Ex-Galbreath executives form HDC Partners A team of ex-Galbreath executives has formed a partnership called HDC Partners, a new diversified real estate investment firm based in Chicago. The company will focus on real estate investment management and consulting, third-party property and facilities management, and occupancy consulting. HDC Partners has formed a private equity fund that will enable private and institutional investors to make direct investments jointly with the firm.

"A firm the size of HDC Partners offers clients the best of all worlds," says Peter Conkey, president of HDC. "We offer a variety of value-enhancing services, a high level of expertise and a track record of success. We have the ability to act quickly and with the absence of bureaucracy, along with accountability at the highest levels of the organization."

HDC currently manages and leases a portfolio of more than 600,000 sq. ft. of space in Midwest markets. The firm's acquisition strategy will concentrate on underperforming assets where the firm can utilize its redevelopment, property management and leasing expertise to deploy a variety of services. These provide consulting services to select clients for projects such as feasibility studies, redevelopment analysis and site selections. At present, HDC is implementing occupancy cost reduction strategies for a variety of corporate clients, including acquisition and disposition strategies.

Office market stabilizes construction levels With a future-to-past ratio of 88%, the office market has established a balance between past and necessary future construction levels, according to Cognetics' latest edition of America's Office Economy. When Cognetics first measured the future-to-past ratio in 1990, it stood at 6%, meaning that we as an industry only needed to build 6% in the 1990s of what was built in the 1980s.

This rise in the future-to-past ratio has come about because of seven years of restrained building and slow but steady growth in the market, and it represents a growing need for construction.

However, the national vacancy rate in office space is still high at 11.6%. According to Cognetics, this rate should be in the 5% to 6% range. And many markets are still faced with vacancy rates in excess of the national average, particularly in the West South Central region (14.7%), the Pacific states (12.8%) and the Mid-Atlantic region (14.3%).

There are three issues that the office market still must face today, and these include sublease space, build-to-suit construction and spatial obsolescence.

According to the Cognetics report, the Fortune 500 alone have created about 250 million sq. ft. of sublease space during the last five years through downsizing and consolidation.

Cognetics also makes another finding in America's Office Economy that concerns the amount of build-to-suit space being constructed today. "If employment growth is averaging between 1% and 2% per year, and build-to-suit construction is 1%, it will still take a long time to work off an 11.6% vacancy rate, particularly if this figure does not include sublease space," the report says. This is partially to blame for the slow decline in vacancy rates, reports Cognetics.

And despite overall high vacancies, many companies continue to build new space to consolidate all of their operations around the country.

Other findings in the Cognetics report that affect the future-to-past ratio are office employment growth and construction needs.

As far as office employment growth goes, the top five markets over the next 10 years include Los Angeles, New York, San Francisco, Chicago and Washington, D.C., in that order.

This, along with the No. 1 ranking of San Francisco for needed construction over the next 10 years, shows that California, other than Southern California, is definitely making a comeback in the office sector.

Other markets with the highest needs for construction are Washington, D.C., Chicago, Atlanta and Boston, respectively.

For more information or a copy of this report, please contact Cognetics Inc. at 100 Cambridge Park Drive, Cambridge, MA 02140. Cognetics' telephone number is (617) 661-0300 and the fax number is (617) 661-0918.

Year-end cap rate/pricing data provided by PIX

NREI is featuring a yearend update on the state of multifamily, office and retail market cap rates and prices nationwide. This data is provided to us by Property Information Exchange (PIX), based in New York. PIX is an innovative information service that links qualified institutional investors with an ever-expanding pool of investment grade properties totaling over $3 billion. This data is an empirical measure of what more than 700 of the largest real estate investors and advisory firms are chasing into 1998.

Multifamily: Based on the year-end 1997 numbers, multifamily market cap rates were 11.3% nationwide in December, down from 11.17% in December 1996. The average for the year was 11.2%.

In pricing terms, PIX data indicates that for 1997, the price per sq. ft. remained relatively stable throughout the year, showing a slight year-end decrease of $57.54 per sq. ft. vs. $57.84per sq. ft. in December 1996. The average for the year was $57.62 per sq. ft.

Office: Based on the year-end numbers, office market cap rates were 10.33% nationwide in December, up from 10.23% in December 1996. The average for the year was 10.33%.

In pricing terms, PIX data indicates that for 1997, the price per sq. ft. rose steadily throughout 1997, showing a year-end increase of $88.45 per sq. ft. vs. $82.96 in December 1996. The average for the year was $86.05 per sq. ft.

Retail: Based on the year-end numbers, retail market cap rates were 9.91% nationwide in December, down from 9.96% in December 1996. The average for the year was 9.94%.

In pricing terms, PIX data indicates that for 1997, the per sq. ft. price rose rose steadily throughout, showing a year-end increase to $117.47 per sq. ft., up 7% from $109.28 per sq. ft. in December 1996. the average for the year was $113.83 per sq. ft.

Fannie Mae's 1997 revenue bonds top $1.3 billion Washington, D.C.-based Fannie Mae (NYSE:FNM), the nation's largest source for home mortgage funds, has invested more than $1.3 billion in mortgage revenue bonds (MRBs) issued by housing finance agencies (HFAs) in 1997. Through 134 transactions with 38 states and 42 local housing agencies, Fannie Mae's MRB purchases have made homeownership possible for approximately 20,000 low- to moderate-income owners throughout the nation.

HFAs issue tax-exempt bonds to finance below-market-rate mortgages made by lenders. Eligible borrowers are first-time, low- to moderate-income buyers earning less than an average median household income. In addition to directly purchasing MRBs, this past year Fannie Mae worked closely with HFAs to determine ways to work more effectively together to meet the shared goal of serving low- to moderate-income home buyers. In 1997, Fannie Mae developed structured bond issues to set aside targeted funds for specific geographic areas or populations with unique housing needs, such as housing for people with disabilities.

Also, Fannie Mae provided flexibility for HFAs through purchases of short-term convertible option bonds and helped fulfill HFA programs such as providing financing to renovate deteriorating housing stock and increasing technology use in the home buying process. "In 1997, we successfully built on our commitment to move beyond the traditional role of institutional investor in tax-exempt bonds to that of a full affordable housing partner," says Jack Gallagher, vice president of Fannie Mae's Office of Public Finance. "In the coming year, we will continue to expand our partnerships with HFAs to bring them the full benefits of a broad secondary market, thereby helping them further their borrowing costs and expand their services to their local communities."

Fannie Mae's innovative ways work for HFA partners through MRB set-asides. For instance, Fannie Mae has worked with three state HFAs to designate proceeds from more than three bond issues to fill specific housing needs. In Detroit, the proceeds from the sale of a $20 million bond issue are being used to fund a first-time home-buyer program with a 6.62% interest rate. Also, a similar partnership with the Wyoming Community Development Authority on the sale of a $3.9 million bond issue will result in the expanded underwriting criteria for first-time buyers. In Oregon, Fannie Mae's MRB program is working with the Oregon Housing and Community Services Department to raise the community's awareness of homeownership as an option for the area's disabled population.

In 1998, proceeds from MRB set-aside partnerships from a $2 million bond issue will be available only for special needs housing in the area.

The WMF Group spins off from NHP Inc. On December 8, 1997, Vienna, Va.-based The WMF Group Ltd., one of the nation's largest commercial mortgage financial services firms and the largest originator of FHA-insured multifamily loans, spun off from NHP Inc., the second-largest apartment owner and manager in the country. The WMF Group, upon the completion of the merger between NHP and the Apartment Investment and Management Co. (AIMCO), a Denver-based multifamily REIT, became the first publicly traded commercial mortgage financial services firm. WMF is currently servicing a portfolio of more than $9 billion and has 14 offices nationwide. AIMCO required the spin-off prior to merging with NHP and the deal is structured to please all three parties and their shareholders.

Under the spin-off, which is not an initial public offering, NHP will distribute one-third of a share of WMF common stock for each share of NHP common stock. Concurrent with the distribution, Capricorn II, one of the company's largest shareholders, will purchase 546,488 shares of common stock for $5 million. Further, NHP believes that the spin-off maximizes value to its shareholders by enabling investors to evaluate WMF's business performance and outlook in the areas of property management and financial services. WMF is now listed on the NASDAQ national market under the symbol "WMFG" and in total, more than 4.34 million shares of WMF common stock was dealt to NHP's shareholders. Also, WMF repaid its inter-company debt to NHP of $9.8 million and NHP transferred $6.5 million from its free cashflow to WMF.

"The company's public status enhances our ability to capitalize on the consolidation and transformation of the commercial real estate financial services industry," says Shekar Narasimhan, president and CEO at WMF. "We are creating a different kind of company here -- one where entrepreneurship in a fast-changing environment is complemented by disciplined financial goals and performance-based reward structures."

The company intends to continue its strategy of seeking to increase reported earnings and cashflow. After the merger, WMF announced two significant transactions. First, the company sold WMF shares to Capricorn II and secondly, WMF entered into a $200.7 million line-of-credit facility with a bank group consisting of Residential Funding Corp., PNC Bank and Bank United. The company will continue to grow through acquisitions and internal growth, design and delivery of new financial products and expansion into related businesses.

Banking on its recognized expertise in consulting with some of the leading institutions in the country, Heitman Properties is launching a new venture to compete for third-party real estate services. The new division, called STRATA Real Estate Services and officially launched on Nov. 3, will be run by David Latvaaho, STRATA's president and former president and national director of leasing for Heitman Properties, based in Chicago.

The division will have four business development directors, to be announced shortly, which will be exclusive to STRATA to grow the business. In an exclusive interview, NREI talked with Latvaaho about the new company.

NREI: Are you starting with an existing book of business?

Latvaaho: We are, which we are going to be announcing in short order with a major assignment in Houston, two major assignments in New York (Manhattan), a major assignment in Los Angeles. It will be very significant from the get-go.

STRATA is really a division within Heitman Properties, that will be exclusively dedicated to pursuing third-party management, leasing, construction as well as transaction management and the corporate and financial end with our institutional clients as well. Now for us it's a chance to showcase a really fine organization to go after third-party business that can compete in a much broader market.

There is over 750 million sq. ft. of office space today that is under third-party management in the U.S. The market is dominated pretty much by the service firms that are brokerage houses. The difference that we bring is an owner's mentality, because we're used to servicing and being a fiduciary. We think like owners and we act like owners and we manage the asset in a much more strategic way.

NREI: Who will be your clients?

Latvaaho: I think the REITs are ultimately going to need help in this area in managing their portfolios, because I think essentially they are new to this business. If you look at the average REIT, it's very young, and they have to grow this management group, and I think they are going to have a difficult time doing that, which I think presents a great opportunity for us as owners of real estate, as they are, and I think they would be reluctant to give that to a service firm.

We're going to focus on clients where we have relationships, either new clients or existing clients -- developers, institutions, public and private REITs, some of the real estate advisory firms, and some of the consultants. We'll also deal with the Wall Street firms and look at the opportunity to work with some of the investment houses that control portfolios and buy real estate on behalf of their investors that don't have any inhouse capabilities. Then there's an area for us on the corporate side, with Fortune 1000 companies to do some of this work for them on the facilities side. And we'll look at joint venture possibilities with all of the above. And I'm also going to work with a number of brokerage houses who do tenant representation exclusively. We're not in the brokerage business and don't want to be.