Tag: Demand for Commercial Real Estate

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Getting to Cash Flow Positive with your Commercial Investment Property?

An investor asked us to give him a rental rate that would quickly lease his vacant space.  The problem with this question is that it's only half the problem. The other half of the question should be: "At what rate would you recommend I quote in the market to lease my space quickly while maintaining my debt service coverage ratio and building a long term positive cash flow?" How easy is it to get to cash flow positive with your commercial investment property? The first half answer to the question is to lower your rent until tenants start making proposals, being aware not to fix a discounted rate because it could eliminate or trap your equity investment in the property.  The second half answer asked for the following pieces of information: your existing leases, your prior year's operating statement, your mortgage, your note, and any additional information regarding the property that you want us to know. Then you create an analysis of your investment as it operates today followed by the lease up assumptions from the first half answer.  Next, you build your proforma including your lease up assumptions and annual debt service information from your mortgage and note.  Once you've generated a cash flow before taxes analysis, you can see how your investment will operate based on the first half answer.  The second half answer will give you the next 3 steps:

1. What are the required rate escalators to maintain your debt service coverage ratio?
2. If new and existing leases are signed at lower rates, what's the lowest rate you can accept without defaulting on your loan?
3. If you've paid down the principal on your loan, run an analysis on what a new loan payment would be based on the reduced principal balance at today's interest rates.  Would it make sense to call your lender to discuss a modification or refinance?

Upon completion of the following 3 steps, you should have a clear, 5 year plan for turning your property in a conforming, positive cash flow producing investment. You'll know exactly what to do to achieve your goal, and it doesn't look promising or you don't think you can make it happen, you can always consider your other options. Get free weekly email updates of this blog. About the Author: Jeremy Cyrier, CCIM is the founder/principal of MANSARD Commercial Properties and member of the CCIM Institute faculty. He delivers thoughtful, large scale commercial real estate solutions to the individual challenges owners and tenants face. Jeremy Cyrier, CCIM was elected by Banker & Tradesman as one of its New Leaders in 2009. You may reach Jeremy at Jeremy@Mansardcre.com.

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How to Catch a Commercial Real Estate Lifeline

Have you ever heard the story about the man who rows out to sea, jumps in the water, lets his boat float away, proclaiming "I am a man of faith. God will save me."?

A fisherman spots him treading water and throws him a lifeline. The man pushes it away and says, "No, thank  you. I am a man of faith. God will save me."  The fisherman shakes his head and calls the Coast Guard. Read more

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Why Understanding Demand is Critical to Success in Commercial Real Estate Investing

A few weeks ago I had the privilege of teaching with one the CCIM Institute's most experienced and knowledgeable instructors.  He has spent a career mastering one of the most important, and often overlooked, components of commercial real estate analysis: identifying and quantifying demand.

He says that demand for space is 80% of the real estate decision and that financial analysis is the other 20%.  Too often, according to my colleague, investors and users focus on the 20% without really digging into what drives the numbers, who's going to be using the space, and why the proposed use makes sense.

Here's an example of why this is so important--overbuilding.  How many developers have you seen in the past 3-4 years losing gobs of money in real estate because of a shift in demand? And do you think the numbers they used are worth anything today? Here's why it matters. Essentially, jobs drive demand for office and industrial space.  As jobs are created, households are created, people get married, have kids and need housing and retail services.  They consequently create a demand for retail space and homes.

So what happens when the jobs go away, as in Massachusetts, which is currently reporting an unemployment rate of 8.6%? Demand for office space and industrial space declines,  creating more vacancies, which leads to a decline in demand for retail space and housing--i.e. a report out this week that multi-family vacancy rates nationwide have it a 22 year high.

The question is, when will the "death spiral" end?  (See Seth Godin's blog). The Death Spiral ends when businesses start reinvesting and hiring.  This is what I tell those who ask me when I think the housing market will recover.  Once the job losses stop and people start feeling more secure about their incomes, they'll start buying lattes and homes again.  Then as companies  ramp up to meet increased demand for their products and services, they'll soak up additional space at lower rates, hire more employees, and we'll see an uptick in consumer spending that will follow the initial consumption uptick of those with job security. My concern, however, is that our government will increase taxes and raise interest rates to pay for their meddling in our private industry, which would forestall the recovery and expansion as well as keep us in a protracted and skittish recovery for years to come.  What do you think? Would you like a demand analysis performed for your properties? If so, email me at Jeremy@Mansardcre.com with the words "How much demand is out there for my property?" 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 office for a free consultation.  If there's a fit, you may retain us to conduct a demand analysis of your properties, their position in your market area, and identification of the top users with contact names and phone numbers to help you gain transparency into your tenant market.  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. 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.