Tuesday, July 26, 2011

In This Climate, Commercial Real Estate Myths Abound

I was forwarded an interesting article from the Los Angeles Times by a a colleague in Naples, Florida, Garren Grup, that talked extensively of the many myths out there today in residential real estate.

After looking at it, I realized it applies to the commercial/investment world, as well.

So here are some of the headline items, in no particular order, and my thoughts regarding the "myth."

-- The notion that you will hunt for an investment property until you find the "perfect" one.
Wow, sufficed to say there is NO "perfect" commercial/investment property. They all have something that isn't the perfect fit for what the buyer has in mind. Further, a lot of the stuff on the market today has some bit of "hair" on it. A colleague over at Chase indicated it another way: "Pretty much everything for sale out there is on the market for a reason, and its not because they've used up the depreciation or its on a 5-7 year turnaround. There is an issue."

-- The longer a commercial building or complex is on the market, the more willing the seller will be to negotiate.
Uh, no, I wouldn't go there. A significant time on the market may well indicate that the seller has dug in their heels and is being unrealistic about price. Or they aren't motivated.

-- A buyers market in the housing sector means its a buyers market in commercial/investment.
Nope. While commercial values have lagged, in many markets they have been rebounding. Further, the idea that buyers can routinely make outlandishly low bids, no matter how unrealistic, particularly with investment properties is just ludicrous. I have received low-ball offers on properties that have so pissed off my sellers they have elected not to respond.

-- The price seems a little high so I'll wait a little while for it to drop.
Yeah, right. Good quality investment properties are few and far between and they are snapped up fast. If you don't jump on it, another buyer will. I have dealt with buyers over the years who hemmed and hawed before deciding whether to put in an offer on a building with strong financials. In the meantime the complex has already gone into contract and there are backup offers in place. Currently, news reports show that some REITs are so flush with cash they are moving into secondary and on rare occasions, into tertiary markets just to find something that might work. They need to pull the trigger and add to their portfolios after sitting on the sidelines for a couple of years.  Further, industry media is reporting that in this desperation to acquire decent properties a small but increasing number of buyers are occasionally ignoring iffy fundamentals and buying certain buildings anyway just to have them.

-- Real estate is too volatile. Just look at the news.
Okay, this is probably something that passes through the mind of the first time investor, rather than the sophisticated or institutional buyers. And the vast majority of news reports are focused on residential real estate. When looking for stable, reliable commercial investments, look to Globe Street, LoopNet and Co-Star to see what is really happening in this sector of the industry. Plus, commercial real estate offers a number of different tax advantages. And remember, real estate is local. Work with a seasoned commercial/investment real estate counselor to understand what is happening in the market or markets in which you have an interest.

-- Nationally, the commercial real estate market appears to be headed .....
Headed where? Please, if you know something, let me know, okay? Seriously, there is no way to know! Please review again the commentary immediately above this one. There is NO such thing as a national commercial/investment real estate market, any more than there is a national residential market. All commercial real estate is local. Know what is happening in your market before you make a move. Know the economic trends, is average income moving up or down, is the population increasing or decreasing, if increasing what is the relative economic power of those who are moving into the area. And so on. This information is available. Just ask your commercial/investment agent.

Truly, we are seeing a market that continues to be in flux. It will get better. Will it get worse first? No one knows. But fundamentals seem to be improving. While there were several quality properties showing up on the market a few months ago, it seems sellers are not currently listing a lot of properties. Particularly during the past 30 days. Perhaps they are waiting to see what happens with the economy while Congress and the White House try to show the American public which is smarter on economic policy and budgeting. Perhaps they are waiting until next year. Or perhaps it is just the summer doldrums, and as soon as we hit Labor Day we will see an uptick in quality properties coming to market.

The myths are out there though. Got questions? Ask!

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