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.

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”.

That has not happened in commercial real estate.  Pundits are predicting that the last half of 2009 and the first part of 2010 will see a plethora of commercial REOs hitting the market.  There are many reasons for this to occur such as an inablility of current owners to refinance debt when it comes due as well as swollen office and growing retail vacancy rate.

However, does this mean that buying an REO is always the best way to go?  The answer is really no because commercial real estate is much different than residential real estate.  One has to be rather astute in real estate to tackle a commercial REO.

The reason is that when buying residential properties, even REO’s there are many protections for the future consumer or homeowner.  There are warranties, and expectations that the seller is going to make all necessary disclosures and is not selling the buyer the proverbial pig in a poke.

When buying a commercial REO, the buyer is really buying a totally “as is” property.  The lender does not have the same duty to find out what they do not know and disclose to the buyer.  The buyer is assumed to be knowledgable enough to have everything check out and make his own decision based upon his own findings.

Certainly the lender selling the REO must disclose what they know to be a problem.  But they usually do not go out of their way to find out the problems to disclose as they must do for residential property.

Therefore the unsuspecting and  inexperienced investor may find himself with significant problems such as structural deficiencies, thorny tenant problems and possibly governmetal citations that must be corrected quickly or else heavy fines could be put into place.  When any or all of these items come into place the large “as is” disclaimer in the contract is trotted out by the bank and they will say they simply never knew these problems existed.

If there are a plethora of commercial REOs coming to the market it may be that prices will be just as depressed for properties that are not going into foreclosure. Those may be the very best deals to go after.  In fact even now, when there are not that many commercial REOs on the market, one may get a great deal by simply putting in a very aggressive offer and that may just be accepted.

Having warranties and representations and full disclosures from the seller are nothing to be ignored.  Think things through before you react.

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.

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.

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.

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.

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.