top MATTHEWS REAL MARKET UPDATE
Fall 2002:

A periodic review of local real estate market trends

REAL ESTATE BUBBLES

There has been some concern throughout the nation that the values of homes are artificially high and could suffer the same fate as the stock market with prices falling substantially below today’s levels in a relatively short period of time. There have been real estate bubble markets in the past that over-inflated and eventually deflated. One example was the agricultural land market of the 1970's. This was promoted by the Russian grain deals, strong inflation, moderate interest rates and high crop prices. This generated surplus cash which helped bid up land prices to over $3,000/acre by 1980. Prices fell through the 1980's then rebounded and today are between $1,500 and $2,500/acre, lower than 20 years ago, but so are grain prices in constant dollars.

A small bubble in residential home prices in Evansville was created in the 1980's by the influx of relocated east coast corporate executives who had sold their prior homes at prices substantially above the Evansville home prices. This group and others spurred the development of several very high-priced subdivisions. Many of those executives were later transferred en mass out of Evansville creating an oversupply. Those home prices fell dramatically creating good buys because those home prices have since increased.

Two economic forces create price increases in real estate. First is inflation or loss in monetary purchasing power which has averaged 3%/year since 1990. Barring other factors, home prices should increase 3%/year. However, appreciation and depreciation can occur in real estate market segments due to the imbalance between supply and demand. Neighborhoods may enjoy greater than average demand and see prices increase above inflation. In Evansville, we have plentiful amounts of relatively inexpensive land so new supply can be added easily. This and the lack of strong population growth have kept real estate prices in check. Evansville has not recently experienced a real estate bubble. We have had slow and steady appreciation of real estate and, therefore, we should not experience any substantial deflation in the foreseeable future.

The reduction in the effective cost of buying a house created by the lower interest rates has helped support prices. In March 2000, an 8.5%, 30-year $100,000 mortgage would have had payments of $768.91/month. This same $768.91/month at today’s interest rate of 6.5% would support a mortgage of $121,650. Assuming a $20,000 down payment for each indicates an increase in market price of 18% in just 2.5 years or 7.2%/year. The best method to determine price changes is to study sales and resales of the same property. We did this in the two most successful newer subdivisions in Vanderburgh County and found price increases of 1% to 4% per year for the past four years. This may be due to an oversupply of listings creating a “buyer’s market” in some submarkets. A few sold for less over time.

In our opinion, Evansville does not appear to be poised for any substantial decline in property values, even if interest rates begin to rise slowly. However, we are keeping our eye on the baby boomers and their potentially large impact on supply and demand as they reach retirement age beginning in 2008.

RESIDENTIAL SUBDIVISIONS ~ GOOD SUPPLY

Have you ever heard the question, “Where are all those people coming from to buy those new houses?” Of course, the answer is not simple. It’s a combination of increased population, new jobs created, demolition of existing homes, demographics, divorce rates, low interest rates and increasing income levels.

With today’s low interest rates and low down payments, many renters are able to buy homes. Nationally, home ownership has reached 68%, the highest ever.

Over the past four years, demolition of houses in Vanderburgh County has averaged 154 houses/year. The average new subdivision has 32 lots. Therefore, it takes 4.8 new subdivisions on average to replace those 154 houses lost. A 1,000 person growth in population divided by 3 persons per household requires 333 new homes or apartments. Approximately 2/3's of families own their home so 222 families need a new house.

The price of development land and development costs have increased. To provide affordable housing, lot sizes have reduced with more zero lot or patio homes; manufactured housing has become more accepted; and more single builder, no-frills stick built model home subdivisions have been developed.

In higher priced homes, a retro concept for subdivisions is being tried in our local market with large homes on small lots with rear alleys providing rear garage access (e.g. Sutherlands, Wyngate, Field Crossing subdivisions and a new lower priced Jagoe subdivision).

Our annual Residential Subdivision Lot Study shows:

• In Warrick County an increasing inventory while vacant lot sales during the past three years have declined from 400+/year in 1998 to 200/year in 2001. Some of this can be explained by the lack of lower priced homes being built this past year. Ohio Township remains strong in subdivision development and Campbell Township (north of Chandler) continues to grow.
• In Vanderburgh County stable residential lot sales, down slightly from the peak in 1998. However, lot inventory has continued to remain high. Center Township has seen the bulk of the new residential subdivisions with Perry and Scott Townships each having several new subdivisions.
• In total, Vanderburgh County has a 45 month supply of residential lots and Warrick County has a 68 month supply.

RESIDENTIAL HOUSING ~ STILL STRONG

The number of homes sold each year for the past few years, in the MLS, has been fairly stable in Vanderburgh, Warrick and Posey Counties. In total, the number of transactions has ranged in the September to August periods from 3,190 in the 2000/2001 period to 3,335 in the 1998/1999 period. The proportion of homes sold below $100,000 has steadily declined due to more new construction sold over $100,000 and the overall inflation of homes.

AGRICULTURAL LAND MARKET ~ STABLE

Professor Atkins of Purdue University publishes an annual survey for the farm markets in Indiana. The summer 2002 edition indicated that in southwestern Indiana crop land prices inched up slowly over the past few years except for low grade land which saw prices decline recently after good gains in 2001. Projections are for slow increases in farmland prices near the rate of inflation.

GIS ~ WHAT IS IT & HOW DO I USE IT?

GIS is the acronym for Geographical Information System which is the application of digitized mapped data accessed through computers. It does for maps and locational data what computers did for word processing, databases and spreadsheets. Evansville, through the progressive and visionary actions of our city and county governments, has become one of the leaders in GIS applications in Indiana and the United States. A tremendous amount of local GIS data is available on the internet and has been for more than a year. With a few key strokes, you can view on your computer screen a high-resolution (6" pixels) aerial photograph of Vanderburgh County and a multitude of data layers.

One of the best applications is the property assessment data which is provided free to the public by the County Assessor, Cheryl Musgrave. If you want to find a property and you know the address, location or tax code, the computer will find it on a map that shows street names, property lines, lot sizes, setbacks, building assessments, etc. The library also has an excellent GIS website with dozens of layers of interesting data, bigger viewable area, measurement tools, etc. The building commissioner, Roger Lehman, chairs the GIS committee and his department has topo and flood maps online. Zoning should be added next year.

The only drawback is you need a high speed internet connection or you will have a long wait. This program alone is worth getting high speed internet access.

To access the GIS programs for Vanderburgh County, follow these steps:

1. www.evansvillegis.com
2. Click on “Vanderburgh County Assessor”
3. Click on “I Agree”
4. The GIS map is on the left half of the screen and the assessor’s data is on the right. These are two separate websites that have been merged. This bit of magic was designed by GIS Director, Matt Arvay.
5. On the map, use the magnifying glasses to zoom in or out and click on Map Layers to see more. Once you’ve zoomed in far enough, aerial photo becomes an option. You can select the identify button and click on a parcel to link to that parcel’s assessment information. Use normal print commands.
6. On the Assessor’s page, click on “Begin Search” or “Search Again” and enter your search criteria. From the results, click on the tax code of property to view property-specific data. Click on the “View Map” button at the bottom right of the resulting page to locate the property on the adjacent map.
7. Also check out under www.evansvillegis.com the Building Commissioner’s site and the Area Planning Commission’s site.

To access the library site which has dozens of layers:

1. www.evcpl.lib.in.us
2. Click on “Community Information”
3. Click on “GIS (Geographical Information System)”
4. Click on “Enter the Vanderburgh County GIS”
5. Select layers (aerial is bottom of list)
6. Use magnifying glasses to zoom in or out
7. To print, right click the mouse and select print

Try out these sites and you will find them both intriguing and useful, especially if you deal with real estate or other locational issues.

TRANSPORTATION ~ PROJECTS ABOUND

The I-69 “direct route” has been selected over the 41/70 route between Evansville and Indianapolis. The direct route will be faster, shorter and produce a greater economic benefit to Southwest Indiana. The next question is, “What route should I-69 take around Evansville?”. On the basis of economic development and efficient movement of local, regional, national and international traffic, a loop around Evansville and Henderson is by far the best. This will require two new bridges, one near Angel Mounds and the other in Union Township near the Posey County line.

Other projects planned to begin next year include:

• the reconstruction of the Green River / Lloyd interchange with some new medians on Green River Road
• four lanes for Highway 62 from Evansville to Boonville
• four lanes for Highway 66 from Evansville to Yankeetown
• Lynch Road extension from I-164 to Highway 62
• Widening of Diamond Avenue to Weinbach Avenue
• Widening of Mt. Pleasant Road with turn lane east of Old State Road
• Weinbach widening continues
• Eickhoff-Koressel construction from Highway 62 north to Upper Mt. Vernon Road

APARTMENTS ~ VACANCY ON THE RISE

According to the Department of Metropolitan Development’s 2001 Apartment Vacancy Survey, vacancy rates within Vanderburgh County continue to rise reaching a 13 year high. Geographically, the highest vacancy is once again on the east side of Evansville with rates approaching 17% on the “near eastside” (between the central business district and Highway 41) and 10%+ on the “far eastside”, east of Boeke Road where construction continues. The balance of the east side plus the north and west sides all reported much lower vacancy rates, at less than 6%.

Based on the number of apartment building permits issued, 2001 was a relatively quiet year in comparison to the previous three years and 2002 year to date. During this 4.5 year time period, three times the number of units (1,607) were permitted and presumably built, than during the ten year period from 1987-1996 (529 units). Data from 1997 was not available.

Historic vacancy rates and apartment units permitted are illustrated in the following graph. (Graph not included.)  Note the lead/lag, in that after the mid-1980's overbuilding and the resulting high vacancy in the late 1980's, the number of units constructed dropped off substantially until 1998 after years of low vacancy rates. Since 1998, vacancy rates have been on the rise due to the overbuilding in the late 1990's.

The recent surge in construction has contributed significantly to the increasing vacancy and one would think that construction would taper off to get vacancy back in line. However, this does not appear to be the case. The saturated “far eastside“ market, with vacancies increasing from 6.1% in 2000 to 10.2% in 2001, has another 200+ units planned. This area represents over half the units surveyed and is the largest contributor to the 2001 county-wide vacancy of 8.7%. As construction continues, vacancy rates will follow and it will take some time to absorb these vacant units.
In summary, the overall apartment market appears to be near saturation in most areas and overly saturated on the far east side of Evansville. Despite this, existing large apartment complexes have become one of the hottest real estate commodities. A dozen or more apartment complexes have sold in the past two years. Compared to other investments such as stocks, bonds and some even greater oversupplied real estate submarkets, apartments are very attractive at overall capitalization rates near 9% made possible by low interest rates. The drop in cap rates, or course, increased values over the past couple years even with slightly lower incomes.

OFFICE MARKET ~ STATE OF FLUX!

The Evansville multi-tenant office market is divided into two submarkets, Central Business District (CBD) and suburban, both of which currently have higher than normal vacancies. David Matthews Associates has monitored these markets for many years.

CBD Market:
The downtown market has long been anticipating the construction of the Old National Bank tower which should lead to higher CBD vacancy rates and downward pressure on some existing lower quality office rents for the short term. At the same time, rents in this building should break the $20/SF ceiling and create a new standard for Class “A” space in Evansville as did the Integra Bank tower a few years ago. Construction has now begun and the actual building size has been somewhat down-sized. The 111 Walkway building has been demolished and the First Indiana Bank building has been acquired by Old National. Their tower and the proposed Vectren headquarters building on the riverfront are expected to be built by the end of 2004.

The current vacancy rate of 16.9% (normal is 7% to 10%) has largely been from recent bank mergers with the vacation of Permanent Federal (101 SE 3rd) and the Centrum (326 Main) buildings. Nationally, the CBD office vacancy rate is expected to peak this year at 17% per a new Grubb & Ellis Study. While a vacancy rate of 15% to 20% is not so unusual in many cities, Evansville has not seen this much vacant space since 1980 and more is coming. On the positive side, this provides available space for any new large office user who might be looking for immediate occupancy at attractive rates. A breakdown shows only 10% vacancy (80,000 SF vacant) in Class “A” presently with Class “B” at 23% (128,000 SF) and Class “C” at 34% (31,000 SF).

The downtown should become an even more attractive location for offices due to the work being done to create “Digital Downtown”, an effort spearheaded by Vision 2000 and Ken Robinson to bring an affordable, high-speed, electronic data and communications system to the central business district.

Suburban Market:
The local suburban market at a 15.8% vacancy rate is also higher than normal (7% to 10%). When compared to the 2000 rate of 20.9% (2001 rate was 14.6%) it shows that the large amount of office space which came on-line in 2000 is being absorbed steadily. This is expected to continue over the next few years. Vacancy is evenly distributed over Class “A”, “B” and “C” space and is not affected by any single large multi-tenant building. A few new smaller office buildings, primarily single tenant, are planned in the near future on the east side primarily.

LODGING ~ PLENTY OF ROOM AT THE INN

Long before 9/11, the Evansville lodging industry was suffering from an obvious oversupply. In just a few years, more than a dozen new motels were constructed in the immediate Evansville area. The total number of rooms in Evansville is now close to 3,900. This has oversupplied the market which has depressed occupancy levels and average daily rates (ADR’s). Surprisingly, the effects of the events of September 2001 had a significant impact primarily on a short term basis at the local level. County wide occupancies were already averaging 50% to 55%. Demand spiked downward for several months but has since improved.

Nationally, 2001 saw the first decline in demand, 2.3%, in at least five years. Also expense ratios increased 3-4% due both to fixed expenses taking a higher percentage as revenue decreased and an industry wide increase of close to 25% for marketing expenditures. Smith Travel Research shows for the first six months of 2002, a 3.6% drop in occupancy and a 3.1% drop in average daily rates (ADR’s). The recovery has taken longer than expected but it is a deep trough from which to climb. Total losses to the lodging industry after 9/11 are estimated to have totaled close to four billion dollars or about 85% of the airlines losses.

The Evansville market appears to have bottomed. This has attracted bargain hunters looking for good buys which can be found but at a high risk. There should be little long term negative effects from the events of September 11. The local market is far more affected by the overbuilding than the decline in demand. City wide ADR’s have declined to ±$45.00 with average revenue per available room (revpar) at $8,000/room per year. The combination of lower ADR’s and lower occupancy have decreased the revpar. Two developments in the Evansville market have emerged which heretofore have been rare: foreclosure and reflaging or changing franchise affiliation. In 2002, at least three motels have gone into foreclosure, the Country Inn and Suites, the Riverhouse and the Fairfield East. Properties which have changed franchise affiliation include the Comfort Inn on Morgan to an Econo Lodge, the Red Roof Inn to a Comfort Inn, and near Hwy 41 and I-64 the Baymont and Best Western have changed to a Quality Inn and Gateway Inn and Suites respectively.

One bright spot may be found in the extended stay sector of the market. This sector’s occupancy averaged 13 percent above the average for limited service, economy, etc. Nationally, from 1995 to 2001, the supply of extended stay rooms grew to 220,000, a 340% increase.

As complex as markets can be, this one distills down to a single, simple fact; there are too many rooms. It will be years before increasing demand slowly absorbs the surplus but it can happen. Already in the first nine months of 2002, convention bookings are up over 100% from the entire 2001 period. This combined with increasing popularity of special events such as the Freedom Festival, Frog Follies and possibly soccer tournaments will help boost demand, but it will probably be a very long time before additional development is feasible.

POPULATION STATISTICS ~ FORECASTING DEMAND

While the average age varies only 1.5 years among counties, the breakdown of the age groups varies much more. Gibson County has the greatest percent of those over 65 indicating more demand per capita there for retirement and health care facilities. Warrick County has the largest percentage of school age children meaning more schools per capita and greater demand for restaurants per capita that cater to children’s tastes. Vanderburgh County has by far the largest percentage and number of young adults partly due to the two universities in Evansville. This group has recently left home and most moved to apartments indicating strong demand for multifamily housing and in a few years will soon be entering the “starter home” market. Vanderburgh County has the smallest percentage of those under 18 indicating lower school populations and fewer renters in the medium term future. Unfortunately, a more detailed breakdown was not available. Vanderburgh County also has a high percentage of elderly indicating a greater need for retirement, senior recreation and health care facilities. Vanderburgh County, even with low percentages under 18 and 45-64 years, still has the highest number of people in those brackets due to the larger population base of the county. The 25-44 age group represents the trade up housing market group and this group is spread evenly across southwest Indiana which is good. This group was born from 1956 to 1975 and is a mix of the last half of the boomers and some of the echo boomers.

RETAIL ~ BIG DEMAND, BIGGER SUPPLY

Evansville has seen a tremendous expansion in the amount of retail building square footage in the past five years. The two areas of rapid growth have been on the east side at the intersection of Burkhardt Road and the Lloyd Expressway and the west side on the Lloyd Expressway near Red Bank Road. The north side has seen more scattered and less intensive growth with the expansion of the Target center currently underway on First Avenue, construction of the Northfield center at Boonville-New Harmony Road and Highway 41, the proposed retail development at that same intersection on the east side of the highway and Sunset Plaza on Highway 41 near Lynch Road.

On the east side, the new Pavilion regional shopping center is renting up at a good pace with Target Greatland Store, T J Maxx, Dick’s Sporting Goods, Linens-N-Things and Border’s Books already open for business plus space for more expansion at this first-class center. This adds to the synergy of this intersection which already includes a Super Kmart, Super Wal-Mart, the new, expanded Sam’s and more. IHOP and Backyard Burgers are the latest restaurants but a new restaurant is planned for the Pavilion outlot. Farther east, the Builder’s Square may be transferred soon for conversion of the property to a new use or uses. In Newburgh, the old Kmart may see some new use since Kmart has filed bankruptcy which may free up the fee owner to reuse the property. North on Green River Road at Lynch Road is a new Schnuck’s Supermarket under construction with room for many more buildings. On the west side, there are rumors that Wal-Mart will relocate to the south side of the Lloyd Expressway.

To better understand the retail market in Evansville, we have collected data from the 2002 Survey of Buying Power published in the Sales and Marketing Magazine. This shows the retail sales volume in eating establishments for the United States, Indiana, the metropolitan areas of Indiana and other counties. In retail sales per person, Evansville at $15,006 per person is second only to Terre Haute at $19,562 per person for the eleven metropolitan areas in the state. Indianapolis is $14,624 followed by the State of Indiana at $12,673 and the United States at $12,646. Dubois County is at $19,128 per person. This shows that Evansville is a regional shopping area, as are, Indianapolis, Terre Haute and Dubois County, drawing shoppers from surrounding counties. Therefore, Evansville can support more than the average number of square feet per person. The 2002 population of Vanderburgh County was 171,600 persons with a MSA of 296,600 persons. Using the standard ratio of 10 square feet of retail space per capita indicates the Vanderburgh County population alone can support 1,700,000 square feet of retail space.

David Matthews Associates conducted a survey of the medium to larger retail centers in Vanderburgh County. The total number of square feet in these 62 centers was 5,500,000, with ±4,000,000 occupied which equals 23 SF per capita. As a regional shopping area, Vanderburgh County can support more space than average. However, the vacancy rates within the current market are 30% on the east side, 14% on the west side, 33% on the north side and 28.5% for the county as a whole based on our projection from vacancy data from 73% of the centers studies. Much of the vacancy is in the larger stores and the new space being leased up. If these are omitted, the vacancy rate of the balance of the market is only 12%. The market is oversupplied with medium to larger, 10- to 50-year old, single-tenant units where the tenant relocated, moved out of town or closed such as Target (most released), Elder Berman, Buehler’s in Village Commons (partly released), Plaza East and West (owned by a large REIT), DeJong’s and Kuester’s. This survey does not include the very large, vacant “box stores” such as Builder’s Square, old Kmart at Diamond/St. Joe and the Kmart in Newburgh.

It is interesting to note that the dollars per capita spent in the Evansville MSA on food services and drinking establishments (restaurants and bars) at $1,274/person was virtually identical to the average of all eleven metropolitan counties at $1,273. They were above the state average of $1,134 and above the national average of $1,174. Indianapolis was the strongest in the state at $1,539.

Overall, it appears that the Evansville retail market has reached a point of saturation with increasing vacancies due to overbuilding. This does not mean that new space cannot come online and be successful. Rather, it means that if new space does come online and is successful, other competing space will probably suffer.

FEDERAL AND STATE REGULATIONS CONCERNING APPRAISERS

Appraisers are regulated by state licensing rules and regulations all the time and by federal rules when appraising federally related transactions (FRTs). Both require real estate appraisers to follow the Uniform Standards of Professional Appraisal Practice (USPAP) plus FRTs require us to follow the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).

• SUBDIVISION APPRAISAL REQUIREMENTS

Some improper appraisal methodology has been used by appraisers throughout the country due to incompetency. One major error is in the valuation of subdivisions. Appraisers, when appraising for bank loans, must estimate the present value of the subdivision both as it existed on the date of valuation and assuming completion, either in phases or in total. The valuation as finished does not equal the aggregate value of the lot sales. In other words, a forty-lot subdivision with $25,000 lots does not have a market value of $1,000,000. Rather, the $1,000,000 must be reduced for sales commissions, developer’s profit and overhead (incentive to develop or buy in bulk the finished job) and holding costs or the time value of money since the lots will be sold over a period of months or years rather than instantly on the day of appraisal. The valuation of the property “as is” requires additional deductions for the remaining cost to develop the land into salable lots. From the dozens of new subdivisions we have appraised for local lenders in the Evansville MSA, we have found developer’s entrepreneurial profit and overhead ranging from a low of 10%-15% of gross sales in the current market to as high as 20%-30% in the late 1990's during a period of strong demand, limited supply, rapid sales and high profits.

• GRAMM-LEACH-BLILEY

Congress enacted new legislation that became effective July 1, 2001 concerning confidentiality of financial records of individuals and how banks must treat this information. Appraisers were grouped in with banks and so fall under the same rules and regulations. Our company policies follow this law in that we do not divulge any confidential information concerning personal finances which we may receive in the performance of our assignment. Our policies go beyond this and keep confidential the results of all appraisals and counseling assignments and, when requested, the fact that we are even completing an appraisal for a specific client or for a specific property.

INDUSTRIAL ~ MANY OPPORTUNITIES

The Evansville area has seen a surge in light industrial lot development with a new crop of platted subdivisions. In the past few years more than a half dozen new parks have been recorded with many coming online. Typical lots being developed range from smaller ½ to 2 acre lots, as found in the MJM Commercial Sub or Charleston Square, to larger tracts of 10 to 20 acres as in the Vanderburgh Industrial Park, a top quality park with good absorption.

As with most development over the last decade, overall supply is dispersed mainly over the north and east sides of Vanderburgh County with the far east side, in the shadow of the I-164 By-Pass, having the greatest supply.

That the supply is reaching its saturation point is becoming a familiar call. A survey of seven parks and subdivisions along this corridor showed a rough total of 212 developed lots with 73 lots or 34% of the lots sold and 66% or 139 available. This includes only those lots which have been recorded and whose development has begun. Not included are future phases which have yet to be recorded and unplatted land available for purchase and use by a single user.

North along Highway 41 are such recent developments as the Baseline Industrial Park with 17 lots, Castle Creek with 15 lots and the Daylight Industrial Park with 12 lots on Highway 57. Of these 44 lots, fewer than a half dozen have sold.

The mid 1980's saw the development of the Eastside Industrial Park, Kotter Avenue Ind. Park and many of the lots north of the airport along Burch Park Drive, Kentucky, Bergdolt and Indy Court. It is only in the last few years that the last available lots have been sold in these parks.

Clearly the available supply of light to medium industrial land is again back up and the Evansville market has a good inventory of various sized and priced industrial lots creating attractive choices for new or expanding industry.

There are over one million square feet of buildings available for sale or lease in our market. The largest, at over 300,000 SF, is a newer building and may have a buyer. Most are older or somewhat obsolete and may be difficult to move.

David Matthews Associates is a full service real estate appraisal and counseling firm founded in 1980.  The company specializes in the analysis and valuation of residential, commercial, industrial, and office properties in Indiana, Kentucky, and Illinois.  A substantial number of the major properties in the Tri-State have been purchased, sold, or developed with the assistance of valuation, feasibility, and counseling services of David Matthews Associates.  For additional information or to make an appointment, please contact us.

 Matthews Real Market Update
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David Matthews Associates
420 Main Street, Suite 1300
Evansville, IN 47708-1508
Call (812) 428-6000 or Fax (812) 428-7092
E-Mail: DMA@evansville.net

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