However, things seem to have tailed off and are most likely stabalizing in many areas of the country.  While we have a long way to go before things are booming it is looking like the start of a pretty good time to get back into the commercial real estate market.

I know that investors are constantly griping that although property prices have fallen they have not in general, gone down to pennies on the dollar.  Strangely, in one of the worst economic cycles in this country’s history, prices will probably not fall a great deal farther if at all.

The Federal government has worked with banks to allow workouts that did not happen in the early 1990s.   The pressure is off the banks to foreclose everywhere they can and so the market has developed a floor that did not exist in the 90s.

Sure financing is still an issue but it can be obtained with enough down payment.  Banks are gun shy and rightfully so. Of course money is almost free to them so why take any risk if they don’t have to.

Every property on the market is not necessarily worth buying. In fact most still aren’t as owners in general have refused to sell at current market prices.  However, a well thought out investment in a commercial property with good tenants and leases that are close to market will do well in the future.

Cap rates are higher now than they have been most of this decade and while they will not go as high as they did in the 90s they are most often higher than the interest rate on the loans available.  That makes for positive leverage and an opportunity for good cash flow.

We are now actively looking for deals to buy that are not necessarily historically at rock bottom prices but deals that will make a lot of sense in the future. Because of the use of leverage and pay down of debt, commercial real estate has always been the best source of wealth over the long term. Nothing has changed.

Something needs to break before the entire investment real estate community does.  Never before have I seen a client turned down for a loan when he has significant funds in the bank, excellent credit and passive income well into 6 figures because he doesn’t have a job.  But I just had that happen.

Never before have I seen a client given the burden of having cash collateral for the renovation of a building when that is what they need the money for but that is what just happened.

Something better happen to get banks lending  on commercial real estate again under reasonable circumstances or this recession can never end.

While zipping up the freeway he glanced at the clock and saw that it was after 1 p.m. and he didn’t need to be at the appointment until 1:45. Great News! There was time to stop and get a quick burger and fries, satiate himself and then get to the appointment.

Everything was moving along nicely. It was just past the lunch crowd, he could walk up to the counter place his order and sit down for a few minutes.  That’s just what he did after he picked up his lunch order at the counter.

The burger was perfect, he bit into it and the taste was just what he dreamt about.  Then it happened. Splat, splat splat.  He didn’t want to look but he did and there was musturd and ketchup and juice from the delicious burger on his new yellow Italian silk designer tie.  A distincly American pattern that said “slopply eater” was facing him.

Salesmanship 101 tells you that you must dress for success to get ahead. Can you walk into a Lisiting meeting with stains all over your tie and expect to walk away with a Listing. The answer is:maybe you can and maybe the client doesn’t want to deal with a slob.  The more competative the market is the more likely the client will be turned off by a potential representative that can’t manage to stick his lunch in his own mouth.

Well, the same principal applies to commercial properties.  Times are tough and leasing is tougher these days. It is not easy putting money into vacancies and waiting for a tenant. It is so much nicer to keep the money until a tenant wants the space and then fix it up accordingly.

The only problem is that with so much vacant properties on the market it is vital that when someone looks at yours it shows better than the competition.  Price is really king today but the reality is that many people want a good price on a really good space to lease. That is they want exceptional value, not a cheap rent on a junky property.

The salesman has to get the food off the tie, buy another tie, or take off the tie completely and try to look hip.  Showing up with huge stains is simply not an option.

Why do property owners then, leave suites with ruined carpeting, unpainted, broken window coverings with the hopes of fixing it  when they finally get a tenant.  Unfortunately they often don’t get a tenant even after multiple people have visited it.

Really good value is not found in a junky property at a low price. Tenants and buyers know that and so do the owners.  It is no good pretending otherwise.

Remember salesmanship 101 and dress your property for success.

Some industries have been showing smaller losses and some factory orders have increased.  In fact home sales are actually up from last year in many areas of the country.  So are things about to break wide open?  As kids might say, ” Are We There Yet”?  Is it time to break out the check book and take advantage of the market?

In my opinion, investing in commercial real estate is premature on a wholesale basis but can be selectively carried out.  Jumping into the market whole heartedly must wait until it has actually started to go up.  However, we are starting to see well thought out offers on properties, that would have once been quickly dismissed, now being accepted.

Well thought out offers does not mean to shoot from the hip and just discount every price by 50%.  Rather it means that one must pay attention to cost per square foot, cap rate, current and reasonably projected vacancies and current and reasonably projected attainable future rents. That is the case even with REO properties. The hold period should be projected to be at least 5 years which necessitates the real estate to be well located and well situated in its marketplace.

We often have to make multiple offers for clients seeking to buy smartly in this economic environment.  However, if there is a sound rationale behind the offer the seller will usually at least think about it.  I believe that in the case of motivated sellers, the offer will be kept and revisited after a period of time has passed.  That is true even by bank REO managers.

Therefore if I had small kids in the back seat of my car asking “Are We There Yet?” I would have to respond “perhaps”.

Typically it is the small investor that goes merrily investing long after the astute investor has dumped all his shares for the novice to gobble up at unprecedented prices.  The same scenario can also be applied to real estate.  This time around big and small investor went off the precipice thinking they were real estate’s answer to Einstein.

So there they are, big and small, bloodied and dazed and hoping that the free fall is over.  After all, here we are in the summer of 2009 and there are just the barest signs of life starting to show in the economy.  A proverbial blade of green grass pushing up through the dry and partched earth giving hope that better days are ahead.

Here is where seperation once again begins between astute and non astute investors.  In real estate we find a whole lot of people once again trying to show their investing prowess by buying up small homes to rent and then to sell.  In some cases these homes are REOs, sometimes they are short sales and sometimes they are just regular sales from somewhat motivated sellers.

With tens of billions of dollars worth of residential foreclosures still on the horizon I have to question this investment philosophy.  How can one buy if the prognosis is for prices to be pushed downwards? How can one expect to cover their costs by renting if there are so many single home investors competing for the same renters?  Thats not to mention all of the existing apartment stock on the market that is also competing in the same marketplace.

Moreover, there seems to bidding wars going on for many homes as multiple buyers clamor to get in on the party.  Doesn’t this just bid prices up and defeat the entire purpose of buying cheap to begin with?  Doesn’t this just gladden the hearts of bankers everywhere with large stocks of REO homes in their portfolio?

Time will tell of course but right now it doesn’t seem to bode well for those joining the crowds.  Of course it may make sense for a buyer who just wants a home for their family and will be staying in it for the next 5 to 10 years.  That involves a different decision than the investor who has solely a profit motive in mind.

Personally I think there might be something to that tortoise and hare race.  It may just make sense to sit back and enjoy the tumolt for awhile before joining in.

Of course if the Seller is desparate, that is different and all bets are off as to what that seller may accept.  But what if the Seller is motivated for one reason or another but not desperate.  How doe deals go together then?

As always, both parties need to recognize the market for what is is at the time they are negotiating the deal.  The buyer can’t be thinking that prices will be 20% lower in a year if they need to buy now.  The seller can’t be dreaming of the money he isn’t getting that he would have received a year ago.  Only the hear and now  count when putting a deal together.

Many buyers remind me of the old Groucho Marx line that he would never join a country club that would accept him as a member.  That is, these buyers typically worry if they make a low offer and it is accepted.  Now they start obsessing that they simply overpaid and that they are unmitigated jerks.

If one is knowledgable and has studied the market and predetermined what a good deal is, than they have a very good chance of buying a property.   On the contrary, if they do not know the market and they what to see blood gushing from the seller before they will do the deal they will never buy a property.

Even in the marketplace I am still speaking to property owners who feel they have the golden goose and that their property is like no other. Of course they expect buyers to pay much higher prices for this prized piece of real estate. When that happens we can kiss the deal goodbye.

So the moral of this tale is to negotiate in the market in which you are negotiating in. Not the land of Oz. It also helps to know what is going on in the market in which you are negotiating.

However, for most of us ordinary investors, greed is not so good, especially in recessionary times.  I am specifically speaking about real estate investing although I believe that my thoughts may also be applied to the stock market.

Greed tends to make us think that we ought to be jumping into the fray and picking up investment property on the cheap.  That is not a bad idea but the implementation of it can have drastic results if not thought out very well.  Most smaller investors are not that tuned in to the real estate market, just as they are not tuned into the stock market.

This issue came to light when I read a promotion for people to take equity out of their homes in California by refinancing, and buying small properties such as 2 to 4 units apartments in other states.  This concept is not new and can be very dangerous to the average investor.  Of course this all presupposes that someone in California still has equity in their home.

The core problem is that the average small investor typically relates the market in most other states to that of Orange County.  We happen to live in one of the wealthiest counties with one of the best economies in the United States. At least it’s that way in normal time.  We tend to go into recessions last and come out first because we are such a desirable place to live and invest.

Most other states do not have the diverse population  or economy that we have and do not have the population density we have.  They often rely on one or 2 major industries and if those industries have problems everyone in the area suffers.  Just look at Detroit.  In fact many of these states do not rebound for years after a recession has ended.  The population density can easily shift and apartments may have vacancies for years.

Moreover, the investor becomes dependent upon a local broker who is very motivated to make a sale.  They may be sincere but they cannot relate to an Orange County economy or weather and what they consider normal may be far from we out here call normal.  In fact properties need to be built to withstand very severe weather conditions, something we know nothing about in Orange County. They also must be maintained constantly to withstand the various weather conditions.

When problems occur with a property out of state the investor will suddenly find out that the property manager for a small building can only be of limited help without lots more money to be sent to them. If the investor owned a property locally they would drive over to it and see what the problem is, make an informed decision and tell the manager how they would like the problem handled. When they need to catch an airplane and kill at lease one day going back and forth, they have a problem. An owner’s decison may not be the same as the property manger’s  but when you are a long distance away one has no way of knowing. The investor may have no idea if the property is being properly managed at all.

One also realizes the problems with out of state investing when vacancies arise.  The local property manger or broker will typically put out a sign and hope for the best. In Orange County that may be all that is needed. But in another state with a poor economy one may need to do a whole host of marketing techniques in order to get a property rented.  The out of area owner can only sit and mange their anxiety while the world seems to spin out of control and their cash flow dwindles to nothing.

I won’t even mention the problems with selling a property for an out of state owner.  That is for another session.  Suffice it to say that one must harness their desires to be the next great bottom fisher that we will all read about in future sucesss magazines.  So keep that greed in check and always always keep the basic investment criteria in mind.  Not the least of which is that in real estate, you need to be relatively close to your property unless you are doing very large deals or are a pro.

Shift to March of 2009 and utter confusion reigns.  Everyone seems to have their own vague idea of what a good deal is and few seem to agree.  However, how can you have concensus when every day the economy seems to hit new lows.  Is it even possible for a real estate transaction to be a good deal at any cost?

Although it seems certain that we still have time to go in a declining market I feel that there are certain identifyable good deals to be had if we take the time to think about them.  Of course it depends on various criteria we set for ourselves.

Following are some examples of what I believe are good deals;

1.  An owner wants or needs to buy a property for his business or professional practice.  It is possible now, for the first time in years, to purchase a property based upon what that company would pay for in rent.  During this decade owners paid far more than they would have to pay in rent to purchase their own building or condo for their business.  Now we can once again establish a relationship so that it actually makes economic sense to buy the property. 

2.  Income property such as shopping centers can now be purchased at cap rates that are equivalent to the interest rate they are borrowing at.  The rule of thumb is that if you purchase a property at a cap rate below the interest rate your cash flow diminishes. The converse is also true.  Therefore anytime you can get the cap rate at least the same as the interest rate on the loan you will do well.

3.  Property values are starting to decline towards building costs.  For years we have been paying far above building replacement costs for properties. This is always on the adventurous side of investing.  The closer to replacement costs the safer the deal is and the lower the rent you can charge to stay full.

4.  It is becoming more and more possible to increase your leverage today on apartment buildings and still have a cash flow on your invested dollars.  That is because mortgage rates are lowering on apartments and the loan payment to income ratios are starting to fall in line once again allowing 75% loan to value loans to be made once again.  This is good leverage but not silly risky leverage.

So once again I will say that there are good deal to be had today.  They are not overly plentiful yet but the camels nose has appeared under the tent, as the saying goes.  In the coming months more and more deals will be coming up.  The question is; will be ready for them?

In the past 5 years our response to these problems has been something like “I’m sorry to hear that but we just can’t carry you while you solve your problem”.  Maybe a little cold sounding but  we really hadn’t heard very much of those kind of issues and secondly there were plenty of other tenants to take the current tenant’s place.  Maybe, if the tenant had a good record with us we gave them a little time to catch up and they almost always were able to.  Times were good.

In today’s upside down world, things are very different.  We are having lots of these conversations and we need to do lots of analysis and thinking about what we are going to do.  There are no longer lots of other tenants waiting in line and if there are they may well be planning on paying much less than the current tenant.  In addition a vacancy that once leased up in a matter of days or weeks can now take months.  More to the point is that so many people need some help it behooves us to try to mitigate their problem in some way.

Commercial rent concessions are commonplace these days where once even the thought of a concession ellicited a sneer and a scoff.  In many cases commercial tenants are demanding to reneogitate their leases or are just walking. The landlord can sue of course but it takes a great deal of time and money to do that.

The goal of Property Managers is to enhance the property owners asset value by operating the property efficiently, maintaining it for the future and to provide profits to the owner.  How do you do all that in an economy where there is so much hurting going on and that seems to be going further and further downwards towards a possible depression (whatever that is defined as)?

The answer lies in running a tight ship, mitigating rent losses by working out payment programs with good tenants with good payment histories, trying not to incur large vacancies problems by keeping the better tenants if at all possible.  Saying all that it is important that tenants are not allowed to fall too far behind because many will never be able to get caught up.  If they are unable to pay any rent then it is probably better to have a vacant office or store.

  Maintenance must be kept up but perhaps some projects can be delayed awhile and still keep the integrity of the physical plant.  Costs for the more sizable projects can be negotiated down to some degree these days where that was almost impossible just a year or 2 ago.  Obviously stretching the dollar in tough times becomes a necessity.

Good management is key to success today, more than it has been for many years.  I believe that those that have it will get by the next couple of years without too much pain. Those that don’t will have to start planning their comeback in 2011 or 2012.

After all, not many people can really be pleased with a financial system that is in the toilet and a general economy on a roller coaster ride that at this point is hurdling straight downwards.  Most people know that in a matter of time things will turn around but they are also hoping that a new administration can expedite that happening.

It is apparent that the new adminstration will put many measures to stimulate the economy into the mix.  People who are mostly worried about their taxes going up are really missing the point. We need to get things moving and what ever steps are necessary to do that will most likely be employed.  Paying lower taxes on half the income doesn’t really make sense.

So if things start getting back to the upward track again in, say 1 to 2 years, as many people seem to think, what do we do today?  Well in my mind the answer is easy and it’s real estate. I know that there are lots of people who say that over the long term the stock market has done better than the real estate market.

That may be but for one thing, it takes a very strong stomach to plow money back into the market in this climate unless you won’t need it for 5 to 10 years.  For another, I believe most of the statistics comparing the real estate market ot the stock market are focusing on housing, not commercial real estate. I also think that they are not looking at the equity gain one gets by paying down a mortgage, especially with rents generated by the real estate.  That sounds awfully good right about now.

In my opinion, if one can buy a property generating positive cash flow, using rather conservative numbers for rents, that person should do pretty good.  Using this concept, apartments are the safest bet, retail next followed by industrial and office investments.  Establishing a price must be calculted on actual income not projected income as has become the custom in recent years.

When current owners sell using realistic numbers, they will be able to move their properties without much problem.  At this point, the majority still want to price their properties as though this were 2006.  That does not and will not cut it in this market.  However, there are more and more owners starting to pay attention to the market if they are sincere in selling.

The bricks and mortar of real estate may seem old fashioned in todays ecommerce world but it still works.  We probably will never replace the value of owning a hard asset such as real estate.