369

3 Birmingham and Orlando tied at 380

2 Atlanta 484

1 St Louis 530

Missouri managed to get two cities in the top ten. Bummer. Keep in mind that if you are involved with Grandview Commercial Real Estate, Belton Commercial Real Estate, Raymore Commercial Real Estate, Lee’s Summit Commercial Real Estate , or any of the other suburbs of Kansas City, this ranking only concerns the actual city limits of Kansas City, Missouri.

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The simplest way to determine a commercial real estate properties value

The Gross Rent Multiplier (GRM) is the simplest way to determine the value of a commercial real estate property.

First, lets find the GRM for a sample property. Let’s say you are looking at a couple of properties and you want to compare their relative Investment Values (IV). You can purchase Property A for $3,000,000 and its first-year Projected Rental Income (PRI) is $200,000. Or, you can purchase Property B for $3,250,000 and its first year PRI is $220,000. Without going any further and without any other information, which of these two investments would you choose? Without a tool, choosing between the two would be a challenge for most investors. That’s where the GRM comes in handy. The higher the GRM, the more income the property produces for a given investment value.

To calculate the Gross Rent Multiplier, you simply divide the Projected Rental Income (PRI) by the Investment Value (IV). For Property A, $200,000 (PRI) / $3,000,000 (IV) = 6.67 (GRM). For property B, $220,000 (PRI) / $3,250,000 (IV) = 6.77 (GRM). Since 6.77 is higher than 6.67, property A is the better investment according to the GRM.

So now that you know a higher GRM is better, let’s say you decide you require a GRM of 8 for your next investment property. You would simply take the targeted properties PRI, multiply by your GRM and you have the highest investment value you can pay while still getting your 8 GRM. For example, if the targeted properties PRI was $1,000,000, you would multiply that by your GRM of 8 to find that the highest amount you would purchase that property for is $8,000,000. $1,000,000 (PRI) X 8 (GRM) = $8,000,000 (IV).

The greatest thing about GRM is its simplicity. The simplicity of GRM limits its reliability, because it doesn’t take into account operating expenses, financing, vacancy losses, or tax impact. All of these factors could vary from property to propery, which could cause the GRM to be misleading. Another shortcoming is that GRM only uses a one year forecast, while looking at the projected life of the investment might produce better accuracy.

Despite its limitations, many investors have built substantial wealth using GRM as their primary investment valuation tool.

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Jobless claims drop to lowest point in 2.5 years!

New US claims for unemployment dropped to their lowest point since July 2008. Initial claims for state unemployment benefits fell 36,000 to 383,000.

This is yet another sign that the economy is turning around and hopefully the commercial real estate market as well!

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Commercial Real Estate’s best index, the NCREIF’s NPI

If you want to know how the commercial real estate market is doing, you need an index. For example, the New York Stock Exchange Index measures the performance of all of the stocks that are traded on the NYSE, this index will give you a pretty good idea how the overall stock market is doing. Similarly, the National Council of Real Estate Investment Fiduciary’s (NCREIF) Property Index (NPI) will give you an idea of how the overall commercial real estate market is doing.

The NPI tracks the performance of a large portfolio of apartments, hotels, industrial properties, office buildings, and retail only. All of the properties report on a non-leveraged basis, although many of the properties are leveraged. The index tracks the quarterly total rate of return of the collection of properties. The properties are located througout the US.

Commercial Real Estate Index

NPI 2006-2010

 As you can see in the chart above, 2008 and 2009 were very challenging for commercial real estate. 2010 looks good, let’s hope the momentum carries into 2011.

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Obama’s FHFA pick doesn’t want renomination

North Carolina’s top banking regulator, Joseph Smith, was nominated to lead the Federal Housing Finance Agency by the Obama administration. The Agency is responible for overseeing Freddie Mac and Fannie Mae.

Several GOP senators voiced concerns that Mr. Smith wouldn’t exert enough independence from the Obama administration. Without a clear path to confirmation, Mr. Smith asked no to be renominated.

An article by the WSJ with more information can be found here.

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IRS defines rules for Chinese drywall mess

If you’ve made a claim or intend to make an insurance claim for Chinese drywall repair costs, you may be able to treat 75% of the cost as a casualty loss in the year paid. If you aren’t making a claim, you may be able to treat all repair costs as a casualty loss in the year paid.

This is merely a summary of the rules, the complete rules are Revenue Procedure 2010-36. As always, this is not advice, you should consult expert advice and opinions before doing anything to do with Kansas City Commercial Real Estate, or anything else for that matter.

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Residential Real Estate prices continue to fall

Both the Standard & Poor’s/Case Shiller home price index and the Federal Housing Finance Agency’s housing-price indices fell agian in November.  The Standard & Poor’s/Case Shiller home price index fell 1.6% from the same month a year earlier, this was the fifth consecutive monthly decline for the index.  The Federal Housing Finance Agency’s housing price index fell 4.3% from the same month a year earlier.

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How to properly measure the inside height of commercial real estate property.

You may have heard a variety of terms used to identify the ceiling height or usable height in a commercial real estate property. Here’s the scoop, straight out of The National Association of Industrial and Office Properties Terms & Definitions for the U.S. Office and Industrial Market:

Clear Height: Distance from the floor to the lowest hanging ceiling
member or hanging objects, beams, joists or truss work descending
down into a substantial portion of the industrial work area. This is the
most important measure of the interior height of an industrial
building because it defines the minimum height of usable space
within the structure. (Synonyms: Clear Headway, Clearance)

Ceiling Height: Distance from the floor to the inside overhead
upper surface of the room. This measure will be higher than any
hanging objects, beams, joists or truss work, unless there is a
dropped ceiling.

Truss Height: Distance from the floor to the bottom edge of any
truss used to support the ceiling or roof of a building. If there are
hanging objects, beams or joists below the truss, the clear height
will be lower then the truss height.

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Commercial Real Estate projects heat up along Missouri 150 Highway widening project

The Missouri Department of Transportation is working on expanding Missouri Highway 150 between U.S. Highway 71 and Missouri Highway 291.  M-150 was previously a two lane highway and is being widened into two 11 foot wide lanes in each direction, with signalized intersections, a raised median, a reduced speed limit of 45 MPH, sidewalks on both sides (from Ward road to Route 291), and a shared use path on the North side (from Horridge Road to Ward Road).

At the January 7th meeting of the South Kansas City Chamber of Commerce, Beth Wright, District Engineer for the Missouri Department of Transportation, gave an update on the project.  She explained that the section of M-150 from Lumpkins Fork Creek to Horridge Road is 40% complete and is on schedule to be completed this Spring.  She also shared that the section of M-150 from Horridge Road to 291 Highway is 80% complete and should be completed this summer.  The section of M-150 from Lumpkins Fork Creek to US-71 is already complete.

Grandview Community Development Director Tom Greenwood said “We have just opened a Gail’s Harley Davidson, a Joe’s Carpet Store, a Zipz convenience store, and a Sonic restaurant.  For that matter, I just got off the phone with a developer who is working closely with three anchor tenants who are interested in doing something.  So things are heating up.” 

Several other commercial real estate developments are in progress along the M-150 corridor.  The National Nuclear Security Administration is building a new 1.5 million square foot campus valued at around $673M at Botts Road and M-150.  The CenterPoint Intermodal Center is a new 1,000 acre industrial park at Botts Road and M-150 and directly adjacent to the new Kansas City Southern Intermodal Facility. Ladco Development is building a $4.7M, 21,000 square foot medical office building at Byars Road and M-150.

Activity begets activity, so expect more new commercial real estate development to follow.

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