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Commercial real estate will continue its climb back in 2011

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Commercial real estate experts predict the local market will continue its slow but steady recovery from the Great Recession in 2011, with the medical office sector leading the way.

“Medical office and multifamily will remain the gems for those placing debt and equity,” said Amy Burmeister, who leads Summit Realty Group’s investment-services team.

The growth in health care real estate appears to be driven largely by health care reform. Reform is “helping to change the face of health care real estate,” said Keith Konkoli, a senior vice president at Duke Realty, who said the prospect of more people being insured and thus seeking care is leading to greater demand for space.

In an effort to increase revenue, hospital systems are spending capital acquiring physician groups and smaller hospitals and developing electronic medical records, Konkoli said. “Consequently, they are looking for help from developers on real estate projects,” which he said is among the factors that should provide opportunities in the sector in 2011.

The local multi-family housing sector, meanwhile, should see continued strong interest from investors, said George Tikijian, whose firm Tikijian Associates specializes in apartments.

Apartment occupancy rose from 89.3 percent in 2009 to almost 91 percent last year. It’s expected to strengthen further in 2011, to 91.5 percent, according to Tikijian estimates. Better occupancy is leading to rent growth, making stable properties attractive to buyers, Tikijian said.

He noted that the Indianapolis area is attracting more than its share of capital because the perception of the city nationally is that it has relatively good job growth and a fiscally stable government.

Tikijian predicts there will be more lender activity here in the new year but that development will continue to be a challenge because of stricter underwriting and cash requirements. New product will continue to hit the market, however, largely thanks to government-supported tax credit deals.

The outlook for other sectors is mixed, but no one sees the market backsliding.

A modest increase in demand for office real estate is expected throughout much of the year, but demand could grow at a more rapid clip in the second half of the year if job growth returns, said Mary Beth Kohart, a vice president in office services for Cassidy Turley.

Tim Norton, the leader of Summit Realty Group’s office team, also sees demand picking up. He said that as absorption strengthens, landlords will offer fewer concessions. But continued instability in the market caused by troubled assets reverting to lenders means tenants will be savvy shoppers and will carefully evaluate the financial health of landlords before signing new leases or renewals.

Norton predicts the North Meridian and Keystone submarkets, which have significant vacancies, will be the slowest to recover. He said the south submarket will continue its rapid growth, due largely to demand for medical office space on the south side.

In the retail sector, Bill French of Cassidy Turley expects development to return, but in very limited fashion. On the industrial front, Summit Realty’s Andrew Morris said a shortage of available inventory will make it a challenge for new and expanding users to find space, which will put upward pressure on rents. Morris thinks speculative development of industrial space could return late this year or in 2012.

Whatever happens in 2011 will occur against a backdrop of uncertainty thanks to a proposed change in accounting rules, noted John Merrill, the new managing director of the Indianapolis office of CB Richard Ellis.

A new rule proposed by the Financial Accounting Standards Board and expected to be completed in 2011 will require tenants to show leases as liabilities on their balance sheets beginning in 2012 or 2013. The rule change could delay decision-making, especially among large corporate users, Merrill said.

Brokers themselves are likely to make some big decisions in 2011, Merrill said, as they jump from one company to another. “There will be an unusually high number of brokers changing companies as they try to position themselves for changing market conditions,” Merrill said.
 

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  1. Cramer agrees...says don't buy it and sell it if you own it! Their "pay to play" cost is this issue. As long as they charge customers, they never will attain the critical mass needed to be a successful on company...Jim Cramer quote.

  2. My responses to some of the comments would include the following: 1. Our offer which included the forgiveness of debt (this is an immediate forgiveness and is not "spread over many years")represents debt that due to a reduction of interest rates in the economy arguably represents consideration together with the cash component of our offer that exceeds the $2.1 million apparently offered by another party. 2. The previous $2.1 million cash offer that was turned down by the CRC would have netted the CRC substantially less than $2.1 million. As a result even in hindsight the CRC was wise in turning down that offer. 3. With regard to "concerned Carmelite's" discussion of the previous financing Pedcor gave up $16.5 million in City debt in addition to the conveyance of the garage (appraised at $13 million)in exchange for the $22.5 million cash and debt obligations. The local media never discussed the $16.5 million in debt that we gave up which would show that we gave $29.5 million in value for the $23.5 million. 4.Pedcor would have been much happier if Brian was still operating his Deli and only made this offer as we believe that we can redevelop the building into something that will be better for the City and City Center where both Pedcor the citizens of Carmel have a large investment. Bruce Cordingley, President, Pedcor

  3. I've been looking for news on Corner Bakery, too, but there doesn't seem to be any info out there. I prefer them over Panera and Paradise so can't wait to see where they'll be!

  4. WGN actually is two channels: 1. WGN Chicago, seen only in Chicago (and parts of Canada) - this station is one of the flagship CW affiliates. 2. WGN America - a nationwide cable channel that doesn't carry any CW programming, and doesn't have local affiliates. (In addition, as WGN is owned by Tribune, just like WTTV, WTTK, and WXIN, I can't imagine they would do anything to help WISH.) In Indianapolis, CW programming is already seen on WTTV 4 and WTTK 29, and when CBS takes over those stations' main channels, the CW will move to a sub channel, such as 4.2 or 4.3 and 29.2 or 29.3. TBS is only a cable channel these days and does not affiliate with local stations. WISH could move the MyNetwork affiliation from WNDY 23 to WISH 8, but I am beginning to think they may prefer to put together their own lineup of syndicated programming instead. While much of it would be "reruns" from broadcast or cable, that's pretty much what the MyNetwork does these days anyway. So since WISH has the choice, they may want to customize their lineup by choosing programs that they feel will garner better ratings in this market.

  5. The Pedcor debt is from the CRC paying ~$23M for the Pedcor's parking garage at City Center that is apprased at $13M. Why did we pay over the top money for a private businesses parking? What did we get out of it? Pedcor got free parking for their apartment and business tenants. Pedcor now gets another building for free that taxpayers have ~$3M tied up in. This is NOT a win win for taxpayers. It is just a win for Pedcor who contributes heavily to the Friends of Jim Brainard. The campaign reports are on the Hamilton County website. http://www2.hamiltoncounty.in.gov/publicdocs/Campaign%20Finance%20Images/defaultfiles.asp?ARG1=Campaign Finance Images&ARG2=/Brainard, Jim

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