MARKET PULSE

As part of the in-depth market and project analyses we undertake, Sullivan Group Real Estate Advisors spends countless hours in the field doing research and examining housing on the street level.  In this column we will post interesting observations we have found in the course of our work across the country.

Second Quarter 2008

FISCAL IMPACT ANALYSIS IN THE SAN FRANCISCO BAY AREA

The Sullivan Group was recently engaged by a national real estate company which specializes in the investment and development of retail, office and multi-family properties. Our team of advisors was asked to analyze the fiscal impact of extended development for a currently underutilized 65-acre parcel in the North Bay submarket of the San Francisco Bay Area. Plans for the mixed-use project include office, retail, hotel and apartment components. The goal was to provide evidence that could be shared with the city to demonstrate the financial impact of the planned development. In addition to the fiscal impact analysis, our conclusions included a site and location assessment as well as a brief review of the subject development’s viability and uses.

We considered revenues generated from property taxes, hotel transient occupancy taxes, sales taxes from the subject’s retail component, and sales taxes generated from the expenditures of subject users (residents, employees, and lodgers) within the city. For purposes of this study, we filtered the resulting aggregate tax revenue to represent only the city’s share. We also considered property appreciation, inflation in expenditures, and the potential for turnover of assets and how this would impact revenue streams. Finally, we examined total city specific tax revenue implications over a long-term period to show both annual and aggregate impacts.

Based on our research and analysis, we determined that the subject property will have a major fiscal impact to the area. Over the first 20 years following initial subject development, $6.2 million in total taxes are estimated to be generated for the city from the planned components. The hotel would have by far the greatest impact on expected city tax revenues. Taxes generated by this component would account for more than two-thirds of estimated total tax revenues. This is due to the substantial property tax in addition to the transient occupancy tax which equals ten cents of each lodging dollar. Though there are many variables to assess in terms of the “costs” of the subject to the city, we concluded that the tax, employment, and market benefits of the subject would far outweigh these costs.

APARTMENT DEVELOPMENT IN RALEIGH, NORTH CAROLINA

The Sullivan Group recently completed a market study related to the potential development of a “Class A” apartment complex in the Raleigh , North Carolina metropolitan area. As planned, the project would feature +/- 300 apartments in a series of three-story walk-up buildings. The units are planned to feature a high unit specification level and a wide range of community amenities. Additionally, there will be a +/- 200,000 square foot shopping center with within walking distance of the site. The subject site offers excellent access to regional highways and employment centers.

The objectives of this study were to test the reasonableness of the product program relative to the competitive market, establish base rents and premiums, estimate the lease-up potential of the property, and to determine the opportunity for an upscale, Class A apartment project in this particular location. Specifically, we evaluated each of the subject floor plans, identified the unit specifications and community amenities required to achieve recommended rent levels, provided insight into the anticipated renter profile and local demographic trends, and offered target rent prices and a target lease-up rate. We also assessed the supply and demand conditions in the Southwest Raleigh submarket. Given the subject’s proximity to highways and everyday amenities, as well as a high level of standard unit features and an extensive amenity package, our research indicated that there is an opportunity for market success.

MARKET OPPORTUNITY FOR COMMERICAL DEVELOPMENT IN THE SEATTLE WASHINGTON METROPOLITAN AREA

The Sullivan Group recently completed an analysis of the potential for retail development within a +/- 1,750-acre master planned community located in a southeastern suburb of Seattle, Washington . The purpose of the analysis was to determine how much additional retail space the local market could currently support and how demand for retail space might change with the introduction of the master plan. We analyzed the current retail market, proposed commercial centers, current retail spending patterns and demographics trends. Based on our analysis, we provided estimates of current and future unmet demand for commercial space as well as an assessment what retail segments were the most undersupplied.

SHARED OWNERSHIP ANALYSIS IN MAMMOTH LAKES

The Sullivan Group recently completed research on the shared ownership market in the resort community of Mammoth Lakes, California. The client asked Sullivan Group to research the success of resort-oriented product in Mammoth since the mid-2000s, and to assess the future opportunities associated with fractional ownership projects specifically. Sullivan Group conducted field research in the local market, as well as desktop research on the national trends in the shared ownership market, to determine how Mammoth compares to those markets with successful fractional or resort components.

Although it is a relatively “young” ski resort, Mammoth is increasingly being considered one of the premier ski resorts in California due to its elevation and excellent skiing conditions. It is situated about 300 to 400 miles from Los Angeles and San Diego and, as such, largely attracts Southern Californians. However, over the past 10 years, Mammoth has been continually improving its on-mountain, lodging and entertainment offerings to expand its visitor base beyond Southern California. Intrawest and Starwood Capital (among others) have invested hundreds of millions of dollars into local development with the goal of turning Mammoth into a world-class ski resort destination that draws visitors from across the United States.

Our research concluded that the opportunity for fractional ownership projects in Mammoth has been somewhat limited over the past few years as Mammoth is still in the early stages of development. Until late-2007, Mammoth lacked a four-star hotel, and it does not yet offer any substantial passenger air service. The lengthy educational process associated with fractional or shared ownership condominiums has also been somewhat of an obstacle; however, the local market is becoming increasingly aware of the particulars of this ownership type. Sullivan Group’s research indicates that with continual upgrades in accommodations and entertainment offerings, as well as expanded air service, there appears to be a growing opportunity for fractional ownership projects in Mammoth.

First Quarter 2008

LAS VEGAS PRICING AND PRODUCT ANALYSIS

The Sullivan Group recently completed a pricing and product analysis for a developer who owns finished lots in a subdivision within a master plan in Las Vegas. The developer asked Sullivan Group to determine the best market opportunity for these lots: (1) to continue with current product that is under construction and for sale in the subdivision; (2) to revise the current product; or (3) sell the remaining lots to one or more homebuilders.

Sullivan Group considered the subdivision and product relative to other subdivisions within the master plan and the overall competitive Las Vegas market. Our research determined that pricing and offered incentives at the subdivision were generally consistent with other projects in the master plan. While sales at the subdivision have recently slowed over the last year, this slower absorption may be indicative of the recent slow down in the overall Las Vegas market.

However, Sullivan Group identified several unique challenges to the subdivision and existing product that may be contributing to lower absorption rates. We suggested minor adjustments to pricing and incentive strategies for the current product in the short-term and floorplan revisions in the longer term. With minor adjustments and a possible rebound in the market in the future, the subdivision will likely be positioned for market success and overall viability in the long term.

RURAL DEVELOPMENT POTENTIAL FOUND IN CAVE VALLEY, NEVADA

The Sullivan Group was recently engaged by a land owner to provide litigation support regarding future water rights on the client’s property.   The subject is located amid 6,000 acres in rural Nevada.  A governing agent is in the process of taking the ground water in perpetuity from the client’s property on the basis that it does not offer any opportunity for future development.  It was our task to determine if there indeed is long term development potential in this rural community.  The objective included evaluating the attributes of the region and to offer an opinion as to whether or not this community offers the potential for development of any sort at some future point in time.  Our research concluded that the area clearly offers the potential for future development.  The vision for the subject property, that of a second home destination that blends the region’s natural elements (wildlife, open space, mountains) with planned amenities (such as a golf and water features), is consistent with a concept executed in numerous locations across the United States.  The Sullivan Group identified more than a dozen such resort/destination communities.  The locational attributes of the subject property (proximate to three major population concentrations and there is an existing airport approximately 45 minutes away), combined with a nationally expanding second home market (second home sales reached an all-time high in 2006 according to the National Association of Realtors and the typical vacation-home buyer purchased a property 220 miles from his/her primary residence) lend support to the opportunity.  Combine the aforementioned with a competitive market that is already being “tested” for development (a regional developer is currently selling ranches proximate to the subject site) and the development opportunity at the subject property is even stronger.

MARKET OPPORTUNITY FOR COMMERICAL DEVELOPMENT IN NORTH LAS VEGAS, NEVADA

The Sullivan Group recently completed an analysis related to the potential development of commercial uses (office and industrial) for a site in North Las Vegas, Nevada.  The 14-acre site is part of a larger 185-acre mixed-use development to include significant residential and retail uses.  The purpose of our analysis was to determine the best uses for the Subject Property and create reasonable recommendations based on site characteristics, market trends, economic growth indicators, activity in key comparable projects and general sentiment from broker/ leasing representatives in the local market.  Our core conclusions resulted in a recommended development program to include a mix of office, industrial and mini storage uses.   

SENIOR LIVING OPPORTUNITIES UNCOVERED IN PRESCOTT VALLEY, ARIZONA

The Sullivan Group examined the specific opportunities related to the development of a senior-oriented rental community on a portion of a 60-acre site in Prescott Valley, Arizona.  The overall site is conceptually designed to include a variety of commercial uses including retail, office, and market rate, non-age restricted apartments.  The senior living component was introduced as a potential concept given the relatively large size of the Subject Property that can accommodate multiple uses, as well as the convenience and “walkability” associated with having residences proximate to retail goods and services.

Senior rental options could include a diverse array of product including independent living apartments, assisted living, and nursing care facilities.  In addition to the positive attributes of Prescott as an attractive retirement destination (ranked by Money Magazine as one of the “Top Five Places to Retire” in 2006), our research revealed strong market conditions among all types of senior rental product, including solid lease rates, strong occupancy rates and a lack of newly completed competitive product.  Ultimately, our recommendations suggest that a mix of all types of senior oriented rental product could present a viable development opportunity for our client.  

NORTH LAS VEGAS SUPPLY ANALYSIS

We recently completed a supply analysis for a single family detached subdivision located in North Las Vegas.  The client was a capital source with plans to purchase the lots and hold them until much of the local area supply had been absorbed and the housing market had improved. We looked at the projects that are actively selling, the number of recently built existing homes for sale and proposed projects in the competitive market and determined most of the supply would be absorbed by late 2009. We also made new pricing recommendations and used them to approximate the per-lot price of the subdivision.

FOURTH QUARTER 2007

RIVERSIDE COUNTY SEGMENTATION ANALYSIS

We recently completed a segmentation analysis for a single family detached master plan located in Riverside County. The client was a developer/builder with plans to enter the market in early 2008. The challenge was to adjust the community’s product, pricing and absorption estimates in light of current conditions in the area. Our research suggests that over the past 18 months net base prices (adjusted for incentives) had decreased approximately 15% to 20% and absorption had decreased +/-40% at the most comparable projects for the subject property. Sales agents report that the limited number of buyers are seeking affordability and shying away from the oversized homes that were popular in the Inland Empire during the peak years of the housing boom (2004 to early 2006).

Our adjusted segmentation plan includes smaller home sizes (more single story plans) than what was initially proposed and subsequently lower prices (particularly in the initial phases of the master plan). In addition, absorption estimates are now more conservative; closer to the current market than prior analyses. Finally, to enhance success, the product program’s unit sizes and configurations are intended to attract a wider buyer pool (first-time, move-up and move-down) as an alternative to targeting only one or two specific markets.

HIGH-END CONDOMINIUM PROJECT IN LAS VEGAS

The Sullivan Group recently completed a market study for a developer in Las Vegas who plans to build a high-end condominium project in a desirable area of Las Vegas. Our work provided the developer with a unit-by-unit pricing analysis, buyer profile, and specific unit features, amenities, and services that should be included at this project.

In addition to researching high-end projects in Las Vegas, the Sullivan Group also provided the client with extensive information on the most luxurious projects in New York, San Francisco, Chicago, and Los Angeles. While several luxury projects in Las Vegas are achieving price points of $1,000 per square foot, prices at projects in these other cities commonly reach $2,000 per square foot or more, making Las Vegas one of the best opportunities in luxury living.

Sullivan Group found that buyers at luxury projects are high-end, seasoned buyers accustom to an exclusive community with world-class services. Sullivan Group recommended offering residents extensive community amenities and services within the project as well as the highest quality unit finishes as standard. With its amenities and exclusive nature, this project will further Las Vegas’ image as a world-class, luxury destination.

INDUSTRIAL OPPORTUNITIES EXAMINED IN NEEDLES, CALIFORNIA

The Sullivan Group recently completed an analysis for a land developer in Needles California, a location proximate to Bullhead City, Arizona and Laughlin, Nevada. Because the region is a relatively pioneering location in terms of industrial park development, few comparables exist in the immediate area. The Sullivan Group considered a number of case study examples of major industrial parks in California and Arizona that shared similar attributes to the Subject Project, particularly their distance from the Port of Los Angeles.

Our study examined the opportunities and challenges of the Subject Property’s location and assigned a competitive ranking for the site compared to other industrial sites. This analysis was based on a multitude of factors that are key for an industrial firm’s site selection, including locational and logistical attributes was well as cost of doing business factors.

MULTI-FAMILY OPPORTUNITIES UNCOVERED IN LAUGHLIN, NEVADA

The Sullivan Group recently completed an analysis for a potential apartment development in Laughlin, Nevada. The study considered a variety of relevant rental comparables, including market rate apartments, condominiums in the rental pool, and single family homes available for rent. Our findings revealed an opportunity for new multifamily product in the region based on a number of factors, including a lack of new rental product built within the last decade, scarce developable land available, and a broad renter pool that is in the key demographic profile and income range to demand new rental product.

LIFESTYLE CENTER SHOPPING AND URBAN LIVING MERGE IN NORTH PHOENIX, ARIZONA

The Sullivan Group recently completed an analysis for the residential portion of CityNorth, in Phoenix, Arizona. The mixed-use project is to include 5.5 million square feet of destination retail in a lifestyle oriented setting, including upscale department stores, fine dining, and residential (for-sale and for-rent) above specialty boutiques in a dynamic urban environment.

The Sullivan Group examined relevant for-sale and rental comparables in the market to establish a viable pricing strategy, as well as assign appropriate pricing premiums for locational and elevation attributes that the units offer. Despite the downturn that is evident in the Phoenix MSA housing market, CityNorth is expected to foster strong buyer interest and yield relatively high price points due to its unique offering of a desirable location and a dynamic “live-work-play” experience.

ASSISTING A DEVELOPER DETERMINE WHETHER TO RENT OR SELL

The Sullivan Group recently completed an Apartment Pricing and Positioning study for a builder in San Jose. The product we were evaluating was originally intended to be sold as for-sale townhomes. With the current state of the housing market, the builder is considering continuing with the project as a rental community.

Based on our research, this change in strategy is strongly advised. Apartment asking rents in San Jose are at their highest rate since 2001, demand for this type of product appears to be strong, and average occupancy rates in San Jose are currently at 97%. Additionally, the subject’s upscale townhouse product will present a unique orientation in this market.