Archive for February 2012

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How a Growing US Deficit Impacts Commercial Real Estate Values

The late economist Herbert Stein coined the phrase "if something can't go on forever, it will stop," which is the point Joseph G. Carson, US Economist and Director of Global Research for Alliance Bernstein makes in his recent white paper "What Will Prevent a US Fiscal Train Wreck?"

In the white paper, Carson explains that the US government has accumulated $6 trillion in new debt since the beginning of the Great Recession and has proposed adding $8 trillion over the next ten years, which could lead to economic paralysis for the US. If we assume that the spending will continue over the next ten years, how might this bloated deficit affect commercial real estate values?

First, the government will increase tax revenues by changing the capital gains rate.  This tax change will allow them to capture more tax on the sale of assets, which will ripple through the commercial real estate market as an adjustment to values. Commercial real estate investors will think twice before selling properties because the tax on sale will account for a larger portion of their cost of sale and they will also adjust their expectations on their acquisitions.  This means that when an investor plans his entrance and exit from the commercial real estate asset, he will have priced the increased capital gains rate into his return assumptions, which amounts to his offering less for the property in order to net more than he would have originally anticipated.  Read more here.

Second, the government will increase the marginal tax rate, which will allow them to collect more revenues from payroll taxes, adjusted income, and cash flows on your commercial real estate properties.  As you plan your future cash flows from operating your commercial real estate portfolio, you anticipate your after tax cash flows to account for the mortgage interest, cost recovery, and operating expense deductions.  It is your cash flow after debt service, or cash flows before tax, that the US will examine for additional revenue.  And when your marginal tax rate increases, so will the percentage of your cash flow before taxes paid to the deficit.

Third, the government will increase interest rates.  To stimulate demand for our country's debt, it will be necessary to originate debt that pays a higher return. And when our debt is more expensive, borrowing money to finance commercial real estate will be more costly, which will chill the market and lead to a flattening of values.

In our view, and in agreement with Mr. Carson, the time has arrived for policies that lead to a better budget balance, either through spending cuts or tax increases.  And our number one priority in the US must be to reduce the deficit.

About the Author: Jeremy Cyrier, CCIM is the President of MANSARD, a market research driven commercial real estate brokerage and advisory firm, and member of the CCIM Institute faculty.  You may reach Jeremy at Jeremy@Mansardcre.com.

Get a free copy of The Essential 7 Step Guide to Filling Commercial Vacancies.

Contact MANSARD's Brokerage Services here.

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4 Reasons to Consider a Sale and Leaseback Transaction

"Real estate is not a core business of Bank of America," said Bank of America spokeswoman Kelli Raulerson.

In a Boston.com article published on February 14, 2012 by Todd Wallack and Casey Ross, Raulerson noted that the bank is considering selling office buildings across the country.  She explained that the sale of office towers across the United States would allow them to streamline their operations.

Many businesses own their own real estate, but consider equity invested in real estate to be too expensive on their balance sheet.

For example, if Bank of America makes a 12% return on their investment owning office towers across the United States, but earns 18% on capital invested in their business, why not free up the capital earning 12% and reinvest it at 18%?  (These numbers are for example purposes only. We do not purport to represent Bank of America's weight average cost of capital).

A sale and leaseback provides you with:

• Control: You still have it when you are leasing
• Opportunity Cost: Capital often earns higher returns in your business
• Flexibility: Leaseback affords you flexibility to expand and contract
• Accounting: Get that debt off your books and capitalize your real estate across your lease term

Bank of America has concluded that their money is best spent elsewhere, and that given the recovery of the commercial real estate market, it is time to sell off billions in non-core assets, which it has been doing over the past few years.

Why then would you consider a sale and leaseback of your commercial real estate?  Not everything that is good for Bank of America is good for you, but it maybe they are onto something worth considering.

About the Author: Jeremy Cyrier, CCIM is the President of MANSARD, a market research driven commercial real estate brokerage and advisory firm, and member of the CCIM Institute faculty.  You may reach Jeremy at Jeremy@Mansardcre.com.

Get a free copy of The Essential 7 Step Guide to Filling Commercial Vacancies.

Contact MANSARD's Brokerage Services here.

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Do Low Prices in Commercial Real Estate Really Win?

Price is important, but it should not be the only lever you use to attract tenants or buyers.

As your competition prices tight to market and differentiates its properties with aggressive positioning campaigns, they are filling and selling their buildings fast. They have discovered that as people rely on the internet for property searches, buyers and tenants see commodities where the lowest price wins. They also know that differentiating by price is a race to the bottom, which is not a race worth winning.

Take a lesson from Apple. People line up to pay hundreds of dollars more for their products because Apple's customers believe in buying something unique, special and different.

Here is how to make Apple's technique work for you.

Identify your property's point of differentiation and exploit it. All properties own a point of differentiation, even yours. It could be an owned attribute, preferred location, heritage, architectural significance, popularity or the newest product in the market.

Our clients have applied these ideas and in weeks have raised rents 15%, reached 100% occupancy (with a waiting list), as well as sold troubled investment properties to the right buyer in 81 days. By establishing a position of difference in the space and investment market, you, like Apple, attract people who recognize your property’s value and pay you for it.

About the Author: Jeremy Cyrier, CCIM is the President of MANSARD, a market research driven commercial real estate brokerage and advisory firm, and member of the CCIM Institute faculty.  You may reach Jeremy at Jeremy@Mansardcre.com.

Get a free copy of The Essential 7 Step Guide to Filling Commercial Vacancies.

Contact MANSARD's Brokerage Services here.

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Where to Find Office Tenants Today

Vacancy.  It is a great word if you are out late on a dark highway and need a place to stay, but not when you own an office building.

Vacancy produces no income, increases your expenses, and leads to perceptions in the tenant market that if the building has been vacant for a long time, there must be something wrong with it.

Here is one technique you may use to accelerate your lease up time and shorten your vacancy period.  At MANSARD, we talk about how birds of a feather flock together.

If you are like most people, you notice that companies of a similar ilk tend to congregate in clusters, much like residents in a subdivision comprise a similar demographic.  Take East Cambridge, Massachusetts for example.  The Kendall Square area of East Cambridge is home to many of the hottest technology and biotechnology companies in the United States.

They have clustered in one part of town because the real estate is conducive to their operations and the area offers a disproportionately high concentration of skilled and talented labor, such as graduates from MIT and Harvard.

If you own an office building in East Cambridge, your work might be cut out for you.  But what if your building is in Boise, Idaho?

Your first step to identifying a prospective tenant would be to profile their business.  You do this by examining the tenant pool in and within 2 minutes of your building. Most commercial real estate brokers have access to database tools that would allow you to create a list of companies.

Next, look for similarities among the companies.  Namely, you want to identify the tenant sectors that have the highest concentration within the area you are examining.

Once you have identified the highest concentrations, take those batches of businesses and identify their NAICS code, which is a government issued industry classification that comes in a 6-8 digit code.

With your batch of NAICS codes, expand your search area from 2 minutes to 20 minutes and create a list of all of the companies with matching NAICS codes that occupy real estate in your building's area.

Now you have your list of high prospect office tenants and it is time to get to work marketing to them.

To learn more about finding tenants for your office building why you should target expanding companies first, download MANSARD’S most recent report detailing how to find tenants for your office building here.

About the Author: Jeremy Cyrier, CCIM is the President of MANSARD, a market research driven commercial real estate brokerage and advisory firm, and member of the CCIM Institute faculty.  You may reach Jeremy at Jeremy@Mansardcre.com.

Get a free copy of The Essential 7 Step Guide to Filling Commercial Vacancies.

Contact MANSARD's Brokerage Services here.