This lesson has once again been vividly spot lighted since the last half of 2007 and so far in August 2008. When this slow down portion of the cycle will start to turn towards the upward swing is still not very clear.

Mortgage brokers and agents are dropping out of the field like flies.  Companies are closing up right and left leaving vast empty office suites in their wake.  Some entire buildings in Orange County have become see through buildings just like we used to have in the 1970s and in portions of the 1980s.  Cars, steaks, trips and cash are being offered as inducements to lease an office space. 

One would think that Orange County commercial real estate is dead, dead, dead.  Interestingly enough, it isn’t.  Just try really low-balling a price on some investment property and you will be shocked to find that the seller may not even take the time to respond to you.

Sure prices have come down from those 12 or 18 months ago.  However, they haven’t plunged and the properties have not wound up in banks REO inventory.  Sellers are hanging tough, at least so far.  They aren’t panicing and they aren’t selling or leasing at just any price.

One could say that commercial real estate in Orange County is selling like hot cakes.  Sure, maybe like hot cakes at a Weight Watcher convention, but still selling.  Sellers will cut a deal that gives the buyer a small cash flow but that is really all that has happened.  Owners are convinced that Orange County real estate has tremendous intrinsic value and they aren’t giving it away.  After almost a year of soft sales and tough financing issues, prices are still hanging in there.  At this point I don’t think things are going to change very much in the future either.

I haven’t seen any indications that sizzling deals are soon to follow.  Commercial properties have been sold with fairly large down-payments in order to get the property financed, unlike single family homes.  This gives owners a solid cushion of safety before their properties start running negative.  Right now it looks like it is more likely that the properties will become hot again rather than the deals will become sizzling.

The question to ask oneself is where else other than real estate would you rather invest your money for the long run?  Where else would you rather have your money invested if inflation really kicks up again?  From the looks of the commercial marketplace in Orange County, the answer is clearly real estate.

Maybe the signal to move in some direction is not readily apparent.  Maybe it’s in the way the lint falls from his navel or how crumpled the cookies are coming out of the box or its in the tea leaves (time to dump the bags).  Chances are the real signal comes from other pundits, consultants, advisors or gurus.  They all start reading each others thoughts and before you know it they have complete consensus.

I submit that there are some very simple signals and rules to adhere to. Three to be exact, much like a traffic signal.  When the market starts going up and everyone is starting to get euphoric it is a clear green light go signal.  Start buying until you see the happiness turn to unbridled giddiness then it is time to turn the burners down.  During the green phase one is buying for growth and sellers being sellers they give the buyers no choice but to buy short term, and turn the property to take a profit.

When the economy goes into free fall and the real estate market starts nose diving it may be prudent to wait until things make a change. Stop for the red light. This is now occuring in the residential market and anyone buying at this time needs to plan on a long term hold.  If this is a home for them to live in then they will most likely be okay in the future but they can forget any short term gains.

The commercial real estate market however is most likely in an orange light phase especially in Orange County.  Prices are not plunging because owners are doing okay with their property, in general.  But the prices are definitely softening.  Sales are down but they are occuring.  Buyers are still out there waiting for a sensible deal.

During the slow down orange light phase one must buy for yield.  The values of the properties can’t be determined for the coming years but if the tenancy is good and the cash on cash return is good there are reasons to take the jump into the market.  The primary reason is that inflation is rearing it’s ugly head and the best way to offset the effects of inflation are by putting your rapidly depreciating cash into hard assets.

The all time winner of hard asset investing is real estate.  At this time in the market it is commercial real estate that has been bought well.  It is still difficult to buy Orange County commercial property with a good cash flow.  However, as sellers become more motivated to sell they will see the light.  Hopefully it will be the orange light demanding the deal be structured to yield a nice cash return.

When an offer is going to come in substantially less than the asking price I find it preferable for the Agent to tell me what it is. In that way we can get right to the heart of the matter without all sorts of other terms and conditons to wade through. It saves everybody a great deal of time and effort, especially if the potential buyer is going to be stuck on the low ball offer.

Therefore I was pleased that I received this offer so I could just tell the Agent that we already had much higher offers that were turned down by the owner and there was no way that he would take time to counter-offer on this one. I did just that and waited for her to tell me that she would speak to her client and ask him to reconsider.That wasn’t the case however. What she did was spend the next 10 minutes trying to convince me that prices are coming down and her client’s offer was perfectly reasonable.When she took a breath I told her that she was arguing with me over a no win situation.

The fact is that the asking price is much higher than offered and we had a slew of offers that were much closer to asking that were all turned down. It didn’t matter that the buyer felt prices ought to be much lower, because the owner didn’t agree.

This scenario is being played out over and over again in todays real estate market. We are in that point of the business cycle where buyers feel that they have to buy very low and sellers, who are typically doing well with their properties, are holding out for higher prices.Something has to give in this scenario.

Most likely both sides will eventually move towards each other and real estate business will move at a faster clip once more.The golden goose days are over for owners. If they want to sell they have to sell at a price that allows a buyer to get a return on investment other than utilizing the greater fool theory.

Buyers have to understand that because the housing market has hit a wall it does not mean that every seller is going to dump their property. In fact, the housing market has very little to do with the commercial market anyway.The biggest difference is that even with prices lowered, homes still may not sell.

There are still a great many buyers for commercial properties and they will step forward if the price is reasonable. One does not have to have a distress sale to move a commercial property.

When a marketplace goes out of whack one way, it will inevitably adjust towards the middle. Both buyers and sellers must make money on a deal and they both need to understand that.

A market with very little movement will convince both sides to give just a little towards the other side. This kind of understanding on both sides is a requirement to do business in this economic environment. Incessant arguing to defend a low ball offer is not.

How do you go about negotiating? Do you start with a really low offer or do you start at a reasonably low offer?

As a Seller, would you respond to a very low offer? How do you determine what a low ball offer is?

Just yesterday the Federal Reserve lowered the discount rate with a 3/4 percentage cut in rate. But will this do any good?

Many say no and some say yes. It did some good on the stock market but not necessarily for the economy. The psychology of investing became a smidgeon more optomistic and that is always good.

However, we dealing in commercial real estate are kind of caught up in the middle of things. For the past several years the underwriting on commercial purchases has been quite stringent. In many cases buyers hoping to leverage a purchase with 15% to 20% downpayments have been forced to put 40% or more down in order to get financing.

These loans really have not been in jeopardy at all. However, the commercial investors have been tainted by the craziness of the subprime lenders and borrowers. Suddenly commercial loans have become even tougher to get and even though there have been very few defaults on these loans, the public is staring at them as though they are about to fall off the high wire.

The net result of this is a perceptible slow down in commercial property sales and in many cases leasing. Buyers are tending to hold off buying while waiting for the commercial market to come crashing down, which it most likely won’t do.

I think those buyers willing to step into the market now will be able to buy at a much better price than they have been able to for the past 2 or 3 years. This will ultimately create a much healthier commercial market for everyone as Sellers can also buy at a cheaper price and be able to move up in size much easier than they have been able to.

In the meantime the Federal Government is stumbling around trying to find some cure for several years of wild and irresponsible lending. The future will tell us how successful some of these schemes are.