Real Estate Forum - September 2010

distressed, according to Real Capital
Analytics.
balance and allow a recovery faster than
office and retail.
In light of the outlook for employment,
wages, and consumer spending, the retail
sector is unlikely to recovery meaningfully
before the second half of next year.

Industrial: Light at the End of the Tunnel The industrial sector continues to benefit from strong production, inventory rebuilding, and international trade growth. From 10.4% in the first quarter, vacancies were down slightly to 10.3% in the second, according to CoStar Group, with net absorption totaling a positive 12. 5 million per square foot. Both warehouse and flex space vacancy rates remained essentially flat during the first quarter, although vacancy in flex-use buildings was 13%, compared to 10% for warehouse space. For comparison, the vacancy rate for industrial buildings had dropped to close to 7% in 2007.

Unlike the office and retail sectors, which are heavily dependent on employment, the industrial sector is driven by industrial production, inventory rebuilding, and international trade (exports and imports jumped 3% during the second quarter). Until recently, all three have been strongly recovering. Average cap rates on industrial property sales declined approximately 25 bps to 8.2% during the first half of 2010, according to Real Capital Analytics, who also report that the industrial sector had the lowest level of distressed assets — approximately $7.7 billion. Resolutions and restructuring during the first half of 2010 totaled more than $700 million, and the average price per square foot of industrial distressed asset sales lagged non-distressed sales by approximately 35%.

The short construction cycle for industrial
space combined with manufacturing’s
continued recovery should keep this sector
in a relatively healthy supply/demand

Recent Developments at Caplease CapLease Reports Solid Second Quarter Results CapLease reported it earned funds from operations as adjusted for comparability, or adjusted FFO, of $9.5 million or $0.17 per share, in the second quarter, and further reduced debt by $43 million, bringing total debt reduction for the year to close to $70 million.

In July, the company completed its amended $140 million revolving credit line with Wells Fargo Bank and extended the maturity by three years to July 2013. The additional borrowing capacity combined with the approximate $58 million of cash CapLease holds on the balance sheet will enable it to acquire new properties as opportunities arise. Paul McDowell, Chairman and Chief Executive Officer, stated, “During the second quarter, we continued to strengthen our balance sheet through recourse debt reductions, utilizing the capital we raised during the first quarter. We also have developed a solid pipeline of potential new investment transactions and have earmarked much of the remaining capital to fund portfolio growth. The extension of our revolving agreement until July 2013 addresses our only near term debt maturity, and will provide us significant liquidity at an attractive cost as we re-enter the investment markets.”

Construction to Acquisition Program Popular with Developers CapLease’s Construction to Acquisition Program has proven to be popular with merchant builders who control a site and have a commitment to construct a building