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Commercial Real Estate Observations is Sylvan's thoughts about various topics related to Orange County Commercial Real Estate, Real Estate in General, and business news of the day. We welcome you to participate by leaving comments on his thoughts.

Stimulation Within Reason

February 16, 2009 – 4:25 pm

Being stimulted can mean a lot of things to a lot of people. Books can stimulate, music can stimulate, caffeine can stimulate and money can be a stimulant. The big question these days is can a goverment stimulate?

We’ve seen hundreds of billions of dollars go to banks and Wall Street and so far not much stimulation has occured. We hear that much more money is need to be a proper stimulant and maybe thats true.  In fact most of America is staking their financial future on the premise that the government’s Stimulus Package will work.

In the meantime property owners are often being put in a position of having to offer their own Stimulus Plan in the form of rent concessions.  Many times tenants feel that the property owner has no cost of doing business and what ever money comes in goes to the bottom line.  That is borne out but the size of the rent concession tenants often request or even demand.

As a property manager and owner we are getting more and more requests from tenants to reduce the rent. However, many seem to think that the property owner is going to have to cave in to these requests or will lose the tenant.  The request can be a 50% rent reduction as though there is no hardship attached to the landlord taking such a cut in income.

There is little thought given to the fact that if income is reduced so drastically the landlord may be in jeopardy of losing the property to the lender.  There is also little thought often given by tenants that perhaps they should speak to their own bank to see if they can get a break on their loan payments or do a total loan modification, perhaps in combination with some sort of rent concession so that everyone can get by these tough time.

I advise business people to prepare a thoughtful business plan that may include a reasonable rent concession.  This plan should show the businesses ability to survive during hard time with all creditors involved in keeping it afloat.  If the tenant waits until they are already in serious default on the rent it becomes problematic to solve their problem either with the landlord or their banker.  Waiting until hope is gone is not a good way to keep one’s business functioning. 

Lets hope that the government Stimulus Plan will achieve it’s purpose and bail America out of its financial doldrums.  In the meantime business and professional people in need of rent relief will hopefully look at the entire picture for relief and not put all their eggs in the landlord’s basket. 

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Property Management in Tough Times

January 15, 2009 – 3:57 pm

“I can’t mpay my rent on time this month” is the beginning of many a conversation that that I have had in the past 2 or 3 months.  The next sentences is something like: ” my hours at work have been cut”, “my business has fallen off dramatically” or “my wife (or husband) lost his/her job and we’re having a tough time”.

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.


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Too Good To Be True

December 17, 2008 – 5:48 pm

In the past 2 weeks we have all been following the almost totally unbelievable gigantic Ponzi Scheme pulled off by one of the world’s most respected investors, Bernie Madof. For over 40 years he produced astounding yields year after year that pleased and attractred billions of investment dollars so the newspapers say.

The crazy part of this was that not only were those returns unbelievable, they were not supported, even by the monthly statements sent to his investors, per various newspaper, magazine and internet articles. Anyone given the returns and the information given to support those returns would see that they were impossible to have occured.  But no one questioned him and it was he and his sons who finally confessed his wrong doings, not some disgruntled investor.

Whether it’s pure greed or our human need to believe in other fellow human beings, I don’t know.  After all who would be low enough to steal and ultimately bankrupt charities, friends and even relatives.  Sure, we have all seen and heard of people stealing some toys from children or the collection plate at church but those perpetrators are hardend criminals, probably on drugs and likely very poor. Not some centimillionaire or billionaire that couldn’t possibly need to steal.

The adage that if it is too good to be true it probably isn’t, kicks in here.  Yet we all want to believe that we can trust the wealthy investment advisor or the public corporation.  Unfortuanately that trust is often misguided.

I have seen people, time after time, pushing to buy a commercial property based upon projections that not only show wild increases in income but spectacular inceases in value.  Try as you might to bring a modicum of reality into their calculations they just don’t want to hear it.  In fact if you are a Commercial Real Estate Broker, they will forget about you and find someone who sees numbers through the same rose colored glasses if you don’t agree with craziness.

Although I do not deal in apartment properties with less than 5 units, I have been approached numerous times by so called investors who wanted me to find them a triplex or 4 plex that they could buy with 10% down (which they could until about a year ago) that would be a good investment.  Well the fact of the matter is that in the last 6 years buying a property in that way would invariably end in a substantial negative cash flow.  Interestingly enough for about 3 years people could buy that way and sell the property at a profit albeit less than they thought when one counts the money needed to feed the property during the holding period.

There are many California investors who levereged into Florida properties that became virtually worthless in 2007.  Not only were they left putting substantial cash into the property every month but they had no one to buy the property from them at any price.  Foreclosure was the only avenue open to them.  I am not saying these were crooked deals but they were often over sold by zeolous sales people who knew better or in many cases were so ignorant they didn’t know better.

Because the theory of leverage investing in real estate is so attractive, people often forget that the same basic principals pertaining to buying a business or investing into a company still apply.  If the property doesn’t pencil when you buy it then you better have a good business plan to rationalize what is gong to change to make it pencil in the near future.  That rationalization needs to be clear and based upon current data not pie in the sky projections of the market always going up wildly.

As of December 2008, I am just starting to see some decent real estate investments come up.  Prices are starting to be based upon today’s numbers not what may happen in 2 or 3 years time.  Financing is tougher to get but we are still getting commercial real estate financed if the borrower is qualified and the property has real numbers attached to it.

Is it wise to start getting back into the investment real esate market? Yes, because buying when property values and interest rates are low makes solid sense.

Will investment real estate prices fall some more in 2009?  Probably, but one can get a deal at any time in the market if solid investment parameters are followed.

Will investment real estate prices start to rise again?  Yes but may not until 2010.  However, if a property was bought right and a holding period of 3 to 5 years is part of the plan then the investment will probably be a winner.

Should we never trust anyone again?  That would really be a terrible way to live. It’s nice to trust people but it is also nice to do your due diligence when dealing with someone responsible for your money. Americans are very trusting people which makes this a great country in which to live but it also allows for the scoundrels among us to flourish. 

Lets just agree to trust in a prudent way.



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A New Tomorrow, But What About Today

November 17, 2008 – 6:11 pm

We have a new President staring on January 20, 2009 and people have strong opinions about it one way or the other.  Actually, it seems to me that the division is not nearly as much as it has been in the past 8 years.  That is, even very conservative thinkers, in the main, are hoping that President Elect Obama can bring us a “New Tomorrow”. 

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.


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Now What?

October 21, 2008 – 4:45 pm

So here we are as a nation with a slumping stock market, frozen lending market and a financial market in disarray.   Our national leadership has come up with a $700 billion bail out/rescue plan that may only be the beginning of the fix.  We now own part of  the largest insurance company in the world and will soon own part of the largest banks in the United States and in some cases, the world.

The most unsettling thing about all of this is that no one seems ready to say that this is the final fix. After all these heroics we don’t really know what will work because nothing quite like this has happened before.  It sounds like the next step will be taking a hint from the FDR New Deal days and start massive public works projects.

The most striking image that I have in all this is that our financial and political leaders insist on saying that no one could forsee this.  Well, that is not exactly true.  My wife Barbara forsaw it 3 1/2 years ago.

You see Barbara does our property management for our or our client’s properties.  The apartments that we manage tend to slant toward the lower socio economic strata of our society.   Around 3 1/2 years ago tenants who were barely able to pay $800/month rent for an apartment suddenly gave her notice that they were moving.

In come cases these tenants had been in their apartments for years.  When Barbara goes to the various buildings she tends to say Hi to the tenants and spend a few minutes chatting with them. She knew their economic circumstances such as where they worked, how many hours they worked and the way they managed to get through the high cost of living in Orange County.

Most of the tenants were moving to the Inland Emprire where they could live the American Dream and buy a home of their own.  The warning signals that came up were that they were buying homes for $300,000 to $500,000.  How could these people who struggled to pay their bills each month possibly come up with a 10% to 25% downpayment for a home in that price range.  How could they possibly pay 2 or 3 or more times their monthly rent for their new housing.  How could these well meaning and hard working people possibly qualify for a loan, much less actually service it.

The answer of course is that they couldn’t.  Loan officers were blind to this, banks were blind to this, investment rating agencies were blind to this, the Wall Street packagers were blind to it and the ultimate buyers of the loans were blind to it, not to mention Congress being blind to it. That is a lot of people that simply did not want to think about future consequences.  But Barbara did.

Actually there were a great many people who could see the danger in all this.  However, they were the ones who were not making money from this national pastime of kidding themselves.  In reality anyone who has any business background at all knows that not checking on credit and an ability to service a debt is flirting with disaster.  The subprime mortgage business was a disaster waiting to happen.  The only thing I believe that most people did not forsee is that this fiasco would take down the entire world.

Sooo now what?  Well I wish I knew but I don’t.  In my commercial real estate world things have really slowed down while people are scratching their heads wondering what to do next.  The strange thing is that commercial real estate in Orange County is still in fairly good shape.  Sure prices are softer than last year but they haven’t plunged.  Office vacancies have opened up more than is comfortable but industrial is not terribly out of whack. Retail vacancies are still relatively small and are threatening to open up but they haven’t yet. Apartments are doing well but it looks like rents will not be climbing much in the next year or 2.  Vacancies may open up more as homes and condo rentals increasingly come on the market.

Basically commercial real estate is sort of tip toeing in the dark right now.  It has not been horribly affected by the current recession in our country and it’s hoping to get through all this intact.  Let’s hope it does.


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When Smoke Gets In Your Eyes

September 17, 2008 – 4:37 pm

As of this writing the Federal Government has taken over Fannie Mae, Freddie Mac, bailed out AIG, overseen the sale of Merrill Lynch to Bank of America and allowed Lehman Brothers to go into Bankruptcy and maybe insolvency.  Now that’s a productive 10 days no matter how you look at it.

Unfortunately it is not the productivity that we especially wanted to see.  The net effects are a financial market in turmoil, banks who won’t even loan to one another, dramatic drops in the stock market and an investment community that is shell shocked.

The question now is what do we do when the smoke finally clears?  When I say we I am really talking about real estate invesments.  No one really knows where we are headed not to mention what we do on the way to getting there.

It seems safe to say that the financial mess and the general economic doldrums that the United States is in will not correct itself in the very near future.  Some say things will get better in a year and others feel that we still have 3 years to go.

In my opinion we  do have at least a year to wait and probably 2 or 3 years of a challenging economy.  Most markets take 3 to 5 years to fully develop and turn around and we are in this one approximately 2 years.  What to do in the meantime?

Owners of properties have an interesting decision to make.  In general, rents, while soft, are not collapsing in Orange County.  Office rents are being aggressively negotiated by landlords and are definitely lower than a year ago.  However, retail space is holding much firmer and industrial is somewhere in the middle.

If an owner thinks that they would like to sell in the next couple of years it seems apparent that they should be marketing their property now.  Things are not going to get any better for the foreseeable future and they could get a lot worse.  Hesitating can cost real money.

It’s a good time to get very aggressive with office vacancies and do what’s necessary to fill them. Who knows how many people will even be looking for offices in the future.  This is a tenant’s market and there is no use pretending otherwise.  Owners big and small are coming to that same conclusion.

Buyers are in the beginning of a great market.  This is the start of a time when significant profits can be taken. For those who have staying power, deals can be cut that are huge discounts from 2 or 3 years ago on office properties.  Deals are not as plentiful in retail or aparments but those days are most likely coming, especially in retail where rents got extremely high.  Riduculous offers from just a few months ago may well be welcomed in the next few months.

As always there will be winners and losers in this market and as always we may be plenty surprised at just who they are.  Hang around, things are just starting to get interesting.

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Commercial Real Estate; Selling Like Hot Cakes?

August 12, 2008 – 4:31 pm

“For every thing there is a season” – Ecclesiastes or Pete Seger, take your pick.  The saying is true as all things go in cycles, especially business.  Investments such as the stock market and real estate are constantly changing. Just when you get to thinking that you are an investment wizard, the cycle cranks around again and you find that you aren’t so smart after all.

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.


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Real Estate is Like a Traffic Light

July 17, 2008 – 4:39 pm

Pundits, consultants, advisors and gurus are always looking for a signal as to which way to invest.  They are looking for a sign so they can pass it on to their clients, friends or subjects.  If they are getting paid to pass on their sage advice then the sign could be complex filled with algebra, calculus, charts and graphs.

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.

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Gas Isn't too Expensive, You Just Have Too Many Friends

July 1, 2008 – 6:24 pm

Just when $4.00 a gallon gasoline seemed like it was a price we could live with it seemed to ramroad straight up to $5.00/ gallon.  Not that we had a heck of a lot of time to adjust to what is now perceived as the lower rate, but it seemed that SUV sales kept going, people still planned driving trips,  big engines in cars were still attractive to the macho among us.  I mean people complained at $4.00 but they just weren’t doing much about it.

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. 


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Pent Up Demand

June 13, 2008 – 2:16 pm

“Get me 3% cash on cash and I’ll buy”.   “Find me a true 6.5 cap rate deal and I’ll buy”.  “Show me 25% to 30% downpayment with a slight cash flow and I’ll buy”.   These and many more comments are being given to me by many buyers trying to get into this market place.  Are they unreasonable in their wishes?  No, not  at all.

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.

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