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.

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?

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.

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.

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?