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Job growth spurs Colorado CRE market in second quarter

The commercial real estate market in Colorado performed well during the second quarter of 2017 thanks to robust job growth in the state according to a leading figure from the CBRE Group. The real estate information company, which released a market assessment on July 10, say that commercial tenants in Denver have now leased more space than they relinquished in 29 consecutive quarters. Vacancy rates remain extremely low in the Denver area, and experts feel that this is a situation that will likely persist for some time.

The CBRE market update reveals that even the beleaguered retail segment posted modest gains during the second quarter due to a decline in the number of vacant big-box stores. Competition for industrial space is expected to be particularly fierce in the coming years as about 75 percent of new industrial construction is scheduled to be built in or around Denver. Experts say that many of these projects involve warehouse and distribution facilities for online retailers like Amazon and Walmart.

CRE delinquency rates up by 28 basis points in June

Much has been written about a looming wall of commercial mortgage-backed securities that will either have to be refinanced or paid off in 2017. About $2.4 billion in CMBS issued in 2006 and 2007 were classed as delinquent in June, and experts believe that this could have caused delinquency rates in Missouri and around the country to soar to 5.75 percent. The 28 basis point surge is the biggest increase in five years according to a real estate information and consultancy firm. The delinquency rate stood at 4.6 percent in June 2016.

The rise in delinquency rates was particularly pronounced among residential multifamily projects, but an industry representative said that the figures were heavily influenced by two large defaults in Virginia. While delinquencies were up for office, factory and hotel projects, it is the retail sector that has lenders and industry experts most worried.

Due diligence in commercial property transactions

Commercial property buyers in Missouri and around the country may be drawn to an office building, retail store or warehouse because it is located in a thriving area or has the potential to provide solid returns, but they will usually wait until due diligence efforts have been completed before making any kind of commitment. During the due diligence process, commercial real estate investors seek to learn more about the financial, legal and physical condition of properties.

Due diligence protects both buyers and sellers. Learning about property defects allows buyers to make more informed decisions, and full disclosure also shields sellers from liability and potential lawsuits. However, the process can be demanding because buyers must often complete it within 30 days of making an initial offer. Thorough due diligence involves gathering documents such as financial statements showing rents and expenses, conducting soil tests and environmental site assessments and performing a comprehensive physical inspection of the property in question.

Falling costs of construction disputes

Missouri builders and developers might know that construction disputes in 2016 in North America cost less than they did in 2015. This is as the time it took to resolve the disputes increased by two months.

Arcadis, an international design and consultancy company, found that the average amount at stake in 2016 construction disputes fell to $21 million. The company also determined the most frequent reasons for the disputes were omissions and mistakes in contracts, uncorroborated claims and inadequate contract administration. Public projects had the highest amount of disputes by percentage, while one-third of cases involved one or more joint ventures.

Loan refinancing becoming more difficult for owners and banks

Commercial property developers in Colorado and around the country generally take short loans of between five and seven years to get their projects started. These loans must then be paid off and refinanced after construction work has been completed. Sources of refinancing capital have been relatively easy to find in recent years as the economy thrived and commercial property values soared, but industry experts say that a confluence of factors is now making things far more difficult for developers in need of cash.

One of the biggest problems that commercial property developers are facing is the reluctance of community banks to extend credit. The costs of complying with the provisions of the Dodd-Frank law can be prohibitive for banks with modest assets, and financial industry analysts say that smaller banks are now being far more cautious and rarely consider loan-to-value ratios higher than 65 or 70 percent. The strict capital requirements of the Third Basel Accord have also placed additional stress on the nation's banks and impacted commercial real estate borrowing.

Colorado Supreme Court rules on construction defect case

Builders in Colorado may have been in a celebratory mood on June 5 when the state's Supreme Court ruled on a landmark construction defect dispute. The case involved how the declarations for projects can be changed, and the justices ruled by a 5-2 majority that a homeowners association was wrong to file a lawsuit before first obtaining the builder's consent to change a binding arbitration provision.

Builders generally favor arbitration because it usually resolves disputes more quickly and can prevent ruinously costly litigation. Industry experts say that the litigious nature of the construction sector is one of the main reasons that builders have been reluctant to begin condominium projects in recent years. Condominiums accounted for 20 percent of all Colorado housing starts just a few years ago, but that figure has since fallen to just 3 percent.

Foreign investors still bullish on American CRE

Investors in Missouri and around the country are drawn to commercial properties because they generally offer robust yields and provide a hedge against inflation, and a report from the National Association of Realtors suggests that foreign investors also see American office buildings, warehouses and stores as safe places to put their money. The trade group's Commercial Real Estate International Business Trends survey reveals that one in five of the realtors who closed a commercial property deal in 2016 did so with a foreign investor.

While large commercial property transactions may receive the lion's share of media headlines, the NAR survey reveals that foreign buyers spent an average of $1 million on each of their commercial real estate acquisitions in 2016. Florida was the most popular state for overseas investors, but they were also active in other major markets like Texas, California and New York. The vast majority of these properties were bought for investment or business purposes according to the NAR.

Slowdown in real estate lending sharpest in commercial sector

Real estate experts in Missouri and around the country have predicted for some time that rising interest rates and more conservative lending practices would make financing more difficult to come by for property developers and investors. Data released recently by the Mortgage Bankers Association suggests that these effects are now being felt. The trade group reports that mortgage closings in 2016 were down by 3 percent overall and 7 percent in the fourth quarter.

Reports suggest that the decline is particularly sharp in the commercial sector, where loans tend to be for higher amounts. Figures from Real Capital Analytics reveal that commercial property sales plunged 10 percent in 2016 and are continuing to fall in 2017. Investors poured more than $80 billion into the U.S. commercial real estate market between January and March in 2016, according to the firm, but they only spent $50.3 billion on commercial properties during the first quarter of 2017.

Political uncertainty may be cause of CRE slowdown

Data from leading research and brokerage firms suggests that commercial property developers in Missouri and around the country are finding it increasingly difficult to secure financing for their latest projects. Property sales figures in the first quarter of 2017 for the nation as a whole were down by 18 percent compared to a year ago according to Real Capital Analytics, but Cushman & Wakefield have reported that they plunged by an alarming 58 percent in New York City.

Reports indicate that even some of New York's most admired and respected developers are having trouble obtaining the cash they need to keep their projects on track or break ground on new ventures. A frantic construction boom that lasted for six years has raised concerns about overbuilding in some of the nation's largest commercial property markets, and these fears have made lenders more cautious and traditional financing packages difficult to obtain.

Commercial property investing offers many advantages

Real estate investors in Missouri and around the country are becoming increasingly interested in commercial properties like offices, stores warehouses and garages. Commercial landlords generally have more businesslike relationships with their tenants, and they rarely have to deal with minor issues or address petty grievances. Most business tenants have reliable sources of income, and they also tend to be more stable and predictable than residential renters.

Investors are also drawn to offices, stores and warehouses because their costs are often lower, their yields are generally healthier and the commercial property sector is less volatile than the residential housing market. Commercial tenants tend to sign longer leases than residential tenants, and they may also take care of some of the expenses that residential landlords are generally expected to cover. Commercial real estate can also appreciate rapidly when business tenants thrive and are reluctant to leave established locations.

Our condo association was faced with monumental construction issues thanks to the original developer of our complex. We were cash poor and in no position to get legal representation without a contingency fee arrangement. Luckily for us, Scott Long and Burke Robinson were willing to take us on as clients. Their work ethic, professionalism and knowledge of condominium construction served our association very well. Any association would be well served in hiring these gentlemen to represent them.

Board of Directors - Plaza Gardens on the Lake Condominium Owners’ Association Lake of the Ozarks, MO

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