Where is our BREAD Buttered?

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Today, I will share with you two of the ways I look at my business - the source of transactions and the reasons. Although not terribly scientific - these two metrics can recap where marketing time has been expended - source. And where future deals might lie - reasons. I’m only talking about deals we’ve completed - not our pipeline of future business. And as I’m fond of saying - if it happens once, it’s an exception, twice a trend, and three times an epidemic.

So far this year, our team has completed twenty-three transactions with an aggregate consideration of over $43,000,000. Projected for the balance of the year is an additional $10,000,000 in closed deals.

Sources of Closed business.

Prospecting. That knock on your door or that annoying mailer you receive is probably from me. Yes. I still prospect. Generally, our calling surrounds an initiative - a general trend we see and touches that result or to make neighbors aware of activity - a new availability or a recent sale. 1 deal.

Social media. Linked-in, Facebook, Twitter, and YouTube - are our team’s go-to media sources. We have found consistency, authenticity, and targeted content are the keys to generating visibility. 2 deals.

Sign calls. Folks still drive-around and call us - and we love it! 1 deal.

Referrals from brokers. Our single biggest source of business! These come in two forms - cooperation on a listing or an occupant requirement or a colleague requesting our involvement to secure an assignment. 7 deals.

Referrals from clients. If you do a good job - these follow. 2 deals.

Other referrals. Critical to our success is networking with those who talk to business owners yet don’t compete with our services. Our network is filled with CPAs, attorneys, insurance brokers, commercial bankers, and wealth advisors. 6 deals.

Repeat business. Probably the finest validation we receive - when that group calls you years after your deal - to do another deal. 6 deals.

Reasons folks are transacting.

Expansion. As you would expect in a robust economy - close to half our closed transactions were caused by the need for additional space. 10 deals.

Contraction. An emerging trend recently discussed was the utilization of a third party logistics provider. Achieved is the need for less space with minimal disruption to the operation. 2 deals.

Re-allocation of portfolio. Some would suggest we are close to the top. If not, we can see it from here. Consequently, several of our clients have “taken chips off the table” and sold some buildings. 3 deals.

Merger or aquisition. The “Brady Bunch” of business activity causes commercial real estate activity. Period. 2 deals.

Renewals. Many of our clients are disappointed to discover the deficit of available buildings. Worse, their owner understands choices are limited and jacks up their rent. Our involvement results in a win for both sides - vacancy and move avoided. 6 deals.

Allen C. Buchanan is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com  his website is allencbuchanan.com

Is the Commercial Real Estate Market Cooling?

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In my humble opinion - yes. I read with great interest - in this publication - the residential real estate trends published by my colleagues - Jon Lansner, Leslie Eskildsen, and Jeff Lazerson. For weeks now - we have noticed more houses for sale, a greater supply of un-sold new homes, longer times on the market, and a departure from a seller’s market into a more normal give and take environment.

So what do residential swings have to do with commercial real estate, you may ask? Plenty! You see - what happens residentially portends the haps in my world - generally by 12-18 months. As an example - our residential peers experienced a dip in 2006-2007. The commercial music stopped in 2008. So, if the theory holds - expect a slow-down commercially sometime in late 2019 or early 2020. Full disclosure - I’ve been wrong before. 

Unfortunately, with commercial real estate - our metrics aren’t as defined as they are with houses - such as the number of new homes available, year over year sales, and time on market. We track gross activity, net activity, vacancy rates, and average lease and sale prices - by product category - retail, office, and industrial. Therefore, most commercial real estate professionals rely on a “gut-feel” of where we’re headed in their respective specialties.

So what is my “gut” telling me about our dealings? Indulge me, while I share.

Listings are hanging around longer. Smart owners are meeting the activity - regardless if the interest is below their expectations. As an example - we recently brought to market a beautifully well located building with complete updates and awesome features. Our pricing was aggressively high. Bang! We got two offers right out of the gate - albeit at a significant discount. Fortunately, our seller chose to deal. Those two were the ONLY buyers that emerged.

Folks aren’t making stupid buys. Two years ago - no asking price was too high. Now - establish a nutty ask - crickets!

Renewal activity is healthy. Companies aren’t moving. Traded is a relocation in favor of - “we will just stick around for another two to three years.” Consequently, a shadow market has emerged - which is difficult to track. If a lease is transacted - we can generally discover the terms. With a renewal - not so much - as this deal occurs with an owner and his occupant - without any published availability.

Pent-up demand is waning. In a down market, a new offering is met with a collective yawn. An up market will snatch the same building whenever there is a sniff it may be for sale. Now, when something new hits, we receive a few inquiries and a small percentage result in tours or offers.

The Labor Day bump. Generally - calls, inquiries, and requests to tour all take a hiatus in the summer months. Once the kids are back in school and the calendar adds an “ember” - things heat up. Not this year. Labor Day has passed - right?

Certainly in-exact. But I’m willing to trust my gut. It’s not mislead me to-date.

I’d love to read your comments. What are you experiencing?

Is Commercial Real Estate a Good Investment - Part Deaux

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Last week - in this space - we massaged the merits. Discussed were the reasons why not - a liquidity event, a sale of the business that occupies, a mis-match of risk, a dispute, and finally aging owners.

From last week -

“You’ve achieved a nice portfolio over the years with timely purchases, well-timed trades up, and careful management of the occupancy, income and expenses. But you are tired! Akin to captaining a ketch - tiny tweaks and tightening take time and talent. In order to capture the winds of income - your sails must be trimmed and you must stand watch over the ocean swells of expenses - lest your vessel should capsize. 

Whew! How about we find a nice cozy port - drop anchor - and relax. But, your ports are limited - as we will discuss next week.”

Today - as promised - we continue our voyage with a precise probe of age and its impact on ownership.

Here is the dilemna. Changes occur as we age - aside from a bulging waistline and the need for hearing devices. Our risk tolerance declines plus our patience subsides. No longer are a tenant’s late payments met with a cordial conversation or the request to plunge a toilet tolerated. But there is a problem - most commercial real estate requires management to max the income and someone must fill the vacancies, collect the rents, chase flaky occupants, pay the bills, fix the roof, file the tax returns, etc.

So, if you’re fed up and want to pivot - what are your options?

Exchange into to a less management intense property. Let’s say you own an apartment complex of twenty units. Your income is dependent upon twenty timely rent checks each month. If one loses a job - you wait, or evict and suffer a vacancy. Until the vacancy is vanquished - the top line is in tatters. So, one strategy is to sell the project and move the money into a single tenant investment - a Dollar General or Caliber Collision as examples. Just keep in mind - your management is lessened to nothing but your risk just sky-rocketed - one blip - no more income. Make sure the tenant is solid and the rent sustainable.

Sell and pay the taxes. Uncle Sam and governor Brown will take a nice bite - in some cases half the gain. Great. You’ve now got a chunk of cash you must re-invest and find a decent return - good luck!

Hire a property manager. Keep the buildings but divorce yourself from the day-to-day. You pay a percentage of the gross rents - generally 5-7% - but you pacify the panic El Niño portends for that vintage roof.

Craft a creative transfer of ownership. Charitable remainder trusts, deferred sales trusts and the like may be a good option. You exchange the daily aggravation for a fixed return - all very complicated yet legitimate. Strong encouragement is given to seek professional legal and tax advice if a creative transfer is considered.

Is Commercial Real Estate a Good Investment? Five Reasons it’s NOT!

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Seemingly an easy answer - of course it is! However, the more difficult response - for which I will delve today - is it depends.

As we have covered, commercial real estate exists in many varieties - a suite of offices, a manufacturing plant, a distribution warehouse, a retail storefront or big box, finally a residential project of more than four units. Yes. That small apartment complex is considered commercial real estate.

Your ownership is one of - “my business lives there” or “I simply collect the rent from tenants who occupy the spaces”. Today, we will treat both ownership classes the same - after all both are investors - albeit with different objectives.

An investment in commerical real estate garners the benefits of cash flow, long term appreciation, depreciation, treatment as a long term capital gain and the ability to postpone taxes upon sale through the use of a 1031 tax-deferred exchange. But beware - you must also deal with vacancy, flaky tenants, fixing the roof, collecting the rent and paying the bills, obsolescence, roll-over costs, entity tax returns, and broker fees.

So, to the tough query of commercial real estate as an investment - let’s examine several scenarios under which commercial real estate falls under the category of “it depends”.

A liquidity event. This is a fancy way of saying “you must sell”. Reasons for a sale could consume an entire column. But, if the timing of the disposition runs counter to the market - IE a forced sale in 2009 - lost is all of your gain. During that period, we saw values drop 30-50% in a matter of weeks. Be happy you weren’t a seller!

A sale of the business that occupies the building. Owned is your company’s address. Your business is your tenant. You pay yourself rent each month. What could be better? Frankly, nothing. This is a wonderful arrangement many small businesses enjoy in California. However, if you sell the business - you no longer own the “tenant”. Is there a reason your occupant MUST stay in your building? Or will they flee to cheaper environs once the lease expires?

A mis-match of risk. Single payers - such as a Dollar General store or a Caliber Collision Center offer the owner one rent check each month. There-in lies the benefit and the risk. So long as the tenant’s business is vibrant - money flows in to your bank account. A blip - and you’re installing a “For Rent” sign.

A dispute. Divorce, partnership squabbles, or a change in motivation all can occur during the life of an ownership. Unless specially structured - ownership shares are not easily divided - in other words - you cannot simply take your toys and go home.

Aging owners. Wow! Once again - a column worthy topic on its own. Here is a preface. Those greying temples and aching back - stem - not from age - but from the pains of commercial real estate ownership. Told were you in your thirties - “invest in real estate”, young lady. You have. You’ve achieved a nice portfolio over the years with timely purchases, well-timed trades up, and careful management of the occupancy, income and expenses. But you are tired! Akin to captaining a ketch - tiny tweaks and tightening take time and talent. In order to capture the winds of income - your sails must be trimmed and you must stand watch over the ocean swells of expenses - lest your vessel should capsize. Whew! How about we find a nice cozy port - drop anchor - and relax. But, your ports are limited - as we will discuss next week.

Do Asking Prices Matter?

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As a seller of commercial real estate - you’ve typically three goals - to dispose of your property for the most possible dollars, in the shortest period of time, with the fewest contingencies. Simple, right? Yes, very. However, the execution - AKA “the devil’s in the details” is not so easy.

Let’s start with the asking price - shall we? Some would advise the price at which you advertise your sale is irrelevant - especially in this robust market. After all, there are many more buyers than available buildings these days. This argument does have merit - as you want to maximize your proceeds - but with a catch. Therefore, I will introduce three different strategies - and the appurtenant pitfalls.

Strategy one. Inflate the ask to an un-achievable number. You can always lower the price - right? Well, right. Sort of. You don’t want to leave dollars on the table and in an upwardly trending market - every sale is at a level greater than the last. Buyers expect this. But, take too great a leap and several potentials say “no thanks!” If too many react this way - you then must lower to achieve activity. 

Anticipated by the market are further drops in the price. Created is a “let’s wait and see if we can make a better deal” mentality. You burn valuable daylight reaching the market. Meanwhile, purchasers have bought elsewhere. That popping sound you hear is your strategy back-firing!

Strategy two. Market the offering un-priced. We see this employed when the pool of potential purchasers is plentiful - and of a certain genre - IE: institutional investors. Generally, an un-priced offering is packaged with the income, expenses, and due diligence material readily available. Prospects are able to review the leases, put their spin on the market rates and determine if the roof leaks - all before making an offer. This approach generates several proposals - which are vetted.

 Typically, a “best and final” follows the initial offering round and a buyer is chosen. Players in this arena are used to un-priced opportunities and therefore will react positively. Just know, if you’re after a less seasoned buyer - your effort will suffer - as this group is accustomed to a traditional “ask - offer - response” scenario.

Strategy three. Establish a starting point lower than expectations. Our residential counterparts perfected this method. It works like this. The market is X. We publish our amount as X - Y. Buyers beat down your doors and bid up the price well past your go amount. An offer war ensues and you - as the seller - are the benefactor. Just remember, you need lots of interest to make this happen. If one lowly buyer comes along - you risk selling your property at far less than otherwise. 

Also, be aware of the other risk - a buyer wins the proposal scrum - but can’t close at the agreed price. Now, you start all over - albeit with several other potentials anxiously waiting for buyer number one to fail.

Why Hire a Broker - Just do it Yourself!

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Selling a commercial real estate asset is akin to planning your daughter’s wedding - sure, you can do it yourself but things go much more smoothly if you have a wedding planner - AKA a commercial real estate professional.

Certainly, you can do a quick Loopnet search, establish a price, purchase a For Sale sign at Home Depot and wait for the phone to ring - set the date, book the church, rent some tuxes and order the cake - this is easy!

Vista Print will create a glossy brochure of your building, mail a few to the neighbors and the inquiries will start to flow - Wow! They do wedding invitations too? Cool! Invite aunt Marjorie and a few dozen friends and let’s do this!

Just got your first hit! They want to see the building next week. Oh wait, you’ve a day job and can only meet the buyers on weekends or evenings. Hmmm, this doesn’t work for the buyers- now what? I guess you could slip out during lunch - but what if the buyer is late or stiffs you? Time wasted - and on an empty stomach.

OK, you get them through. They like it. An offer will be forthcoming. I’ll bet you’re glad you’re saving that 6% you’d have paid the broker. Why don’t more folks do this themselves?

Your prospective buyers call. Do you have a recent appraisal? Does the roof leak? When will the tenant vacate? What will be left when the occupant leaves? I noticed the building doesn’t have central air. Do the cracks in the floor portend something serious? Would you consider seller financing as we have a small credit blip - a bankruptcy? Oh, by the way, my wife has her agent’s license - so we will be deducting 3% from our offer. Next!

Three different agents - who comb the area - call. We have qualified prospects who would like to see your building. Will you pay us a fee if we bring you a buyer? Can you forward to us any marketing collateral you have? Any idea how much electricity feeds the property? - as one of our buyers is a machine shop. One of our guys stacks products high in the warehouse. Will the sprinkler system handle high-piled storage? What is the zoning? Our buyer is a trade school. Will the city allow that occupancy without a conditional use permit? Hmmm. Feeling a bit overwhelmed?

Finally, your perfect buyer appears - dressed as Prince Charming. Let the wedding bells ring! After all, a commercial real estate deal is a union of sorts. You gloat a bit as your email buzzes with a full asking price offer. No financing required, quick close, as-is - alright! Done. But, not so fast. You see, this buyer has made three full price offers to three separate owners. His plan is to tie up all three - and jettison two of the three. Will you be saying I do? Or, I wish I had - hired that broker.

Random Commercial Real Estate Advice - This One Appeals to All!

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If you’re reading this, chances are you have some stake in commercial real estate. Otherwise, you’d be focused upon Mark Wicker’s review of the Laker’s roster. 

What’s unclear is the vantage point from which your interest lies. As an example - our neighbor - Sam (name changed to protect the innocent) - is a retired project manager from a large SoCal general contractor. Expected in our driveway is an instant critique of Sunday’s topic - either Pulitzer worthy or what were you thinking? 

I’ve received notes from many fellow brokers with whom I compete. 

Still, others own or occupy commercial real estate with their companies. 

Finally, there are readers who cash a check each month from the rent said occupants - tenants - pay them.

So this column is for you! All of you - by category of reader.

Sam. Your insights are amazing. Thank you! It means the world to me that you take the time each week to read my missives and instantly deliver an unvarnished review. I wish I possessed your encyclopedic knowledge of construction - and could frame it - no pun intended- in a way our readers would enjoy. I’ll keep trying.

Fellow brokers. The biggest opportunity for new business is with inactive clients. Notice I didn’t call them “past or former” clients. They are inactive because they aren’t currently transacting. But, are you certain? How long since you grabbed coffee or lunch with them. Make it a point this week to call all of them. You’ll be amazed at how much new business will surface.

Owners and Occupants. Chances are these past few years have been your company’s best ever. Good for you! Provided are paychecks for a multitude of Orange County workers. You are the lifeblood of our local economy. If you own and you’ve not taken a moment to value your commercial real estate - please do so. You’ll be astounded. If you lease, please review how much time remains on your contract. That smacking sound you hear is your landlord licking his chops - waiting to double your rent come renewal time. No lease you say? Hmmm. You’re vulnerable. Rent can be jacked. Your building can be sold. All manner of havoc can be created for your tenancy.

Investors. You had it rough from 2009-2012! Vacancy was rampant, tenants were scarce and you made any deal to survive. Now - the proverbial worm has turned. Rents have spiked, values have peaked and you’re approaching a lease expiration with your tenant. Your time - right? Just keep in mind. If you hit your tenant too hard - he may relocate. Cool, you say. I’ll just lease the building at the increased market rent - no problem. Yes, but - re-leasing your building is not free. Downtime, refurbishment, tenant improvements, abated rent, broker’s fees - all diminish the new rate you achieve. Please do this simple exercise. Assume a market rent and term you’ll strike. Total that amount. Then compute the cost to originate the new deal - using the categories above. Subtract cost from total and voila! What remains is the net amount you’ll receive - if your assumptions hold true. Now, compare the net amount with what your existing tenant is willing to pay you to renew. Hmmm. Maybe keeping him is a good idea after all.