Tag: CAP Rates

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Why We Invest in Commercial Real Estate When Times Are Tough

I have to confess that maybe I’ve been a bit negative in recent entries.  Maybe it’s because of all of the news out there that times are terrible and that it’s not going to get any better. My business former business partner and I tended to joke about it.  He’s a bear and I’m a bull.  Deep down, I’m an optimist and believe that we’re entering a window of opportunity over the next 24 months that are going to be a tremendous time for acquiring assets.  I also believe that we live in a dynamic, creative, and innovative country whose people have the ability to face down challenges and grow through them. So, sure. Times are tough.  But money’s still being made. And the world still goes around. So maybe I haven’t been too negative, just realistic.  The way I see it is that you ought to hear it for how it is.  If this information helps you make, or even save, money, then kudos.  You’re making it work. It’s not all bad, though. There is money being made out there and it’s going to continue being made.  In fact the ones who are doing it, seem to be living by a credo that I once heard. “Buy when times are tough or when it’s just hard for you to buy.  Sell when it’s easy.” Do you think you are a seller today? If so, email me at Jeremy@Mansardcre.com with the words “Sell my building in today’s market” in the subject line.  Include your name, when you would like to be called, and the best number to reach you. I will  contact you to schedule a time for you to invite me to your building for a free consultation.  If there’s a fit, you may retain us to sell your property.  If there isn’t a fit, we’ll tell you we cannot help and will refer you to another firm that may be a better match. 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.

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How to Think Like Smart Money

We live in a time of turbulence.  We hold on as old systems are tested and pushed to the hilt.  Look at how government spending supports and maintains these systems for as long as possible before allowing them to break -- case in point, GM’s bankruptcy. But what happens when these systems shatter?  We pick up the pieces and rearrange them to create new modes of operating amidst a new landscape.  We develop a new equilibrium, don’t we?

Here are a few applications I’ve seen recently:

• Combine a demolition crew with a functionally obsolete 
 warehouse building to bulldoze portions of the building to create 2 -3 functional industrial properties.

• Make tenants your lenders.  Ask them to finance your 
 development and also be the anchor.

• Unpack the words “Toxic” and “Asset”.  They’re really just liabilities.  Turn 
 trash into cash by repackaging, repricing, uncovering underlying value, and 
generating return on investment by aligning the new asset with market 
demand.

Ask yourself, if it’s true that, according to he philosopher Heraclitus, “A wonderful harmony is created when we join together the seemingly unconnected,” then what pieces could you assemble to create new opportunities that will make you money and provide value to your community? 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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When New England Based Investors See the Bottom

When the market changes, not everyone agrees with what's happening.  If change is inevitable and everybody resists it,  how do we know when the market will bottom?  In the last post, you read about what 1,157 New England based commercial real estate owners and investors thought of the market. Today, you'll read about where they think it's going. If values are tied to income, what's happening with your tenants? Owners and investors have a keen eye on the tenant market. They use it as a gauge to predict where the market may be headed, relying on a tenant's strength to weather changes in their business and to consistently pay their rent. When surveyed, most investors and owners felt that tenants were becoming riskier and that tenant expectations of them were changing. 78% of those polled said that tenant defaults are increasing and 75% agreed that tenants expect landlords to modify leases upon request.  While 41% of those investors and owners somewhat agreed that tenants expect lease modifications, they clearly feel that tenant expectations are changing and they're aware that modification requests may still be looming. Only 9% of investors and owners said they disagreed that tenants expected more landlord concessions, but 31% disagreed that tenants expected rents to decrease. Tenants have been telling us that they expect rents to decrease, but most have been signing renewals, so these new leases they're renewing may be meeting some resistance as investors and owners try to hold out for as much as possible while still being open to deteriorating lease fundamentals in the competitive market. When do you think lease rates will bottom? Several investors and owners answered "who knows?", which was quite surprising.  Most agreed that rates would not bottom this year, rather in 2010 and 2011.  There seemed, however, to be a narrow divide between whether rates would bottom in 2010 or 2011. 2011 took the prize for the bottom of the lease rate market. When do you think values will bottom?

Definitely, 2011.  2011 was the resounding year that investors and owners alike predict a bottom in values in the commercial real estate market.  If incomes are so closely tied to values, then it makes sense that 2010 and 2011 would represent the bottom of the lease rate market and that affected values would result in 2011.

Ultimately, we see the emergence a new market where the necessity vs choice sellers compete. 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 also expect investors to price the projected dregs of 2010 and 2011 into their proformas and begin to aggressively pursue deals as cash dwindles, vacancies increase, rents decline, and debt matures.  If you're a seller thinking about holding out for more, be ready to hang on for a while. It's going to be an interesting ride. 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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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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Why Being Pound Wise and Not Penny Foolish May Pay Off

Property owners, here's your good news, the stalemate is ending.  You have just summitted a mountain of transactions and have been sliding down the other side,  as represented in CoStar's chart showing national sales volumes for office properties. You're wondering, what's selling? And for how much?

The appraisers are wondering, too. "There just aren't any comps out there," as stated by 3 appraisers that have called our office in the past 3 weeks.  "We're calling around trying to value a subject property and are having a tough time finding lease and sale comparables to determine market value." Typically, the national office market measures approximately $2 to $3 billion in sales, which from 2004-2007 looked like an aberration when it reached a high totaling $18 billion. And in less than 2 quarters, we've quickly ridden down the other side and are looking for the bottom.  No wonder there aren't any comps. To those looking for comparables, the comparables are coming.  The market will be repriced and you'll have transactions to study.  The next question will be: what will those deals be worth? Our crystal ball says: watch for the second two quarters of 2009 to show more market activity than the previous two.   Speculators exit the market and investors reactivate.  Sellers, Buyers, and their Lenders battle over what market values really are, and by the end of the year, expect to see that chart beginning to point toward the mean. During the second half of the year, buyers creep into the market, testing the bottom to see which sellers are the first to accept that the game has changed. These sellers are labeled "distressed."    Some are.  Many aren't.  These pound wise sellers see that their properties are worth more now, leaving the impending battle over new values for the penny foolish sellers who enter the market needing to sell in 2010 (see more on this topic here), when we have more auctions, actual distressed sellers, and more supply that's competing for the same buyers. 2011 looks cloudy right now. There's talk of some employment growth, which helps to absorb excess space created by this year's job losses, but we believe this "return to the mean" may take some time to process.  If you're holding property  with an anticipated exit in the next 24-36 months, you may be pound wise to enter the market today instead of holding out for penny foolishness tomorrow. 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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Boston Commercial Real Estate Gains from 2005-2007 Wiped Clear in 2009?

Portfolio Research has published some mean numbers that indicate that we're going to be in for a wild ride over the next couple of years in the Boston area commercial real estate market.  As much as what I hear around town is a false sense of hope and security that this will blow over soon and we'll get back to prosperous times again, it looks like the coming storm is going to get nasty.  Here's what Loopnet quoted:

PPR expects property values across all sectors to continue falling through at least 2010. Multifamily will lead the decline, registering a 32 percent drop between 2007 and 2010. Office will fall 31 percent during the period, retail 29 percent and industrial 21 percent. Click Here.

The early stages of this correction began in early 2007 as speculative investment continued while the tenant market began to show early signs of softening.  One fundamental was at work in our market area and among our clients: landlords cutting deals with tenants that were 20% below actual values.  These deals were under the radar but represented a monumental shift in values, or phase 1 of the downturn. Imagine a landlord with a 20,000 SF building who was charging $10/SF NNN for his space.  He was generating $200,000 in net operating income. On a 7 CAP he's worth $2,500,000.  He then signs a new deal at $8/SF NNN, or 80% of his previous rent.  His building, priced on the 7 CAP, is now generating a $160,000 net operating income and is worth $2,285,000, or 9% less than before. Phase 2 kicks in. CAP rates go up.  Investors now say they'll pay a 9 CAP for that deal.  Now his building is worth $1,777,000 or 29% less than before.  Voila. That's what PPR has projected. Phase 3 is yet to come. When that investor's debt matures at the 5 year mark, he needs to go back to the bank and refinance his loan. Guess what, now he's worth 29% less than before and the bank wants him to contribute more equity to decrease his loan to value ratio.  If he doesn't have the cash, partner(s), or credit, his building's up for sale or goes back to the bank.  That's where the last hit in values will come from.  And who really knows how big that's going to be when it happens. Get Your FREE 2009 Commercial Real Estate Market Outlook for the Boston Area. [download id="4"] Your Free Copy 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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Why CAP Rates Won't Save You This Time

The past several years have been forgiving to commercial real estate investors. You could go out, buy a building, lower the rents, and sell the property for more than you paid for it. Huh?

Sounds strange doesn't it? Imagine this, you're a savvy real estate investor who's interested in purchasing a 40,000 SF office building located minutes from the highway and is 100% occupied. The asking price is attractive--it's priced on a 9 CAP rate. It has a net operating income (NOI) of $600,000 and your 70% LTV debt will cost you 7.5%. You pay $6.6M for it. Now, looking at this deal, you know two things for sure. The CAP rate is far higher than the cost of leverage on the property, so there's a pretty good bet that you're going to be cash flow positive right out of the gates on this one. The second thing you know is that you've got a full building, teeming with strong tenants that are are paying on multi-year leases. Looks pretty good, doesn't it? So you buy it. You collect your cash flow each and every month. Things are going great. Then the market begins changing. Another investor has seen that you're 100% full and charging great rents, so he decides to build a new 50,000 SF office building 2 blocks down the street. It's one of those new "green" buildings with modern architecture, the latest amenities, and guess what, your new neighbor's going to be charging 10% less rent than you are. Worried? You should be. Over the next year, your building begins to increase in vacancy , as your tenants let their leases expire and move down the street. The remainders start picking at your rents trying to renegotiate their rates because they figure you're getting anxious and are afraid they'll leave too, if given the opening. You rewrite the leases, keep the building, and now have 85% occupancy. Your net NOI is $442,000. Nasty, you're now out $158,000 per year. Then some guy who says he's from San Diego calls you and makes you a cash offer. He offers you a 6 CAP or $7.36M. He figures that he's not going to earn 6% during the next 12 months in the stock market and is betting that he'll be able to sell your building to the next guy for even less than a 6 CAP without doing much to it. Guess what, you just hit it big. You're now going to sell that building for more than you paid for it, grossing $700k, despite the fact that you were collecting less rent and experienced an increase in vacancy over the past few years. You just made money to take your building the opposite direction you were supposed to. This story ended in the third quarter of 2007. How about now? Bad news. The market's changed and those CAP rates are going up, which means that values are going to be coming down. You'll no longer be able to buy a building and expect to sell it for more than you paid for it, even if your operating fundamentals deteriorate, because investors see that the future is uncertain and they want their initial investment back faster. If you're buying on CAP rates today, you should know that you may be buying yourself a major problem. CAP rates give you a glimpse at 1 year's operating performance for your property without taking into consideration the cost of financing, reserves, commissions, taxes, or most importantly, the overall holding period. Be warned, there are better tools out there for evaluating deals. And if you're just using the one that worked for the past 7 years, you may be unpleasantly surprised at what you don't get in return. 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.