The Instability of Stability

Just the title can cause confusion.

We are in the third year of this commercial and industrial real estate down cycle, and confusion is key. The marketplace has accepted the current economics, whether it be the business world, investors, users, etc. Like any group of interconnected beings, the business world has adapted and it is fascinating to me.

Business continues to be done despite the current economic crisis. Sophisticated buyers (and those not so seasoned) are jumping into the market at prices they know deep in their souls will be taking another hit. A hit down that will cause their investments to not show returns for quite some time.

There is a massive amount of foreign money, pooled monies, syndicated private money and corporate money. Some are moving on deals while others are sitting on the sideline. The good news for us is that deals are getting done. Of coarse, the volume is down but we are making a living.

Property values are under pressure from the marketplace and the recent months of stability are starting to crack! This will be good for first time home buyers and owner/users of real estate, but my advice is to wait and be patient with your cash, because the future is going to have amazing opportunities. You will want to reserve your cash for that special deal or deals, pending your appetite and abilities to purchase.

My recommendation is to look for deals that have the following characteristics:

1. Below replacement cost
2. Below market cost
3. 10% cap rate or better without leverage
4. Good location
5. Have the ability to hold if you lose the tenant or the rent drops 50%

This downturn will continue for quite some time. It is important to protect your ability to function without pressure from bad tenants and continued decline in values. For a more detailed discussion about how you might be affected, and how you can profit from this market, please contact me.

A Broker's Worth

I am still amazed when a potential client decides to go on their own and try to represent themselves in real estate deals.

After 25+ years practicing industrial and commercial real estate, I am aware of the many perils that can derail a transaction, from property details to government regulations. I also know that I possess the negotiation skills that can make or save a client's fortune.

For instance, last year I had a deal in escrow and my client decided to meet with the buyer, without me being there. I did not know about the meeting until way after the event took place.

In that meeting my client negotiated a reduction in price from $11.5 million to $10.95 million. The problem, which I explained to my client, is that he did not get a $500,000 non-refundable deposit for a consideration for the reduction, nor did he get a complete waiver of due diligence. Well, you can guess what was coming in a few weeks and did.

Against my advice, my client met again with the Buyer and this time he got the price lowered to $9.5 million. The deal did close and I think that the property today is worth maybe $5 million. The point of this discussion is that we probably could have gotten the deal closed at $11 million as we would have made the first reduction with a released funds deposit as consideration and waiver of the due diligence.

Emotions play a large part of business deals. It is important to have professional representation working for you to save you from yourself.