Monday, June 27, 2011

Bifurcated Commercial Property Market Makes Trending Tough

While I have been cautionsly optimistic of late, it is clear that just as their seem to be two Americas politically, there are two commercial/investment real estate markets.

Some are calling it bifurcated -- a situation where the strongest values coming out of commercial real estate are on the coasts, think Los Angeles and New York. With everything else in between caught in a struggle.

Even here in Ohio, and in Central Ohio, you see areas with stronger values and others in a far weaker situation. For the most part, this area has stabilized. But the large institutional players are not coming here. They are looking at the largest markets only, and while flyover country investment opportunities might include the occasional Chicago property, but for the most part they are not interested in Middle America. Fanning the flames of concern that commercial property prices may not yet have stabilized (though that depends on the property itself, and the quality of hte tenants), are the Moody's Investment Services numbers. Moody’s Index is now 49 percent below the peak of October 2007, and at its lowest point in data going back to December 2000, according to this Bloomberg report. About 30% of the reported April transactions involved distressed real estate (which might be conservative; this is defined by Moody’s as only those assets where a known default, foreclosure proceeding or bankruptcy of the owner has occurred).

The seemingly never-ending flow of money for commercial properties of all types -- fully leased to creditworthy tenants, of course -- continues to flow. Among REITs, pension players and other institutional investors, prices are being bid up as each as a huge "war chest." with which to fund acquisitions. In fact, some properties have wound up being acquired after bidding wars.

The best approach, however, is still an analysis of a property's relative strengths and weaknesses. This can still be performed, and should be. While the pension funds have deep pockets and can afford to make a mistake, for my clients, a thorough analysis if a potential acquisition is the absolute best insurance one can have on have

Saturday, June 25, 2011

Office Innovation Witnessed First-Hand

All of us in commercial/investment real estate don't just act as paper-pushers. Well some do. But the majority work to solve problems. We counsel, we console, we create, we research and recommend. Both based on our experience, and what we find in the discovery process.

One of the items I have talked about for some time is the changing office. Technology is dramatically impacting the modern office, in ways people didn't see coming. More people in any number of industries telecommute, meaning they work from home or the local Starbucks. At the kitchen table, or home office, or sipping a latte with extra foam (in truth, I am a tea drinker), all the while on the web using any number of mobile applications to get the job done.

Which has office owners and Tenants totally rethinking -- and in many cases -- already modifying how they look at space requirements and allocation. In fact, we experienced this phenomenon ourselves. We moved our Prudential Commercial Real Estate offices from downtown Columbus to just north of the northern freeway outerbelt, in an office area known as Northwoods. Nice facilities, slightly smaller space than what we left. But as I was packing my stuff, and watching my colleagues negotiate boxes and files and so on, many felt they had to bring every last item with them. But we didn't need the larger office we left. More of our agents work from home, or as we have recruited agents, they work from offices in other locations they have maintained themselves for years.

And when our big move happened? Well let's put it this way . . . I found myself asking one overriding question, over and over:

Um...Where the hell did all these filing cabinets come from?????

Many of them are empty today, just sitting around in corners or tucked into otherwise unused closets. In fact, we disposed of a number of older lateral file cabinets once we got into our new space. Nothing truly teaches you how much equipment you really need for your business than a move. But innovation, changes in workplace practices, and even technology are playing huge roles in space allocation. We, like other companies are able to do more with less. Tech has obliterated the need for file cabinets. We no longer have a largish server room for our technology. One telephone switch room now. "Cloud" computing reduces not only our need for dedicated information technology space, but for companies in other industries also.

We have a lot of desks, too. Interesting considering that half our commercial agents -- some of the most productive in our shop -- work remotely.

Doing more with less space is the watchword, and companies like ours  -- with only a handful of exceptions -- are making it happen. It is both the technology and changes in human behavior that are at the heart of the office makeover revolution.

Forbes Online has an article about how college kids are more accustomed to doing their homework from virtually anywhere but home. They even don't go to libraries or a place where there is a desk anymore. And as they gravitate toward the workforce, they bring those "telework" habits with them. They can work anywhere. Products like the iPad make it easier also for collaborative creation. Far less need for offices and those desks.

Our front line tech at PCRE is our new phone system. We no longer need a dedicated receptionist, as the modern commercial real estate brokerage and other firms are utilizing, well, modern telecom systems. Incredible efficiency that is allowing us to redeploy our resources during a down economy to areas where it is more sorely needed. We had some initial hiccups with the deployment of VOiP. But the underlying philosophy is sound.

Elsewhere in commercial real estate, Forbes notes that shopping malls are changing. With the rise of e-commerce combined with advancements in mobile technology, malls are desperately working to adapt to attract shoppers. How? As they want more shoppers and for people to come to the mall more frequently, they are creating destinations that are less about the retail, and are more about the social meeting experience. Witness the rise of upscale restaurants, spas, performances cultural activities and educational classes.

The Web is changing our physical space. And some project it may spur an unheard of construction boom, and more and more fiber optic lines must be laid to upgrade communication infrastructure, Why? For as the Christian Science Monitor noted recently, physical presence is very expensive. It costs a lot to get from where you live to where you work or shop. Office and retail space are expensive to build, rent, and maintain. Keeping the space cool in the summer and warm in the winter, and clean at all times, is expensive as well.
So you shop online? Well, think about it. You reduce the need for bookstores, drugstores, and many other retail functions. Many of these same stores will shrink to small sizes where they are almost unrecognizable -- or they will evaporate.

Today our office is our computer, writes one Monitor guest columnist. "Physical mail and the need to sort it and deliver it is less important. Most of our files are electronic. Many of us spend little time at our office desks and more time working at home. More firms are having their employees share office space or are making offices very small and sharing conference space."

All of this may lead to a significant construction boom, predicts one futurist in the Monitor. He speculates that as people are required less to drive to work, that public transportation equipped with wi-fi may grow as business people opt to just go to the office one day a week. He sees malls with empty retail spaces being demolished, to be replaced by more single family or multi-family housing stock. That a new society constructed under the influence of the internet (just as the advent of the previously unheard of drive-in theater was influenced by Henry Ford and the Model T). A society that relies less on brick and mortar destinations.

Truly, I don't see anything that immediately transformative happening. People still want to get out. They want to drive to the mall, or wherever, to have a meal out. Human beings are social animals. We can't be cooped up inside homes and apartments working, ordering our jeans and take out meals. People need to get out. They like to peruse shops. And we travel. Still, it is an interesting prediction whose results will only be known over the span of time. But malls, offices and other commercial space is morphing as technology applications continue to explode.

Nevertheless, in the present day many commercial brokerage clients are looking at energy usage also, and as Tenants and Owners, alike, start focusing on smarter usage practices, commercial real estate practicioners will increasingly look for and recommend the best methods for marketing, financing and promoting social incentives to lease space, or even move office and other buildings that are for sale.

Technology is changing things. And in most areas, making businesses and square footage usage far, far more efficient.

Following Up On Social Media Tools, Strategies For Real Estate Practioners

Recently I published a short post about social media and small brokerages. I had about 20 attendees at a recent luncheon presentation, and have been asked to give an updated overview of social media there in the fall, as well as a similar presentation soon to the members of the Licking County (Ohio) Board of Realtors. The very reason I was at the Independent Brokers Association to start with was because social networking is a passion, and an approach I have advocated for years.

In fact, my invitation came about from Doug McCloud, a past president of the Ohio Association of Realtors, who suggested IBA approach me about such a presentation due to my avid CRE blogging and use of social media. Doug had attended one of the LinkedIn classes I had taught to members of the Columbus Board of Realtors. A few hundred attendees each time, with great questions and feedback.

The reason for this brief commentary is that in the past week I have received more than a dozen comments from a number of sources. Each one an advertisement or link to sites where they are selling stuff. I publish useful comments, constructive comments. I provide links to other sites of interest, where readers can learn. I do NOT permit links to advertorials or flat out spam. Sorry won't do it.

With that said, I'll give a brief rundown on my philosophy for social media and real estate brokerage. This works for me. It might not be everyone else's cup of tea, but since this is my forum (my sandbox?) I get to share my philosophy first and foremost.

I do not believe in putting listings on social media sites, such as blogs, Twitter, Facebook, LinkedIn or some other equivalent tool. Links to a list of listings are okay (thats what I do), but your site should not be populated with listings. It is a waste of space and time. Listings can be found everywhere -- buyers and sellers (consumers all) don't need agents to help them find property. Your social media site should be about differentiating yourself from the competition. Showing the agent is the expert. It should be about teaching, educating, informing. Making the reader more knowledgeable. But at the same time, increasing the author's credibility and reputation. THAT is the best use of an agent's time in social media, IMHO.

Case in point. I have buyer after buyer who say they were drawn to me because I shared knowledge. I didn't brag (generally), and I wasn't trying to shove buildings down thier throats when I had no idea anything about their goals and needs. True, commercial/investment brokerage is different from residential real estate, in thatwith the latter people simply want to buy, or sell, a house. Find their home. Create their shelter, their domicile, their respite from the rat race. In my biz, there are any number of different motivations. Those differences often are extensive -- they could be: early retirement, set up personal pension plan, put aside money for kids' or grandkids college, built a nestegg for travel, protect the value of an existing family estate portfolio, and so on. Often, the type of motivation dictates the type of investment property one is seeking.
Here is another thing: I don't use or like Facebook for real estate. A lot of agents love it, and that's fine. If it works for them, great! But I have found that most people using Facebook for their real estate business are just throwing listings on it. There is no strategy behind it. Secondly, rightly or wrongly, I have a bias against sharing the same platform that teenagers use (FB) to candidly and credibly promote complex business practices designed to help build portfolio wealth and support the the bottom line of well known institutions and corporatons. Facebook is a great tool, respected by millions of people. It just isn't for me.

Notice what I said earlier, also. If there isn't a strategy behind what someone is doing for business with a social media tool, it is not only a waste of time for the owner/agent who is using it, but visitors will quickly find that these same sites are either not dynamic (they don't change very often). or they offer nothing but listings that can be found anywhere else.

What I teach, preach and otherwise advocate is how agents can use these tools to set themselves apart from the rest of the pack.

That is what has helped my practice. So, to those folks who expected me to publish their comments (in reality, links to the stuff they are selling), sorry. Like I said. If you have something on your site to share that is constructive and educational, I'm all over it. Just trying to sell your CDs, books and tapes? Not gonna happen......

As always, thank you for your support!!!

Wednesday, June 22, 2011

Distress Is Everywhere; Impacting Pricing, Property Management

The economy continues to be hit at all levels. But there are rays of hope....

Case in point -- A lot of residential housing stock is now firmly entrenched in the investment RE category. And more is coming. A new report shows that many agents (primarily on the residential side) are switching gears due to the poor shape of the economy and becoming property managers. How and why? As more and more owners are upside down on their houses, and haven't been able to find buyers, they are renting their homes and using (hopefully) experienced agents as their managers/marketing representatives.

In short, the weak housing market has given light to what we in the real estate industry are calling "accidental landlords." And the renters? In many markets, they are new to the city and don't trust the economy enough to buy. But they have income, stable jobs and are finding bargains as they peruse the inventory of available rental homes.

Secondly, according to Moody's Investors SErvice, U.S. commercial property prices (on average) fell in April as sales of distressed assets made up a large share of transactions. The Moody's/REAL Commercial Property Price Index dropped 3.7 pecent from march and 13 percent from a year ago. It is now 49 percent below the peak of October 2007 and at its lowest point in data going back to December 2000.

In fact, Moody's reports that nearly 30 percent of transactions in April 2011 involved distressed properties. THAT, my friends is an amazing number. We're talking commercial/investment buildings here -- NOT single family housing. And Co-Star Group stated earlier this month that prices for investment-grade properties declinced 5.3 percent in the same month, April.

Now for the good news -- BTW, I concur in this. Moody's and Cash On Cash believe the transaction volume -- which was up -- helps lay the groundwork for a "meaningful broad recovery" in the U.S. commercial real estate market. Prices are on the increase in certain areas of the nation. We are seeing stabilization here in Central Ohio, even a little uptick as well.

It will take time. We may have another round of rough sledding in 2012. But the fundamentals seem to be getting better. At least for now. For me? I have hungry, qualified investors. Not bottom feeders, but active, quality buyers looking for smart opportunities.

Transactions are happening...

Tuesday, June 21, 2011

Social Media For The Small Broker

I am heading over to the Columbus Board of Realtors midday today to give a luncheon presentation on "Social Media For The Small Broker." I am honored to be a guest speaker of the Independent Brokers Association, which is comprised of, you guessed it, smaller real estate brokers from the Central Ohio area.

Definitely looking forward to the exchange!

Monday, June 20, 2011

Metals 'Dust' A New Way To Add Value (Even When The Business Is Dead)

I can't say I am the end-all, be-all guru on adding value where others say none exists, but I do like to think I'm a pretty creative guy when it comes to creating new streams of income for my clients. Frankly, a lot of it I picked up on from our company owner, David Mussari, who is a frigging genius at the art of creating ancillary revenue.

Anyway, I'm usually talking to fellow agents or owners about extra land next to an apartment complex or retail center (lease it during the summer to local nurseries for plant and bedding impulse sales; leased in the winter for Christmas tree sales); below grade space (add coin-operated laundry for income, or caged storage space); two or three acres as part of your multifamily complex (construct public storage units), etc. There are any number of ways to add residual income if you just put on your thinking cap.

So I was having a conversation with a colleague who runs an auction firm last week, and he told me about a company he dealt with in California. It seems a Midwest jeweler with multiple locations went out of business and the bankruptcy court had everyone involved working hard to squeeze every last nickel out of the owner and the properties themselves to settle the bankrupt jeweler's millions of dollars of debt.

Enter a giant sucking sound from the West Coast. The news was money to my ears! Each of the stores had hardwood floors installed in the areas where custom work was done on rings, watches, pendants, etc. Anything where precious metals were being formed or sculpted -- you name it. The flooring was taken up in several Midwest locations, carefully wrapped, and shipped to the California "reclamation" firm.

The result? The bankruptcy court received a check for nearly $500,000 from the firm, which had extracted gold dust, silver dust, titanium dust, diamond dust, and the dust of other precious metals and gems. That $500k was AFTER the firm had taken its fee.

The next time I am talking jeweler business -- whether it is business only or real estate, I am going to be asking questions about the flooring and how often the firm cleans in the custom/repair workspace.

As for the bankrupt jeweler? It wouldn't have made a difference as the owner's debt was voluminous. But it is really too bad the company had to go out of business for anyone to "find" additional value -- in the floor, of all places. Sort of like found money on the floor of a neighborhood pub, when you look down and see a 20-dollar-bill, and no one else around.

Only I've never looked at the floor and seen a half million dollars. But the next time I look at hardwood, the story of the jeweler will definitely cross my mind . . .

Saturday, June 18, 2011

NHL Blue Jackets Lease Deal Fix May Be In Jeopardy

One of the most prominent commercial leases in Ohio is back in the news again.

The National Hockey League Blue Jackets lease with Nationwide Arena, and its details, are well known to Central Ohioans. Particularly those who passionately follow the beleagured hockey franchise's ups and downs. The latest news is a proposed "fix" -- lets call it financial help -- from the Ohio General Assembly may be in doubt because of new budget cuts in funding to local governments.

Details here.

Thursday, June 16, 2011

MUH Owners Either Raising Rents Or Offering Incentives

As the old real estate saying goes, its all about "Location, Location, Location."

Two stories published this week regarding apartment vacancies are at polar opposites: One discusses how the housing downturn is a boon for some renters, particularly in hard hit markets of Florida, Las Vegas and Southern California.

There, the Associated Press reports that explosive condominium development and conversions of apartments into condos for sales are finding those units unloaded onto the rental market because developers can't sell them. In some areas of the United States, apartment vacancies are edging up as frustrated sellers instead try to rent out their homes and condus in once red-hot housing markets. This "shadow market" of investor owned homes and condominiums is creating competition for traditional rental markets. In some cases, incentives such as a a free month of rent or upgraded unit fixtures have re-emerged after disappearing several years ago.

Some invstors will take any dollar amount just to get some cash flow. On the downside, many of these same residents are being displaced with distressed owners ultimately are foreclosed upon.
Conversely, MSNBC reported that rents are going up in many markets due to tightening supply of apartment housing. I would throw in that inflation is a factor as well. But simply put, with apartment and rental housing construction halved in recent years and a wave of former homeowners competing for apartment space with "echo boomers" and other renters, conditions have suddenly ripened for owners to raise the rent. Many national apartment operators adjusted their projections recently and expect to be nudging rents up across the nation.

Nationally, rents are expected to rise 5 percent this year and another 5 percent in 2012, according to Greg Willett, vice president of research and analysis at MPF Research in Carrollton, Texas. The trend is not expected to moderate until 2013, when new multifamily housing construction adds to supply and the housing market stabilizes enough to attract new buyers.

For existing owners, if you are in a market with a tight supply, you will likely be edging your rents up over the next few years. For investors looking to buy in these markets where the apartment business has been relatively untouched by the recession, and this includes Central Ohio, however, you will be paying higher prices to invest in multi-unit housing properties. On the other hand, investors who aren't afraid of those markets terribly hard-hit by the economic downturn, and who have deeper pockets to wait out the fiscal rough waters, will continue to be able to pick up bargain rental properties as developers and others cut their losses and dispose of long-empty inventory.

Investor demand for apartment building is heating up (I am seeing it among my investors and with conversations with colleagues and peers). Interestingly, we are seeing inquiries coming from either coast, where investors are realizing the Midwest and so-called "Middle America" provide significant opportunity, either to pick up any available distressed assets or invest in stable, steady growth properties. In fact, sister company Prudential Mortgage Capital last week sold a troubled portfolio of 4,681 apartment units in Western Pennsylvania, Indiana and Ohio to a venture led by Kushner Cos.

Meanwhile, giant lenders Fannie Mae and Freddie Mac are facing potential reforms under pressure from borrowers, advocacy groups, and Congress. Even Congressional leaders who several years ago, despite overwhelming evidence that the two organizations' lending practices were creating a figurative house of cards, resisted changes or oversight to the two iconic lending bodies, are admitting that they made huge mistakes. Now, members of Congress from both sides of the political aisle are pushing for change.

The likely result? Tighter lending standards. In fact we are already seeing a tightening in line with what most traditional lenders have instituted. And with an incredibly heavy supply of homes for sale, as I have written in these pages previously, we may well be raising a generation of renters. Many renters either are choosing never to buy, believe they can't qualify, or have decided to wait to move into home ownership some years down the road after uncertainty about jobs and looming inflation level out.

Bottom line: Investors have choices, many choices, depending on location.

Wednesday, June 15, 2011

Globe Street Poll: 2011 -- How's It Going?

Globe Street, the commercial real estate news service, continues to run its weekly polls and the results of last week's query is interesting. Well, at least to me. Here it is:

OK, We're Well Into 2011. How's It Going?

41%   It Sucks & I'm Tired of the Recovery Chatter

38%   Starting to See Some Activity. Waiting for '12

21%   I'm Busier Than I Have Been in Two Years
For what it's worth, I fall into the third category. Mostly because I changed the way I do business. Right now I am working day and night, and making significant inroads I was unable to make in past couple of years. I think we may be backsliding a bit economically and 2012 may possibly be as rough as 2010. But there is a window of opportunity now through the remainder of this year.
What we collectively -- investors and my colleagues alike -- make of it is up to us ....

Warren Buffet's 'Moat Investment' Philosophy Holds Plenty Of Water

Bad play on words in that headline, isn't it? Because moats hold "back" water, right?

But the billionaire investor's thinking and strategy is sound -- it holds water. Buffet talks about "moat economics" and describes a moat as being that barrier of safety sorely needed as we weather this stormy economy.

So what is a moat investment? To be succinct, it is an investment -- in this case we are talking about commercial/investment real estate -- that has some barriers to entry that keep your competition at a minimum (there is no way to prevent competition), AND keep your principal and interest dry. Okay, now I'm really stretching the moat metaphor.

I will write even more simply: You work with your investment adviser, investment counselor, etc. (each of whom should be working with your investment real estate counselor, unless the latter wears the hats of the former) to carefully select and analyze commercial properties throwing off strong returns. Now, your risk level may differ from your neighbor or best friend. You might be okay with a strong cash-flow property that won't appreciate much, where your peer, friend or colleague may, in fact, be willing to accept a lesser cap rate in return for more stability and future appreciation.

The bottom line is you never know how the numbers will shake out until you perform the analysis. But those "moat" real estate investments are out there! If bought right, if analyzed correctly, if a strategy is in place and well thought-out five-year projection is established -- and it all makes sense, you will have some of the best protection you can imagine for your real estate.

Just like the guy in Vicksburg, Miss. who built a home-made moat around his house when the Mississippi River was well over its banks in the Deep South in May of this year. But he had the right idea -- he thought it out, he executed the plan well, and he stayed high and dry for some time.

Sometimes, there are projects with huge profit potential in the early stages. In these cases, capital is at a premium (critical, we might say) and the property developers may consider SIGNIFICANT discounts to early investors. But you won't know until you inquire or make an offer to get the conversation started. Geography can also serve as an econonic moat, with certain areas filled with expensive homes, expensive multifamily, and expensive high-end retail. At least in most cases. There is some risk, however. All you have to do is look at parts of Las Vegas or Collier County and Lee County in Florida and see places were upscale housing and retail were built, or construction started -- and remain idle and empty today.

Do your homework.

The opportunities out there are limitless right now. Interest rates are low and the inventory is high. But it is easy to get emotionally attached to a property, or sucked in to a deal that seems to good to be true. RUN THE NUMBERS! If you don't know how to conduct the analysis, consult with a seasoned commercial/investment real estate agent who knows what they're doing.

And finally. Quit trying to "steal" property. There are plenty of solid deals out there to be had. Waiting for the bargain of all bargains only delays your entry into the game, or prevents you from growing your portfolio sooner. So-called "steals" will come in their own time. I've written offers for serious, big-time investors whose M.O. is to throw a lot of stuff to the wall at a time and see what sticks. But they are players. The guys who are dipping their toes in the water and only want to commit larceny (figuratively, of course) their first time out . . . well, good luck to you. In my experience, these folks take their time and almost never get around to buying because the deal just isnt' good enough.

I know an agent here in northern Columbus who has a significant portfolio of apartments, and the buyer got what he wanted for loan terms from a solid lender. Read that again . . . he got what he wanted. But then he decided it wasn't enough. He is now shopping the loan among other lenders. Guess what? I'll be $100 he loses the apartments because he is trying to shave a fraction of a fraction of a fraction of a percent off the interest rate. Okay, I get that. But he is going to lose the deal if he isn't careful.

The "moat" properties are out there. Again, you can't entirely eliminate competition, but you can find properties that fit your economic goals. There will be many times when you need to act fast in order to snag the opportunity when it appears. But the more you put pencil to paper, the more properties you'll will find, and "the one" throwing off the results you want will emerge.

When Warren Buffet looks for real estate, he has gone on the record numerous times saying he looks for "moat" properties -- opportunities that boost his potential for profit.

A pretty smart guy in my book....

Tuesday, June 14, 2011


For the fifth or sixth time in a month or so, I've been sent on a wild goose chase by colleagues in this profession. Specifically going out to take an initial look at a building that might work for a buyer, then finding reality bears no resemblance to what was advertised.
Where do wild geese come in? Because the information being posted in the online listing is incredibly misleading. And when I use the word "misleading" I am being polite. When agents decide to list the potential Net Operating Income as actual, but fail to disclose it is a projection. The same issue with cap rates.
My partner at Blue Rock Capital Advisors, Jack Turner, and I have been neck deep in analysis of too many buildings in the past several weeks, only to find out in more than a half dozen instances that the actual numbers bear no resemblance to what was advertised. Now, I am totally in favor putting the best spin on a story, polishing the apple and all that. But this is flat out dishonesty. If the numbers don't show so well, tell other agents that the numbers you are listing are "potential" caps and NOI.

Case in point. A 40,000 SF+ office building. Listed at more than $2M. Noted that the occupancy is only 47 percent, but the NOI is $506,000. And a capitalization rate of 23. We knew the building, so drove out to take a look to see what shape it is in present day. Lots of upside potential, considering the numbers and what we saw. In pretty decent shape with minimal deferred maintenance here and there. The parking lot needs to be replaced. But overall, very doable. Then after yet another call to the listing agent (3 calls since last Thursday; as we know a handful of companies don't want to openly market listings in an attempt to find their own buyers, thereby doing their sellers an incredible disservice) we finally received a detailed financial analysis. Reality check:  actual numbers -- NOI is negative $80,380, and the actual cap rate is negative 3.65. Plus ridiculously below-market rents.
This is only the latest instance where this has happened. In the past four weeks I have experienced:
- NOI being dramatically different in reality than what was advertised in a medical office building in an upscale suburb;
- Rents being dramatically different (occupancy too) in a MUH property south of the city;
- Every tenant (there are five) lease expires in two years in high-end neighborhood retail strip, but the property is advertised as having 10+ years left on the leases. Get the funny math? Five tenants multipled by two years equals 10? Huh???
The count where this has occurred? The aforementioned corporate office building, a suburban medical office building, a retail plaza, a second MOB, a retail strip center, a multifamily complex east of Columbus, a portfolio of government office buildings, and a high-end retail strip center.

We have seen actual occupancy rates, length of leases, cap rates, NOI, property size and price -- different factors in different properties at polar opposites of what was advertised. Not just off slightly, but in no way close to the reality once you got into due diligence. If only these had been disclosed up front, with projects then showing the upside, AND realistic pricing from the agents and owners. Because agents should be representing the best interests of their sellers. If someone is taking the listing just to have their name on a sign, but there isn't a snowball's chance in hell the building will sell (unless a real rube walks in, unrepresented, and decides to make a run at the building), then what help is the agent giving the seller? How is the seller truly being "assisted" if an agent is blowing smoke up their a**?

Frustrating for me, but for those CoC readers who are investors, who go it alone and choose to travel these waters without using seasoned counsel, I cannot imagine how you react when you run into this. For I know what is going on. But to the unitiated, you could pretty much get a hate on for everyone in our industry, perceiving that everyone lies. The reality? A few bad apples are spoiling it for everyone. Please know this is not standard operating procedure.

In the residential world, agents will get needled about advertisements for "cozy" (small) homes, "handyman specials" (it may fall apart soon), and so on. But to blatantly present best-case projections as actual financials and not disclose? Grrrrrrrr ........ You do know, right, that the truth will be revealed in the due diligence period anyway?  Right?

As far as my projects? Today's resolution is Move On. Our many investors have needs, are motivated, are WELL qualified and bankable, and are ready to move now. No time to dwell on it other than shake our heads and remind ourselves ..... we do not operate that way.
Vent concluded.

Monday, June 13, 2011

NIMBYism Impacts Investors, Residents; Takes Toll On Local Economy, Illustrates Law Of Unintended Consequences

I saw a piece on Inman News over the weekend, which was inspired by Builder magazine. No matter which headline you use, the resulting message is the same:

-- There is a cost to NIMBYism, and its impact on housing affordability.

But I want to take it a step farther. The "Not In My Back Yard" trend impacts an area's entire economy. We see it over and over. People who want jobs, or already work in a given area, need affordable housing. Often times that isn't a single family dwelling. So they look to apartments. And not "dive" housing, but upscale apartments. Or mid-range apartments. What they can afford based on the wages they are receiving in a competitive, market economy.

But the focus more and more of some communities is to preclude certain kinds of residential housing, with a perceived eye toward preserving property values. This quite often actually backfires. Call it the law of unintended consequences.

Now, let it be known I am all in favor of good zoning. But many community leaders, or neighborhood rabble-rousers, or even city council people in cities and townships large and small, sometimes take their power and their authority to the limit. Thinking it will get them re-elected, they will jump on the NIMBY bandwagon and prohibit ANY kind of multifamily housing solely because a vocal minority has an issue with said property type. And that "perception" again that apartments -- no matter the quality -- negatively impact their property values.

But what are the results?

Take Naples, Florida for example. I am very familiar with the area, as my family holds investment property in Collier County and has been spending time in this beautiful area of southwest Florida for nearly 40 years. Some years back, a number of areas began some restrictions on construction of apartments, in favor of condominium development. As a result, service workers sorely needed in the area -- teachers, firefighters, hotel and resort staff, and police -- often could not afford to live in the city itself and were forced to reside outside the growing community. There was discussion about making people live in the city as a condition of employment. So what happened? There was intense discussion about increasing the pay of many service workers on the public payroll, helping them earn higher wages that might enable them to live in the service area.

Of course, there was a backlash from the controlling authorities -- the city and county, the local school boards . . . even taxpayers already feeling the financial squeeze of escalating taxes opposed increasing wages. And why? All because a decision had been made to severely restrict new multifamily housing developments. And what do developers do? The single family and condo developers who want to build in Southwest Florida are sitting tight right now because of the economy. Multifamily -- the only commercial real estate market segment that remained strong during our recent recession -- is still off-limits for discussion in much of this area. So the developers with money, who are ready to go, move to other markets -- taking their money with them.

Is there rental housing in the Naples area? Sure. There are a handful of newer buildings that went up before the real estate market crashed, and a number of building conversions that are receiving Section 8 funds. But those are for people who in our economy are the most vulnerable, and earn the least. What about the middle income worker who doesn't want to own, just rent. Well, thanks to the economic downturn, a LOT of newer condominium developments that could not get buyers, or condo sellers who can't find buyers, are renting their units just to cover the note. I see this continuing for some time. But just try to get an apartment complex development approved. It is an uphill battle because of entrenched biases.

In Central Ohio, there are a number of suburbs and bedroom communities -- not all -- but several, that have put severe restrictions on multi-unit housing development. For no other reason than "we don't want it here." Particularly along the northern loop of the Columbus freeway outerbelt. And yet they don't realize that they could be adding to their tax base almost immediately, rather than waiting for the economy to turn around and for housing developers to once again start putting up single family homes. There are MUH developers who, given the right circumstances, will built right now because they know the apartment market is stronger than pretty much any other commercial/investment market segment.

But as I hinted earlier, this impacts the economy of an area. The demand for workers earning moderate wages remains. Yet they often cannot find housing they can afford without driving for miles; NOT an attractive situation to be in when gasoline prices continue to hover near $4 a gallon! This impacts workforce availability.

Worse yet, when a strong, willing and able workforce is not present, potential employers who might consider coming into an area will pass, and go somewhere else. Thereby denying an area of sorely needed new jobs.

In the wealthy Chicago suburb of Winnetka, rental stock has been on the decline and there is a bias against new construction of multifamily housing. The area is becoming more transient with fewer and fewer full time residents giving way to owners who only come out on the weekend or once a month. This is having an impact on the local school system, as fewer and fewer students are enrolled.

In Salisbury, Conn., new hires to the school district cannot find homes they can afford in the city. The city's community fire department and ambulance service are losing firefighters and EMTs because these critically important people cannot afford to live in the city. Many of the individuals who are leaving grew up in the area, and if given a choice would gladly stay as they love the city and their jobs. But with people quitting because they can't afford to live there, there is now discussion of turning over fire and ambulance services to neighboring communities or to the county -- at an increased annual cost of actual service and increases costs to taxpayers. Oh, BTW, that cost to taxpayers? It is expected each taxpayer in Salisbury will face an estimated 36 percent increase in their taxes, primarily through property taxes, should the city need to pay another municipality to provide these fire and emergency ambulance services.

Again, the law of unintended consequences in action. NIMBYism doesn't just cost people the opportunity to live in an area, it costs cities economically.

And finally, I step away from the business side of this discussion to comment about a cultural note. I find fascinating the double-standard that seems to be emerging. Today's progressive, open-minded homeowner will insist that the laws on discrimination are "right on," and our neighborhoods should be open to anyone who wants to live there. I couldn't agree more! Our neighborhoods are far more diverse than ever in history.

BUT ....  (and it is a big but), as the stock of rental and affordable homes decline, and areas seemingly cater to only one kind of resident, the lack of housing diversity is leading to a lack of resident diversity. Are we backsliding???

Food for thought ...

Thursday, June 9, 2011

Columbus Green Real Estate Examiner this week named me their Columbus Green Real Estate Examiner. I will be writing stories for about sustainable buildings, both in the commercial and residential sector.

Should be interesting....

Wednesday, June 8, 2011

Whaddaya Do With An Old Firehouse?

Many of us at one time or another, commercial/investment agents have been presented with the dilemma of being asked to list a property that has outlived its usefulness.

Or to be more precise, there is a higher and better use for the property. But what if the building on a property can be "repurposed?" It happens all the time. Restaurants converted into banks; homes turned into dental offices; automobile sales lots/buildings turned into medical school offices; even retail strip centers turned into charter schools.

So what do you do with an old firehouse? That place where in iconic photos of the past muscular firefighters slid down a pole at the sound of a bell and jumped onto fire trucks, racing into the night, having only minutes to save someone's house, or office, or warehouse, or store, or restaurant....

Well, these days, classic fire stations are being converted into spectacular homes!

Again, its a highest and best use thing. And there are consumers who love the architecture and history of our oldest firehouses. And they often beccome the owners because of their spectacular love for all things historic and iconic about architecturally significant old fire stations.

The link above takes you to a page that includes photos of fire stations / ne beautiful homes in Tampa, /Fla., New York City, San Francisco, Calif., and Wellesley, Mass. Some incredible work to bring these gems back to life, but their owners took shells of yesteryear and made them worthy of any home and garden tour.

America's Hottest Investment -- FARMLAND

Not me saying it, but TIME Magazine. Here is the cover story --

"America's Hottest Investment: Farmland."

Yep, what I and others have written about for some time. Particularly producing cropland in the American heartland. The demand for commodity crops -- particulary corn (which is driven by worldwide demand for corn for ethanol fuel production) has driven up corn prices. Which has pushed farmers around the globe to plant every acre they can in the maize-colored crop. Even to the detriment of other crops, or land they previously had in hay (which  has created, at least in the U.S., a hay shortage, thereby driving up hay prices).

American humorist Will Rogers famously said, buy land - they aren't making any more of it. That coupled with the commodity push around the world is driving up prices. In my neck of the woods, the areas seeing the largest spikes are western Ohio, which is considered the eastern edge of the American "corn belt."

A very good story about modern farming and land values. TIME says the return on investment right now is a better return than stocks or gold. Worth reading and passing on.

Tuesday, June 7, 2011

Spreading Around The Meltdown Blame -- Many Homeowners Need To Fess Up

As so many have been so quick to trash lenders, irrationally holding banks solely responsible for the ecnonomic meltdown that occurred in the U.S. and abroad, one of my pet peeves has been the comments of those who ignore the actions (or inactions) of Congress, and the blatant manipulation of home home mortgage and re-fi market by some very smart (or just greedy) homeowners.

This post is not about making money in commercial real estate, but serves as an example of the hubris, not of lenders, not of lawmakers, but of many, many home and business real estate owners. Not everyone tried to game the system. But as I have written before, there were certain members of Congress who willfully ignored loud, dire warnings about the problems with Fanny and Freddie (attn. Mr. Barney Frank); certain mortgage lenders who talked buyers into purchasing more than they really could afford; certain slimy mortgage brokers who intentionally altered loan applications; and certain home and commercial building owners who used their properties like ATM machines, constantly pulling out cash though re-financing.

So for those who want to irrationally just blame banks banks because they harbor some bigotry toward commerce and the entities that make the markets hum, I give you the following:

-- 40 percent of underwater borrowers took cash out of their homes.

Got that? Yes, 40 percent of those people who owe more on their homes than their homes are worth, re-financed at one time or another and pulled out cash. Probably to play, buy some expensive toys, or even pay a couple bills. And that 40 percent bears the blame for their trouble. Especially those who purchased other un-needed consumables (boat or cruise, anyone?).

NOTE-- THIS IS NOT AN INDICTMENT OF ALL HOMEOWNERS WHO ARE IN TROUBLE!!! Many homeowners are honest, hardworking, and ran into some trouble, and tried hard to work things out.

BTW, its not me pontificating on the subject (well, I have, but I am not the source of the info). The new study showing these statistics is none other than real estate and loan data aggregator CoreLogic.

An interesting story, to be sure. Check it out. And if you have a friend, colleague or neighbor who puts the blame on the banks, please correct them. And put this information in front of them.

They are not stupid, just ignorant. And as is well known, ignorance is uneducated innocence....

Green Energy Update

For those in both commercial and residential real estate looking for more tips on incorporating green energy components or services into their property or properties, you might want to take a look at the latest edition of GEO News.

GEO stands for Green Energy Ohio.

Click on this link to read the electronic edition of GEO Spring, Vol 4, Issue 1 (Spring 2011).

Weekend Warriors

With rather short notice last week I was asked to assist with security measures at an event in the Hocking Hills area of SE Ohio. The event -- Warrior Dash.

A friend and I had talked of signing up for it last November, then promptly forgot about it. It quickly sold out. When presented the opportunity to be involved in a behind-the-scenes role, I jumped in mostly because I wanted to see the event in person. It was something else! I ran into many people I knew, including clients of mine whose apartment buildings I have sold near The Ohio State University, and an office colleague who was running with her brother, sister-in-law and friends.

Below is video taken from someone's helmet-cam, with a view of the course as run Saturday and Sunday. I wound up staying over Saturday night rather unexpectedly, and we had two severe thunderstorms during that time. What had been a rugged 3.1 mile obstacle course on Saturday, was a wet, muddy mess come Sunday. Over two days, between 25,000 and 30,000 people competed over the two days. Plus, there were thousands more in attendance to take in great music and food, and cheer on their friends and relatives who were busy jumping fire, crawling through mud, climbing rope cargo nets, swimming large farm ponds, etc.

I it was an incredible event with which to be associated. The organizers have it down to a science, and my hat is off to them. Ryan, Molly and Brianna, really sharp people charged with making Warrior Dash a financial success for its owners, and just plain fun competition for the participatns, pulled off an incredible weekend.

Warrior Dash is one of those spectacles you witness, and while watching both what the participants see, and getting to peek behind the curtain, you say to yourself,  "I wish I had thought of that...."

Friday, June 3, 2011

If You Own, You've GOT To Understand The Generations

As some of us get a little older, we notice that our investors seem to be getting younger....

But as an owner of any commercial/investment property, particularly multifamily, its always a good idea to understand how our customers/tenants/residents/lessees think. And understanding that often starts with knowing how old they are, and what motivates their particular "generation." If you manage yourself, it wouldn't hurt to be aware of the following. If you use professional management, well its a fair bet that your management firm is boning up on this info themselves.

So, courtesy of Cam Marston at, here is a primer on Generational Differences, understanding how to push their hot buttons, and learning how to sell your property to them:

Matures -- born between 1909-1945. Traits are dedication and sacrifice. Believe that experience will always be the best teacher. Conformity, blending, unity, team. Hard times gave way to prosperity. To reach them as consumers: Show that you value what they've learned through their experiences. Quality is important -- emphasize it. Never mention a product is good for their age group. Standard and pre-packaged are good.

Baby Boomers -- born between 1946-64. Traits are being workaholics, competitive, they view success as "visible" (trophies, plaques, certificates), they are optimistic, they are consumers, and are defined by their jobs. To sell to them as consumers: Your product or service, or working with you, should emphasize time-saving elements; help them feel victorious -- they are competitive and want to win; become a member of their "team" because teams are important to this group; customize your service for the individual; and consistent themes within this group include "forever young" and "rebellion."

Gen X -- born between 1965-1979. Traits include questioning authority (they were taught this), they have no real shared heroes, they are somewhat disdainful of Boomers, this generation began the trend of parents and children as "friends, they are somewhat cynical and pessimistic, they have shorter time horizons, and have taken a carpe diem approach to their lives. To reach them as consumers you need to list every available product, service, option and solution; this group is VERY skeptical of too much advertising/hype or promotion; peer-to-peer testimonials carry much weight; and be prepared to answer "Why?" often; you will have to prove you are an authority.

Millennial -- born between 1980-2000. Key traits with this group are that these individuals are optimistic, they have been programmed and coddled, they are group-oriented, busy and stressed, like Gen X they were raised as their parents' friends, and while they are ambitious they appear to be directionless. To sell to them as consumers your product must have an immediate application to satisfy their need for instant gratification; your product or service must be unique to them and have individual relevance; they like to be admired as individuals; technology is assumed, and they are acutely aware of what others have and are doing.

Clear as mud, right? For me, the key to working with my clients' Residents or Tenants is understanding what makes them tick. Sure, to many old school owners it simply revolves around "pay your rent on time and you will be left alone."

But that understanding of their motivations can be another key factor to retaining quality lessees, particularly in multifamily communities.

Your mileage may vary. But its worth considering....

Thursday, June 2, 2011

Are We Growing A Generation Of Renters?

A fascinating story is out this week, courtesy of Harvard University's Joint Center for Housing Studies, and it suggests that we may be creating a generation of renters -- people who are either too hesitant about private home ownership, or don't want to risk losing a home as they have seen family or neighbors.

The State of the Nation’s Housing report released this week verified a number of trends

my colleagues and I who work the multifamily market have seen emerging for many months now. One stat is that renter households keep growing. The report said that from 2006 to 2010, renter households increased 692,000 annually on average, to 37 million. In the same time span, the number of owned households fell on net by 201,000 annually.

The report also notes that renters who have put off homebuying and homeowners who became renters again are driving this shift. Even as the number of households aged 25 to 34 increased one percent from 2007 to 2009, the number of households that bought their first house decreased 14 percent. The number of first-time homebuyers between 35 and 44 fell 21 percent.

Not surprisingly potential buyers are waiting it out. “With home values still falling in many markets, even would-be homebuyers appear to be waiting on the sidelines until they are convinced that prices have bottomed out,” the report said.

But (and its a BIG but...), things could be moving too far the other way though. With rents for professionally managed apartments moving up 2.3 percent from the fourth quarter of 2009 to the fourth quarter of 2010 around the country (according to information cited from MPF Research), the Harvard report says that some renters could again start to think about buying. In particular, the report cites a Fannie Mae National Housing Survey that reported the percentage of renters saying they will probably continue to rent fell to 54 percent in the first quarter of 2011 from a peak of 59 percent in June 2010.

For now, however, a growing number of Americans can't afford a home or don't want to own one, a trend that is spawning a generation of renters and a rise in apartment construction across the U.S. As I have written before on these pages, many of the new renters are former owners who lost homes to foreclosure or bankruptcy. And others? They feel it is too costly. Or too risky. Or the doubt a home's potential appreciation. Unfortunately, if purchased "right" (and it is easy to do now since inventory is high, prices are low and interest rates are bottomed out), homes today will surely appreciate nicely over the next decade.

At this writing, nearly 38 million households (not people, but households) in the United States are renters. Also, as noted earlier, demand is driving up rents, and spurring new construction. Which again is why we are seeing multifamily prices on properties remaining high, as demand is keeping ledgers in the black.

Interestingly, before the housing bust, mortgage rates were so low it was often cheaper to buy than rent (plus you got all those great tax deductions as a homeowner). According to Moody's Analytics, a decade ago it was cheaper to buy than rent a home in more than half of the 54 biggest metro areas. Today, it is cheaper to rent in about 72 percent of metro areas.

One fascinating aspect to all this is the talk about the so-called "Millennials," the children of the Baby Boomers. Millennials are not quite as attached to the single family detached residence in a far suburb. They watched their parents commute long hours to jobs, either in cars or by train (at least on either coast). Long drives, combined with the high price of gasoline, has them shunning the McManse in the fringe suburbs. They would rather live in urban centers in apartments, or condos, or renovated houses. And when you look at cultural trends, an incredibly large percentage of young people say they have no plans to ever have children. These shrinking family sizes means that fewer people aspire to a suburban lifestyle.

I never twist someone's arm if they don't want to invest. It is a personal choice. But if you are going to buy, buy for investment and be selective. I was talking to a colleague earlier today in Cincinnati, and we agreed. There is still time. If a prospective buyer is on the fence, rent where you want to live, and invest your funds in a property that can be treated as a commerical/investment vehicle. Where you can take full advantage of the many tax deductions available with investment properties (and not with a personal residence).

For as many of us have said, a house is NOT an investment unless you are charging your children rent for their rooms.

Either way, the even heavier pressure on multifamily is a boon for the time being, both for owners and for investors who get in sooner rather than later. But the "buy-right" time on multifamily may already be past.

When Adults Act Like Children

When adults act like children, it is insulting. To children.

The owner of IP address 70.30.23 (Roadrunner Commercial account) is well known to me. And for some juvenile reason, they seem to have nothing better to do during the past 12 months or so than spam my comment section. But the name calling of about a week ago brings a particular chuckle. For when one resorts to name calling, as everyone knows, an individual has now surrendered the battle. For they have run out of argument if there was any to begin with. Abandoning the intellectual high road, and intentionally joining with the morally bankrupt who are a growing stain within our communities.

IP 70.30.23, I feel sorry for you. I urge you to get some counseling.... Soon. You need it.

Property Management Is ALL About Response Time (And Follow Up)

A lot of building owners, unless they have professional property management handling their property for them, tend to get to maintenance requests as they have time.

Most often, that is not good enough. And it shouldn't be. For keeping quality tenants, or residents if you own a multifamily complex, is about providing quality service that makes them want to stay. Think about it; how satisfied your residents or tenants are living or working in your complex is largely influenced by how satisfied they are, which influences how likely they are to renew their leases.

So with that said, remember the following: Dealing with maintenance requests is a three-part process -- submission, handling AND follow up.

John Gallagher, a certified property manager and a sernior vp of a large property management firm overseeing around 6,000 apartment units in the mid-Atlantic region of the United States, is a firm believer that maintenance processing does not end when the property technician successfully fixes the problem in an apartment.

Since service orders need no longer be phoned in (they can be received by the management office via email, internet, phone or fax), the focus still needs to be on "service," Gallagher notes. And as residents and tenants trend younger, they are more likely to use email or the internet to submit their maintenance requests, since such needs can be communicated on the lessee's schedule. Basically, anytime day or night!

A story in the June 2011 edition of Multi-Housing News talks of  the importance of service follow up, which is highly criticial to tracking, measuring and ensuring customer satisfaction. Follow-up surveys are a standard best practice at Mr. Gallagher's company, Polinger, Shannon & Luchs. The company sends out a survey after EVERY maintenance request, once the request is closed, asking lessees about their experience.

While most residents to not respond to the surveys, especially if the maintenance was performed as expected and to their satisfaction, Gallagher says, the process promotes good customer service AND, perhaps just as important, makes residents feel valued. At the same time, renters who are displeased with their service will almost certainly respond to the survey.

Quite something to think about: Most owners or management firms may believe that the leasing agent is the primary determinant of resident lease renewal rates. But in actuality, the maintenance technician is just as much a factor in renewals as that leasing agent.