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1. Solutions Create Opportunity

   Solving problems for distressed investors will create prime investment opportunities.  Look for ways to provide workouts for distressed investments.  As loan terms mature, many properties will be unable to cover the debt service associated with new loans. Financing criteria has changed dramatically and will surprise many investors as they look to re-finance.  Large “vulture” funds are being formed for the sole purpose of raising capital to profit from distressed institutional grade investments.  On a smaller scale, attentive investors can capitalize on opportunities by providing solutions in their local market.

2. Cash is King

   Investors who have been disciplined and kept a healthy amount of liquid assets are now in a favorable position.Kelly Hugh, a well respected real estate economist says “There is such a volume of capital out there. I have three pictures I use in my talks, one is of Niagara Falls, one is the Sahara Desert and the third is the Hoover Dam. The argument is that for a long time we had a Niagara of capital, now people think we have a Sahara but we don’t. It’s a Hoover Dam. It’s all sitting back there. The question is; when does it get released?”

   Those investors who can move quickly and provide interim resolutions will come out ahead

3. Change Strategy from Growth Investing to Value Investing

   In recent years past, investors had a buffer that alleviated bad investment decisions.  Rent growth and appreciation seemed to remedy any ill-advised acquisitions.Now with rent growth and appreciation absent, property owners are forced to find new ways to produce the yield desired.  Strong asset management combined with tenant retention will help drive yield in existing properties.  New acquisition investments can take advantage of the upward trend in CAP rates.

4. Avoid Lowering Rents

   Commercial real estate values are tied to the income the property produces.  As retailers are struggling we will see more and more vacancies in the market.  Existing property owners should strive to minimize down time and re-tenant quickly.  Up-front incentives such as free rent and tenant allowances will help entice new tenants while maintaining your property value for the long-term.

5. “Buy into Fear, Sell into Greed”

   There is no arguing we are in a slowing market, however investors that seize the opportunity can turn this into a wealth-creation market. While the masses are standing on the sidelines there are unbelievable opportunities for a knowledgeable investor.

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Jul

22

The International Council of Shopping Centers estimates nationwide retail store closures will total 144,000 in 2007, a 7 percent increase from 2006.  Although this a large number, in 2006 123,000 new stores opened and 139,000 closed.  New store opening have helped soften the effects of nationwide store closures.

There is no arguing that retail is presently a troubled sector with consumer confidence dropping and consumer disposable spending in negative double digits for 50 straight weeks.  The confidence confidence index serves as an important bellwether of consumer spending, which accounts for two-thirds of the U.S. economy and an essential economic driver for the retail sector.

Nationwide retail properties reported a vacancy rate of 7.8 percent in the Reis Inc. second quarter 2008 survey.  Locally we have seen a number of store closures, but nothing close to other troubled markets around the United States.  Starbucks recently posted the final list of approximately 600 company-operated stores in 45 states scheduled to close beginning this month through next March.  Our MSA has only one store scheduled for closure, the Starbucks located off Market and Garland in Spokane.

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Jun

27

Deer Park looks to awaken - Spokane Business Journal

City approval of office tower is appealed - Spokane Business Journal

Big project planned in Rathdrum - Spokane Business Journal

Bankcda consolidating offices - CDA Press

Lounge aims to fill swanky void - Spokesman Review

Judge OKs county track purchase - Spokesman Review

Big projects eyed near raceway - Spokane Business Journal

Parker Toyota reconsiders expansion - Spokane Business Journal

Crown West plans project at SBIP, but sees slower growth - Spokane Business Journal

PARD will not take appeal to state supreme court - Daily Evergreen

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Jun

3

Here are links to real estate & development news from the latest Spokane Journal of Business.

ALK-Abelló unit readies for growth

SRM buys, to redevelop Burgans site

Catholic Charities plans service center

Snap Fitness franchisees plan growth

Hampton Inn & Suites to rise in Spokane Valley

Two businesses plan to build near Esmeralda Golf Course

$3.7 million restaurant set in Valley

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May

8

The Spokane Journal of Business is reporting that Avista has just tied up 3,200 acres near Rearden, Washington to build a wind farm. Here is the update from the Journal:

Breaking News
Avista ties up site to develop wind farm …
Avista Corp. said today it has acquired rights to to a site to develop a 50-megawatt, $120 million wind farm near Reardan, Wash. The 3,200-acre site is roughly four miles south of Reardan off of state Route 231, includes Magnuson and Hanley buttes, and mostly is farmland, Avista spokesman Hugh Imhof says. He says the company will lease the property from seven landowners, will order wind turbines for the project this year, and will build the wind farm in 2011. Avista says that because of the intermittent nature of wind, the project will generate an average of 15 megawatts of power, or enough to serve 11,250 homes, and it can carry the electricity on its own transmission system, which saves cost. Avista Chairman, President, and CEO Scott Morris says the wind farm will help Avista satisfy renewable resource requirements under Washington law. Imhof says the company, which plans to build or buy 300 megawatts of wind generation by 2017, is continuing to look for other wind-power sites, mostly near its own transmission system.

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Apr

11

Review

Job growth in Kootenai County manufacturing employment has driven high demand for this product type. Of the 2,215,420 square feet surveyed in Kootenai County, only 87,869 square feet is vacant (3.97%). The majority of the vacant space was found in smaller buildings with fewer than 3,000 square feet. These vacancies are due to substantial construction of small spaces over the last several years. Even with low vacancy, leasing rates have resisted upward movement and remain fairly static. Tepid rate trends have failed to keep pace with increased construction costs, which in-turn, have kept developers from building large speculative industrial space.

Over the past year, low interest rates and favorable owner-occupied financing have converted several leased industrial spaces to owner-user space. This shift could make room for additional lease space in the near future.

Industrial land rates in Hayden have edged higher than Post Falls. In Riverbend Commerce Park, offering rates are $4.00 to $4.50/sq. ft. Light industrial lots in EXPO at Post Falls range between $5.00 and $8.00/sq. ft for half to one-acre lots. Industrial land prices are slightly higher in parts of Kootenai County than Spokane County, with some asking prices above $10.00/sq. ft.

Forecast

Only a few new projects are proposed at this time. The Riverbend Commerce Park is currently finishing up two buildings with a combined total of approximately 87,000 square feet. The Park has a 43,000 square foot building slated for construction in the near future, but no formal decision has yet been made. Riverbend Commerce Park is moving forward on Phase 4 plans, with 24 lots ranging from 1.0 to 1.5 acres, of which several lots are currently pending sales.

Businesses looking for large spaces will need to consider build-to-suit options due to the lack of supply. The aforementioned static rental rates should begin trending upward to keep up with construction costs. The manufacturing employment underpinnings of the industrial market remain positive.

Furthermore, low vacancy rates and strong demand will create a healthy industrial market in 2008.

Industrial Vacancies

Manufacturing Employment

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Apr

10

County top bidder on 300 acres at raceway auction - Spokesman Review

Article on Wallace, Idaho - New York Times

Landing marina nears completion - Spokesman Review

County halts Bayview restaurant remodel - Spokesman Review

Hayden Canyon developers try again - CDA Press

Owners seek to save course - CDA Press

Lithia Motors builds facility for dealership in Liberty Lake - Spokane Journal of Business

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Apr

10

Review

Sales volume of multi-family product in Kootenai County was off 57% as compared to 2006 ($35 million in 2007 vs. $15 million in 2006). Values declined approximately 11% from 2006 levels as the average sale price fell from $345,000 to $306,000 in the multi-family arena. Unsold stock remains higher than previous years, especially in the condo market.

The good news is Kootenai County apartments achieved an average rent of $0.77 per net square foot in 2007. Overall, apartment vacancy decreased to 4.3% from 5.7 % the previous year. Remarkably, studio apartments (a small segment in our market) recorded no vacancies in the final 2007 apartment survey conducted. Some newer units with exceptional amenities or superior locations are achieving rent of over $1.00 per net square foot.

Affordability remains a key concern for Kootenai County. A household is considered cost-burdened if annual rental rates exceed 30% of a household’s yearly gross income. Presently, one in seven US households is severely housing cost-burdened. Kootenai County’s affordability has declined over the past decade and is now less affordable than neighboring Spokane County. The growing low-income rental population is driving an increase in demand for affordable housing.

Forecast

Values will continue to be soft, presenting opportunities for liquid buyers. Vacancy rates will decline to levels not seen in years as prospective homeowners sit on the sidelines waiting for the housing market to hit bottom. Additionally, the recent melt-down in the “sub-prime” mortgage arena has caused tightening of underwriting standards for new home loans, thereby closing the door on many first time home buyers who are currently renting. The result is lower vacancy rates and increased rents for apartment housing.

Apartment Market Survey - September 2007


Historical Apartment Vacancies

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Apr

9

Review

New construction in the area has slowed alongside the national housing market. Lots platted in Kootenai County decreased from 2,462 in 2006 to 1,362 in 2007. The largest decreases were seen in Rathdrum and unincorporated areas throughout Kootenai County. While the number of lots platted decreased, major developers positioned for future growth. A number of significant land acquisitions were made along the Highway 41 Corridor, North Hayden area, and Cabela’s development area.

Over the past decade, single-family home construction throughout the region has been stimulated by population influx to Kootenai County from neighboring states. One of the best indicators for tracking buyer relocation trends is the origin of surrendered driver’s licenses. The Idaho Transportation Department has tracked the origin of surrendered licenses since 1997. The number of surrendered licenses from California ballooned from 834 in 2001 to 1,383 in 2006. The top two sources of immigration for Kootenai County are California and Washington respectively. This data shows an increased attraction to Idaho from across the Western region.

Forecast

Census Bureau statistics project that by 2030, Idaho population will increase to over 2 million residents. This reflects a 52% increase over 2000 population, and a 45% faster growth rate than the national average. Idaho is predicted to need an additional 390,000 new housing units to absorb the population influx. An increase in housing units goes in step with an increase in jobs, retail stores and office space. Unquestionably, Kootenai County is a highly desirable destination that will continue to be viewed as a market with great investment opportunities.

Lots Platted

2007 Building Permit Summary

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Apr

8

Review

2007 marked the completion of numerous retail centers across Kootenai County. Major project completions included the opening of Cabela’s near Stateline, Kohl’s just south of Prairie Avenue on Highway 95, and Sportsman’s Warehouse adjacent to Costco.

Retail vacancy was measured at 8.1%, with over 3.8 million square feet surveyed. The highest vacancy rate was measured in Rathdrum with 12.95% vacant. The rapid development of strip centers throughout the county has outpaced retail absorption. Small users have numerous options forcing landlords of Class B properties to attract tenants with move-in specials and aggressive tenant improvement allowances.

Taxable sales attributed to Kootenai County in 2007 rose to over $1.2 billion, an increase of 7.91% over the previous year. National retailers continue to expand to meet the needs of the growing population and economic base.

Forecast

Phase II of the highly successful Sportsman’s Warehouse strip centers is scheduled for completion in summer of 2008. Tenants in Phase I have quickly realized the benefits of Costco and Sportsman’s Warehouse serving as shadow anchors.

The Pointe at Post Falls has attracted major national retailers. The project has slated over 800,000 square feet of retail to big-box, hotel, theater, restaurants, fast food and inline space. As of the end of February 2008, there are no signed contracts, but negotiations are underway with Wal-Mart, Lowe’s and Sam’s Club. A large hospitality component is also expected in the near future.

Barnes & Noble is set to open July 2008 in the Village at Riverstone. Other planned tenants include Red Robin and Ironwood Athletic Club. In first quarter 2009, nine undisclosed national retailers are scheduled to open.

Ongoing softness in the housing market will continue to affect retail absorption. Inevitably, if consumer spending continues to slump and unemployment increases, the national retail market will further soften. Kootenai County’s retail market still remains comparatively healthy, particularly in the high-end retail sector. However, a softening would likely send vacancy rates higher and exert pressure on landlords to reduce asking rental rates.

Owners and developers of retail real estate are well aware of the challenges facing retailers. Nonetheless, local conditions still remain relatively robust compared to the national situation. Kootenai County’s close proximity to Canada could also aid the retail market as tourism spending should be bolstered by the weak United States dollar.

Kootenai County Taxable Sales

Retail Survey Breakdown

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