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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.

Is Real Estate Still a Good Invesment?

September 1, 2010 – 11:55 am

Business cycles in real estate generally last 3 to 5 years, in my opinon and observations.  It seems as though the current down cycle we are in started around 3 years ago but we obviously are not yet out of it.

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.

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Financing Commercial Real Estate

April 20, 2010 – 12:20 pm

Banks, you can’t live with em and you can’t live without em.  At least in commercial real estate and in most business enterprises that altered old adage is true.

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.

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Does Anybody Care About How a Building is Dressed?

October 26, 2009 – 5:56 pm

The Broker was sailing along in his upscale German car on the way to an appointment that he thought would most likely result in a Listing on an office building he had been working on for months.  Although usually dressed in business casual attire he had on a suit and dress shirt with imported Italian tie.

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.

Are We There Yet?

August 13, 2009 – 2:34 pm

In the past few weeks we have finally been reading positve news about the economy. No, things have not turned around but they seem to be “less” worse than they were.  Job losses, while still approximately 350,000 last month were no longer over 1/2 million a month.  Car sales were dramatically up although the cash for clunker program was the main driving force behind that.

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”.



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Hope Springs Eternal!

July 15, 2009 – 11:47 am

When the stock market took it’s precipitous drop in value in the second half of 2008, it took all sorts of investors with it.  The steep slide seemed to catch every type of investor by surprise.  Sure there are tales of the odd investor who says he converted to cash in 2005 and felt vindicated, but by and large both novice and so called expert investors went down with the ship.

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.



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Thank You. Now What?

June 16, 2009 – 3:47 pm

These are really interesting times.  Sure, sure the economy stinks but it’s not as simple as that. I mean there is a tug of war going on as to whether the stink is getting worse or the fragrence of floral perfume will soon be wafting through our nostrils.

Just today I received an email from a financial wizard who tells me that we need to start acting on an inflationary economy.  Then I picked up an article that points out we are in a deflationary economy.  Yes says another article, but the government is spending money like water and huge inflation must follow.

Of course goes another pundit, but manufacturers are operating dramtically below capacity and even if the first tiny hint of an increase in orders is starting to show, it is no where near inflationary.  Yes goes the counter argument, but money pouring into stimulating the economy is reving the engine with the parking brake on. Soon as the brake is released, off we go.

It makes sense says another expert but have you noticed interest rates have gone up and are still climbing?  That will kill stimulation of the economy like a spike through the heart.  The bickering goes on and on between the pundits, experts, gurus, geniuses, economists, mathemiticians and no one seems to getting the upper hand.

So now what?  Good question.  For a real estate investor such as me, the long term key is buying real estate with an understanding that both sides may be right. Deflation in the short run but inflation, or at lease moderate inflation for the mid run. 

With this 2 part theory in hand one must buy real estate knowing that there is a good likelyhood of deflation in the next year and that the purchase price must account for that.  If inflation sets in approximately 2 or 3 years from now, hard assets such as real estate are the very best hedges one can have.  Although no one wants to sell low, the sales that are actually occuring are at prices that should offer the buy good protection through a deflationary economy until things normalize.

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Are REOs Always Good Deals?

May 14, 2009 – 5:20 pm

For the past year or year and a half we have all been deluged with articles, blogs, newletters and television reports about the vast amount of residential REOs that have hit the market.  These homes have really depressed the pricing on housing.  Sales numbers are up for homes this year because of the depressed prices that have occured and lured many buyers back into the market.

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.

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Negotiating in a Tough Economy

April 24, 2009 – 4:10 pm

As of April, 2009, there is a great disparity between what a buyer wants to pay and what a seller wants to accept.  I have never seen a gap as big as it is now.  However, there are stil some buyers that want or need to purchase a property now and there are still some sellers who really need to sell their property now.

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.


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Greed Is Not Good In Recessions

April 24, 2009 – 3:34 pm

One of the more famous lines from movies that will stay with all of us is when Michael Douglas says in the movie “Wall Street” , “Greed is Good”.  In that movie and in that time frame maybe greed was good, at least for Douglas’ character.  He certainly seemed to live the good life.

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.

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What's a Good Deal?

March 27, 2009 – 11:54 am

Life was so much easier in the old days, like 2006 or 2007 and maybe even the first 3 months of 2008.  A good deal was when your offer was accepted by the Seller of the property.  Your heart soared, flowers bloomed and everything was going well for the world.

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?



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