Now when we are faced with $5.00/gallon gasoline the entire population has gone into a tiz.  Truck and SUV sales are down preciptiously, fewer cars are on the road, airplanes charge for everything and just for good measure they don’t even feed you anymore.  People are even passing up their gourmet Latte in the morning.

As though that isn’t enough, experts are now talking about $7,00/gallon prices on gas as soon as the end of 2008.  Who knows what other draconian cut backs the American population is going to come up with.  One commentator suggested that we could stop visiting friends and family that don’t live within a short hike from us.  In other words, get to know your neighbors better and ditch those old friends of yours  that you only trade visits with once or twice a year. Who needs them anyway?  In fact is you can throw out a relative or 2, so much the better.

How will all this affect the real estate market?  Well location location location will once again become a serious mantra for buyers.  This time around a good location will be one in a village type setting where one can walk or ride their bike to work, shop and go out to dinner.  Mixed use projects may well have come unto their own.

Failing being able to walk to work, those commercial properties that are at least close to substantial housing will  become much more valuable.  Those industrial buildings close to the actual workers instead of the boss will be very much sought after.  Retailers that have websites that allow online ordering that can be delivered may be the next wave of successful operators.

Southern California freeways may actually unclog.  Unfortunately we have quite limited rail capacity at this time but maybe our political leaders will focus on moving people between cities and within cities at the times they need to move not just perceived peak travel times.

The times are really changing quickly.  It’s still too early to say exactly where we are going in real estate. But is seem likely very desirable locations such as Orange County will be become even more desirable and costly.  Before you dump the family and old friends you may want to see where all this will shake out. 

People are talking about the slow down of sales not only in residential housing, but in commercial real estate in general.  What you don’t hear much about is the demand that is becoming pent up by buyers hoping to invest in commercial real estate.

When dealing in homes we all know there is a dearth of buyers because home prices are still declining.  Why buy a home that will almost assuredly be worth less in a year from now than it is today?  Good question with no especially great answer forthcoming.

Dealing in commercial properties is really a different matter even though it is being shoved into the same basket as housing.  People are really afraid to go into the stock market.  Every day there is more bad news regarding stocks and the economy.  Every day another captain of industry bites the dust albeit with a  severance package most would kill for.  The investor has very good reason to fear where the market is going in the next 12 months or more.

Commercial real estate does not have those great drops in value or battered returns.  True, some office buildings are getting smacked with vacancy rates that have risen significantly in the past year. However, even in those cases most have such a cushion built in them that we have not seen even this catagory of commercial property going into foreclosure.

Then why the slow down?  It’s simple.  Property owners have been doing so well with their properties in the past 5 or 6 years that they aren’t pushed to sell.  However, if they really wish to they can sell easily by simply allowing the buyer to achieve a modest return.  This isn’t really a very painful or costly move for most sellers. 

The fact is that by pretending this is still 2004 or 2005 they are missing an extraordinary chance to take some significant profits.  They are betting the farm that the market will go back to rapid run ups in value in a year.  In my view that is very unlikely to happen at least for a few years.  Investor psyches have been severely impacted by what has been going on in the economy in general.   They have learned a very hard lesson, once again, that they simply cannot get sloppy or emotional when investing their money. 

The encouraging news is that more sellers are starting to realize that even though their property is not worth the pie in the sky number they have attached to it, it is still worth a hansome price.  If this idea continues to take hold we will once again be back in a market that is more than fair to the seller and gives the buyer a reason to invest in real estate.  Hang on because I think we are getting there.

Actually there is a little bit of a twist to that statement.   The bigger you are, the tougher it is to get money.  That is, if you buy a billion dollar project, or several projects to make up that billion, you probably will have a heck of a time getting the financing to complete the purchase.

Why you ask?  Why is because nobody seems to know how to evaluate the safety of a loan.  All of a sudden the major lenders in the United States, especially Wall Street, no longer believe that they actually can tell a good loan from a can of beans.  This is a strange world we live in when the supposedly best and brightest don’t have any faith in their own reasoning abilities.

Now the real twist comes.  Remember those people who needed a loan but the banks looked down on them?   Well, suddenly they are the only ones who can get financing.  If you need to borrow $250 mil. for a project on main and main with solid gold tenants you can’t.  However, if you need to borrow $2.5million for a nice little shopping center in some suburban setting loaded with mom an pop tenants, you can.

Strange as it may seem, the smaller investor, the guy next door, can actually buy real estate more readily than that major institutional investor.  The catch is, and there is usually a catch, this borrower, who is now the apple of many a banks eye, is very often afraid to buy because it may be the wrong time in the market.  If this investor does not wake up he may miss some pretty terrific interest rates on loans that will ensure cash flow for many a year to come. 

Local bankers are waiting with outstretched arms for the missing investor.

What we don’t usually know in advance is exactly how all of these changes will impact real estate prices.  Not to mention just who will win the election. 

No matter who wins there are those that will feel we are all going to hell in hand basket.  These people start to get depressed as soon as the candidates from each party are chosen.  Conversely there are those owners who know beyound a shadow of a doubt that prices will rebound and start shooting upwards.  These people start to get giddy when the actual Presidential candidates are chosen 

 Not only do these people all feel they have had a flash into the future about the pricing of their property but they also seem to have received a Divine message as to who will win the race. Therefore some owners get more morose and some just can’t stop from grinning.

As the Broker in all of this, I get calls from some people who want to get out of their properties before the election and some who want to start buying before the election.  I have not really kept an actual scorecard on which side is more clarevoyant but I am pretty sure the answer is neither.

The reality seems to be that nothing much happens one way or the other.  That’s true at least initially when a new President takes office.  If there is a movement up or down it will have occured due to movement either up or down in the economy itself  because of further anticipation or some time farther into the Presidents term.

I have never counseled anyone to buy or sell real estate because of an election.  Those decisions must be based upon the same reasons one buys or sells at anytime that they happen to make that decision.  If you want to take some profits or you want to retire, go ahead and sell.  If you have some money you want to place in a solid investment, go ahead and buy.  In any case you are probably making the right decision.  At least for you.  If you have another answer, please let me know.

This was a great plan and could pay off tremendous dividends. Leverage allowed percentage returns into the 3 digit number ranges. Life was good.

Unfortunately things tend to change. Somewhere in the early 2000s prices started to escalate so much that our perfect investor with the perfect plan had trouble finding a property to buy that was priced in a distressed range whether it was distressed or not. So the investor started moving farther and farther from home base.

Suddenly Orange County investors started to find themselves in the middle of San Bernardino. Maybe even the High Desert or worse. Not only that but soon even these returns were in full retreat. Pretty soon the investment with all of it’s risks started paying off like a certificate of deposit. In other words, lousy.

Now the business plan needed to change. Now the cowboy investor had to start figuring that he would need to live with this investment for awhile. Maybe even 5 years. If that was the case, property management became more and more important. Operations were where the money was going to be made.

Admittedly this was pretty tame stuff. Returns could be better than certificate of deposits but they were not going to be like hitting the slot machine bonanaza either.

Today the investor may need to plan on a 6 or 7 year hold and he probably needs to pay attention to tenant retention and deferred maintenance. He needs to become a property manager or hire a good one to keep the cash flow coming and eventually to make that big pop on sale that came so frequently in the good old days. 

In today’s world blind luck has been replaced, once again with good management.  True, blind luck is much more fun to talk about at cocktail parties, but usually management triumphs.  This marketplace has driven us back to the mundane.

Now imagine your surprise to receive an email with 50 choices on it. How can that be? You only want to be in top notch buildings and only within a mile of the airport. 50 Choices???? That’s absurd.

Absurd? Maybe. True? Definitely.

What happened to all the office tenants? That my friend is the big question these days. Office building owners are giving bonuses to brokers to do a lease, they are giving bonuses to tenants to do a lease and they are giving bonuses to existing tenants to not opt out of their lease.

I know that officials in the Federal Government are loath to use the word recession but an awful lot of ordinary people think we’re in one now. Office tenants seem very fearful of making a move in case business gets worse than it is.

Interestingly this makes for a very good time for a tenant to cut a great deal for the next few years. However, it is precisely at times like these that most people opt to do nothing out of fear. In many cases it’s an irrational fear but in many other cases the fear is justified.

Us, commercial brokers and office building owners may be looking for tenants in all the wrong places but so far no one has told us where the right places are. Any one who knows of these places please feel free to share.

For more information about Orange County Office market see this article in National Real Estate Investor online edition

I hadn’t been thinking about buying this building as I didn’t even know the owner wanted to sell. It wasn’t on the market but the other Broker told me he heard that I had purchased 3 other larger properties in the park and the owner was anxious to sell.

The property was 5,000 s.f.. I ordinarily don’t like to insult people with offers but as I really didn’t plan on buying another building and as I would need to find a tenant I made what may have been construed as a low ball offer. I didn’t really care if he took it or not so I said will I would pay $180,000 with 1% downpayment and the owner would need to carry a note for the balance for 10 years.

I should state that the property is on a ground lease so the price would always be lower than a property on fee land, or land that comes with the property. On the other hand the property is in Irvine which is ordinarily pretty pricey. This definitely could have been considered a low ball offer.

Interestingly enough the owner accepted my offer. $1,800 down payment and the balance would be carried in a note.

The year was 1998 and although the press and government said that the great real estate depression of the 1990’s was over, it really wasn’t to be over for another 2 years. Things may have been getting better but it was slow and we all had memories of not being able to sell properties at any price much less lease them. We sort of thought the worst was behind us but there was no exact way of knowing.

The question is: Was my offer low ball or was it reasonable?

One might remark that it was reasonable because the owner, who was not under duress and was very successful actually took the offer and never even countered. He was actually happy not to have to carry an empty building and not to have to worry about finding tenants in a slow marketplace. He was also happy to have an income stream on the property rather than a negative. In addition he didn’t have a tax consequence so he was happy.

I don’t advocate low ball offers. Buyers who spend their time doing that often wind up wasting everybodys time. However, usually the market dictates what a low ball offer really is. If the market is booming it serves no purpose to offer prices that are very much off market rates. Some markets demand going higher than market prices in order to win the property.

Down markets obscure the definition of a low ball offer. If prices continue to decline who knows what low means. If an offer has some reasoning behind it then I encourage clients to submit it. If it is just low with no particular reasoning or thought then it is probably a waste of time. That is, some buyers insist on taking 20% or 30% off of any price no matter if it is well priced or not. That tactic seldom works.

Of course in a down market one tends not to hear the words “low ball” uttered by the seller or the broker. Unlike booming times, they may even say thank you for the offer no matter the price offered. In good times there is a good chance your heritage will be questioned in no uncertain terms.

Did you ever make or get a potentially low ball offer? Did it work? Was it really as low ball as originally thought? Leave your answer in the comments below.

The same reasoning can be applied to buying a property using what is known as negative leverage. That is, buying a property at a 5 cap rate and financing it at 7% interest. It’s going to be real tough to make a return on investment until the net operating income grows substantially.

Buyers are suddenly reacquainting themselves with the concept of cash flow. It’s been a few years since that has dawned on them. Frankly, I’m not sure why that concept seemed to vaporize around 2002 or 2003 but it did.

I know, I know property values shot up faster than a rocket and one only had to buy and sell a property in the space of a few months to realize their gain. But still, why did we collectively lose our basic principles when dealing with hard assets such as real estate.

Why did losing money become fashionable? Why did it take the tanking of the entire mortgage market and eventually the credit market to wake us up?

Won’t it be nice when Sellers all wake up too?

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?

The stock market dropped then has regained slightly but is still significantly down. GM announced a $39 billion loss for last year, Fed Chairman Bernanke has said that he is prepared to keep reducing the bank lending rate to keep the economy moving and the President and Congress are trying to decide how big a stimulus program to institute.

Things sure seem bad. Strangely enough though, the commercial real estate market is still chugging along like the little engine that could. True things are not like the recent past but they aren’t like the dark ages of the early and mid 1990s either.

Rents are still going up, occupancy levels have decreased in office properties due to the mortgage companies that have bailed but retail and industrial occupancies are still hanging in there. Apartments are still doing well in general. However, that market is skewed with all of the high end units that have come on stream in the past couple of years together with the condos that couldn’t be sold being converted to apartments.

Right now it seems like the Orange County commercial real estate market is going to squeak through the current economic mess in fairly decent shape. There are no mass foreclosures going on, in fact there are almost no foreclosures of any kind going on in the Orange County commercial real estate market. You can prove the point by calling any major bank and asking for a list of their commercial foreclosures. There aren’t any.

So if you are an investor in real estate, don’t get depressed. Maybe you shouldn’t read the newspapers either.