Tag: Boston MA Commercial Real Estate

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How New England Based Investors See the Market

Change is inevitable and everybody resists it.  But what happens when the market changes and not everyone agrees with what's happening?  We wanted to find out.  So we ran a survey of over 1,157 New England based commercial real estate owners and investors to collect their thoughts on the commercial real estate market. Do you really think anyone selling today is distressed? Well, not exactly.  On our end of the business, we're hearing that there aren't enough opportunities in the market and that sellers are afraid to transact, creating the impression that those selling today must be distressed. Our survey indicates otherwise.  The results were almost equally divided.   Almost half disagreed.  Only 9% said they definitely agreed that anyone selling today is a distressed seller. What's going on with cap rates? Will they stay the same or increase?

We've seen an uptick in cap rates.   What do you think?  75% said  they believed that cap rates would change.  Yet a full 25% maintained that cap rates would stay the same.  So if rates are changing and most agree, are they going up or down?

According to our investors and owners, 84% thought they would go up, but they were mixed on how strongly they felt about it.  28% somewhat agreed that cap rates would increase, 44% agreed they would increase, and only 13% said that cap rates would definitely increase. When the market's in flux, people tend to withdraw and then slowly return as they reassess the situation. These opinions may reflect the beginning of a detente in expectations between buyers and sellers.  There's not doubt that cap rates are increasing and it seems to be gaining general acceptance in the market among owners and investors alike, which signifies the early steps in agreeing on the market's direction (the amount of the cap rate increase is to be determined by how much they buy and sell for over the coming months.) If you were to have asked these questions 3 months ago, the outcomes may have differed.  More people would have likely answered that anyone selling was truly distressed, which, according to this survey, seems to have moderated. Two types of sellers--necessity vs choice sellers--will emerge and investors will begin to see the distinctions between these opportunities.  They'll react accordingly, looking first for those who have to sell (necessity) and often times ending up buying from those who (choice) want to sell--these deals are often stabilized, less risky, are well located, and are superior in construction. We believe that this easing of expectations in the market will lead to increases in transaction volume. More properties will sell, but for less. In the next post, learn about what these investors and owners think of the tenant market and when they expect to see the bottom. About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com. Sign up for free CREFrontline updates, if you haven’t already. It's free and has absolutely no obligations.

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Are You Playing Not to Lose or Playing to Win?

Play not to lose? Who would do that? More people than you may realize. How many times have you heard the excuse, "Our marriage is terrible. I'm not happy. But we've been married for 25 years, so why get a divorce? Only if it could be like it was when we first met." Or, "Sure, when I bought this building it was going to be worth 50% more than what I paid, but since I lost those tenants, I'm negative every month. Not a big deal, the market will turn around and I'll get back to where I was, eventually." Sound familiar? We play not to lose all the time. It's human nature. (If you'd like more on this topic, check out Sway, the Irresistible Pull of Irrational Behavior.) I've experienced this phenomenon on numerous occasions, including this morning when I was setting up a bank account with a banker who confessed after making an error in English that it's her third language. I asked her what the others were--Arabic and French. I have a BA in French and all I could mutter was "oui" when she pointed out that my last name was French. I was too afraid to make a mistake by talking to someone that probably spoke French much better than I. Oh well, I missed a great opportunity to improve my language skills, but I didn't make any mistakes. Playing not to lose costs a lot more than we may believe. Have you ever watched a gambler start out big and then chase his losses to the bottom and beyond? Why doesn't he just walk away after he's 10% down? It makes sense. He could put that 10% back together in no time. Instead, he holds on with the hope that it'll turn around. Here's the insightful part: we succumb to our will to recover what once was. We're so afraid to lose that we'll spend whatever it takes not to lose, be it time, money, or emotional resources. How do we overcome this tendency to play to win in today's commercial real estate market? First, let's start with a few simple questions to find out if you're playing not to lose: Are you losing money on an investment property believing that things are bound to turn around soon? Have you ever said that in five years you'll look back and laugh at the paltry losses today because you'll have made so much more by holding on? Do you look at what your property used to be worth and tell yourself that it will be worth that or more again one day? If you answered yes to any of these questions, you're probably right. Eventually, it will come back. It just depends on how long you're willing to wait, how much are you're willing to spend, and how bad it hurts before this property becomes a real loss to you? What if you could pinpoint that turning point, make the decision to take the loss today, and then invest your money in a winning investment? How would it look 5 years from now? Ask yourself, would you be wealthier holding on defending your investment? Or would you be better off letting go, taking your lumps, and reinvesting to win? Once we see that our behavior of loss avoidance is natural, we can abstract ourselves from it and realize that if we play not to lose, we really don't win, or maybe just not lose that bad--unless we keep chasing losses. Get objective. Take a look at where you're heading. Is it the direction that leads to greater fortune or loss? Here's what I'm going to do. The next time I'm in the bank, I'll speak French with the banker because making mistakes now would be much less costly than never practicing my second language and becoming a better communicator for my next trip to Paris. About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com. Sign up for free CREFrontline updates, if you haven’t already. It's free and has absolutely no obligations.

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Get up to 90% financing with an SBA 504 loan

Not long ago, if a borrower was simply able to complete the application for a 100% loan, and they would be approved.

Talk to those who have tried the same in recent months, and you’ll hear a different story – one in which lending institutions have limited borrowing to the point of virtually freezing the real estate market. Buyers are quick to become discouraged when loans are no longer readily available without putting 30% or more down. However, tough market conditions have increased the use of specialized programs to fill the gap.

The SBA 504 program is a popular option for owner-occupied properties in need of fast cash. Offered by the New England Certified Development Corporation, the product is designated for projects ranging in size from $500,000 and up, and can be used to purchase land or buildings, new construction or expansion, renovation, leasehold improvements, or equipment.

With an SBA 504 loan, a borrower obtains a first mortgage loan for usually 50% of the project from a bank. There is no maximum dollar amount. New England Certified then provides a secondary loan (called a debenture) for the next 40%. Certain manufacturing entities are eligible for up to a $4 million debenture. All other industries are capped at $2 million. Up to 90% financing means the borrower typically provides only 10% equity for the project. Loan terms may extend as long as 20 years, and low fixed interest rates (fixed for 20 years for real estate; 10 years for equipment) are available on up to 40% of the project.

Borrowers must:

· Be located in New England.

· Operate for profit.

· Owner must occupy part of the property.

· Have a tangible net worth of $8.5 million or less.

· Have an average net profit of less than $3 million over the last two fiscal years.

Existing buildings must be at least 51% occupied, or 60% for new construction.

Just because it’s more challenging to obtain a 90% loan these days does not mean it’s impossible!

Sign up for free CREFrontline updates, if you haven’t already. It's free and has absolutely no obligations.

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As the Debt Markets Weaken, Joint Ventures Surge in Popularity

When I woke up to the news of Wall Street's version of Chernobyl yesterday with the news of Lehman and BOA's acquisition of Merrill Lynch, I experienced a sinking feeling in my stomach.  We're no doubt facing uncertain times in our economy as the financial market meltdown will continue to emanate confusion, uncertainty, and widening gap of buyer and seller expectations from their investments. This morning, I attended the Boston Real Estate Finance Association's seminar titled "Equity Placement for Real Estate Joint Ventures" given by Frank Petz, Managing Director, Eastdil Secured. At this talk, Frank covered timely issues surrounding  the use of institutional equity for joint venture partnerships in real estate and how the capital stack, different sources of equity and associated strategies affect the pricing and structuring of equity for joint ventures. Frank discussed some of the core issues rocking the financial world today and demonstrated through his presentation of equity placement, that the joint venture and mezzanine markets will continue to be active and will likely undergo some changes in the coming months and years.  Namely, these structures will be looking more closely at longer hold periods for their investments, reaching as far as 5-8 years.  Investors will begin to place more emphasis on cash flow performance than the back-end of the deal, where residuals often supported the majority of the deal's IRR.  And lastly, as the credit markets contract and lenders continue to avoid risk, moving from 75% LTV's to 60% LTV's, the mezzanine and joint venture markets will grow in popularity as more commercial real estate investors seek funds to bridge the widening equity gap. What do I see?  Buyers and Sellers are still arguing over what a "fair" CAP rate is in today's environment.  Expect this trend to continue as the credit markets adjust and investors seek steady returns to weather the storm. Get free weekly email updates of this blog. About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com.