Building sales market is best in six years.

For the first time since 1988, the small building sales market has experienced both appreciation in value and increased sales volume. In 1994, prices appreciated by 5 percent on average. Sales volume also increased by 17 percent over 1993 totals.

These statistics are taken from our sample of 9,366 buildings which are in the statistical pool that we study and cover on a daily basis. The increase in volume of sales is noteworthy, as in 1994, 2.7 percent of the entire market turned over. This has been the highest total since 1989 when 3 percent of the market turned over. Historically, throughout the early 90s, the turnover ratio has been at approximately 2.1 percent of the total stock of properties.

The increase in prices is even more significant, as this is the first time the market has experienced appreciation since 1988. Prices have fallen steadily throughout the past six-year period and ended at a level that was roughly equivalent to that experienced in June of 1982. Although the price level today is approximately half the level we experienced at the height of the market in 1988, the 5 percent increase is a very encouraging sign for the market.

The two main reasons for the increase in prices and volume are the short supply of available properties and the perception by the buying community that prices are rising, signalling that it's time to get back into the game before the market takes off.

The supply of buildings has never been overwhelming, although throughout the period of 1991 through 1993 bank foreclosures flooded the market, creating an oversupply that further served to reduce building value. This was in addition to the recessionary influences that the general economy had.

Now that many banks have completely sold their foreclosed properties back to the private sector, both investment purchasers and user purchasers are finding it tough to find good deals.

Rising interest rates have not really had much of an effect on our smaller building market, as day-to-day cash flow has never been a predominant variable in the purchasing equation. Location, physical structure, long-term appreciation, and perspective have always been key components of the buy decision.

The statistics that we have quoted are based on market averages. If we look at a couple of key components of our market we can see that the prices for multi-unit residential property have increased to 5 to 7 times the gross rent, which relates to capitalization rates of 5 to 8 percent. This indicates that buyers are considering the speculation value of a property or potential conversion at some point to justify prices paid for these buildings.

These gross rent multiples are substantially better than the 2 to 4 times gross rent that was being paid just three years ago. To put this market in perspective, however, we must look at the activity of the mid-80s, where these properties were trading for 10 to 13 times the gross rent!

When looking at the investment segment of the market, we're seeing real rates of return at 6 to 8 percent. Although "set-up" income might show a 10 percent return, once real expenses are calculated and a 15 percent collection loss and vacancy allowance is added (which is the actual city average), the effective return to the purchaser is in the 6 to 8 percent range.

Residential townhouses have been the hottest commodities in our small to mid-size building market. Properties have been trading at a feverish pace, and due to the short supply, 20-foot wide properties have been selling routinely for over $4 million. This had been unheard of for the past several years and is reminiscent of the mid-80s.

On any property that is well-located, there has been excellent activity and a multitude of buyers for any availability looked upon as a prime building. This demand has brought marketing periods down to 60 percent of what they were in 1992.

Development properties have also experienced a tremendous surge in demand. Three months ago, developers were not in the market in any great numbers and development sites had questionable value. Starting in about October or November of 1994, the activity within the development community has skyrocketed. Sites all over town are being bid on and prices have ranged from a low of $25 per buildable square foot to a high of $75 per buildable square foot. However, the average for a good neighborhood is probably in the $40 to $50 per buildable square foot range.

Announcements of new developments have appeared in local trade papers for the first time in several years and this is a very encouraging sign for the future of the city.

Massey Knakal's prediction for 1995 is that we anticipate a 27 percent increase in the volume of sales up to approximately 3.5 percent of the total market. We also anticipate price appreciation reaching double digits by the end of '95. This will be due to the small supply of properties available for sale and the ever-growing number of purchasers looking to get in while prices remain at relatively low levels.