Friday, September 29, 2017

The DOWNSIDE of an Up Commercial Real Estate Market

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Someone wise once opined, it's a great time to sell commercial real estate - but not a great time to buy commercial real estate. A market needs an ample supply of buyers, sellers, and lenders - all operating independently yet in concert to function properly. If an imbalance exists - too few sellers for the buyers in the market or a shortage of free flowing capital - the picture is shaded in favor of the scarce. Currently, our industrial market is up trending - great for sellers, tough for buyers. Below are a few of the downsides of an up market.

Available buildings are in short supply. Vacancy on industrial buildings is the lowest its been since - well ever! We state our vacancy as 2% - 2 of every 100 buildings are available. However, if we dissect this figure, we discover that the true vacancy - buildings without an occupant - is closer to 1/2%. You see, if a building is marketed for sale or lease while still occupied, it is counted as available. If the availability is dependent upon the occupant finding new quarters - good luck - it may not ever be vacant.

Sellers are over zealous. It seems that every deal sets a new record and is completed at a price higher than the previous deal. This robust activity causes sellers to be quite bullish. Recently, I submitted an offer to a seller whose property is not on the market. He has indicated, however, that for the right price, he would sell. Our offer contained the "right price" but now the seller believes values have eclipsed his right price and he has a new right price. Upward we go.

Normal negotiations are impossible. Because available buildings are in short supply and sellers are over zealous - conducting a traditional give and take dialogue is difficult - close to impossible. Unless a buyer is willing to step up and accept the offering per the seller's terms and conditions, another buyer comes along who will. I've witnessed several instances recently where buyers miss out and are forced to conduct another search for their new business home.

Establishing values is tricky. As commercial real estate professionals, we are tasked with recommending values to sellers based upon recently completed transactions and currently available buildings. In an up market, a wide gap exists between the recent deals and the ones available for sale. The intangible - which makes establishing values tricky - is how close to the gap the next round of closed deals will be. Also, appraisers go nuts. Buyers and sellers agree to a price that cannot be justified by closed sales. An appraiser must then interpolate a value using a secret matrix of appraiser magic.

Lenders are a bit goosey. Commercial real estate lenders sense our values are near the top. A loan misstep could cause an uneasy time if prices adjust downward and the amount owed exceeds the market value. Currently, foreclosure activity is practically non-existent - but the skeletons of 2009-2011 still haunt many lenders. Proceed with caution appears to be the credo of many who loan money on commercial real estate.

Friday, September 22, 2017

Summer's OVER. Commercial Real Estate Considerations

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Summer's over although the heat didn't get the memo. Kids are back to school. Disneyland is navigable again, The Orange Street Fair is distant memory, and folks are back to work with an eye toward wrapping up their commercial real estate requirements before the holidays - which will be here before you know it. If you venture into some stores - you might believe the holidays are next week!

So, what commercial real estate considerations should you make with four months left in 2017?

Plan for 2018. If you have a landlord - and don't own your location, chances are your owner is busy calculating the operating expenses on your building. After all, in January of next year you will receive a bill for the projected property taxes, property insurance, and common area maintenance charges for 2018. Generally, owners break these into monthly payments and reconcile the over or under payments the following year. This time a year is also a good period to reflect on your business for next year and your potential space needs. If you anticipate any major changes in the square footage you occupy, use this time of year to anticipate and react.

Parking lot, cooling and heating, roof. As mentioned in a previous column, now is a wonderful time to have that roof checked before the rains of winter come deluging down. You should have a really good idea how your cooling is working - as its worked overtime in August - but what about the heating? Fire it up and correct any problems. Many owners deal with parking lot issues - such as spalling, pot holes, and re surfacing in early fall. The rains are a couple of months away and these hot dry conditions are ideal for parking lot repairs.

You've still time to make a deal. We've four months left until we chorus auld lang syne. Plenty of time to search, negotiate, and sign a lease. If you're direction leans more toward owning, plan to be in escrow in two weeks - otherwise, I'm afraid the buzzer may sound before you close.

Great time of year for marketing. Contrary to our residential counterparts who experience their busiest in the spring and summer, our busy season starts now! So, if you are a seller, put that building up for sale and take advantage of the year end activity.

SBA runs out of money - theoretically. Another reason to secure that deal now - the Small Business Association gets a new burst of funds to loan every October. If we have any government shut downs or budget shenanigans, and your loan is not in the approval queue, an SBA loan can get delayed. If your loan isn't approved before October - you could be vulnerable. Speak with your loan professional and insure your loan is on track and not subject to delays caused by a budgeting hiccup.

Friday, September 15, 2017

Seller Accepts an Unsolicited Commercial Real Estate Offer - 5 Reasons Why

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Recently, I penned a post entitled "Should I Accept an Unsolicited Offer for my Commercial Real Estate".

If you missed the post, you can quickly catch up by clicking here. 

The conclusion? - a resounding no. It is my firm belief, a seller can achieve a higher price by putting the market forces of buyers competing to work.

OK. Got it? Then why would any seller accept an unsolicited offer for their commercial real estate? In my opinion, the reason is contained within the list below.

Seller is desperate. More is owed than the property is worth. A lender has called a loan against the real estate. The operating company housed in the building filed bankruptcy. All could lead a seller to be desperate. If the property is marketed, the desperation becomes public - disclosed, discussed, and baked into the offering prices. Such desperation can also carry a tight time frame which won't allow a normal marketing process to be conducted.

Seller wants to avoid disruption. An owner occupant is concerned by the business interruption a marketing process will create. After all, folks will want to tour - during normal working hours when you are making and shipping things. Tours - unless very carefully controlled - distract employees and add a layer of suspicion by those working in the building. If a seller has not told his employees he is selling the building - you don't want them to find out from someone walking by their office.

The sale is a part of a bigger sale. Frequently, the sale of your commercial real estate is coupled with a sale of the business that occupies the premises. Because two sales are involved, the commercial real estate sale may pale in importance to the business sale. In such an instance, a marketing process for the building is jettisoned in favor of the business deal.

Seller is unsophisticated. Rarely is this the case. With access to on line research and countless commercial real estate professionals at the ready, most owners of commercial real estate are quite knowledgeable about the market and property values. However, in limited circumstances - and out of convenience - a seller may react emotionally to an unsolicited offer and accept it without testing the market.

The unsolicited price offered cannot be bettered in the market. I've seen this happen recently. Precautions must be made, however. You must be crystal clear with a seller - based upon what we are seeing in the market - recent sales, current avails, investor motivation, etc. - what is before you is as good as a marketing effort will produce - and without all of the appurtenant disruption a marketing process will create.

Friday, September 8, 2017

4 Ways to WIN a Commercial Real Estate Deal

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The commercial real estate market in Southern California is as competitive as I've ever seen it. And, by the way, email didn't exist when I started in the business - so, that's a long time.

In a classic economic sense, an imbalance exists. We have too many buyers chasing too few availabilities - akin to a giant game of musical chairs - someone will be left standing when the music stops.

So, how should you position yourself and your company to win when the right opportunity comes along? Allow me to discuss a few ways.

Financial qualification. Your bank will gladly loan you money to buy a building - they've told you so. But, have you allowed your lender to peruse your current financial statements and tax returns? You are best served securing a pre-qualification letter. But, not just any pre-qual letter - one that included a complete review of your current financial snapshot.

Remove any contingencies. Do you have a property to sell before you buy? If so, your deal may be overlooked for another that is ready to go. Does the occupancy for which you plan to use the building conform to the zoning? If not, plan on 6-9 months of city approvals - once again, you lose because a compatible use will avoid the lengthy approval process. Is the source of your down payment liquid? Are the members of your team in place - legal, architect, contractor, CPA? Any unchecked box here could result in your loss.

React swiftly. In order to quickly mobilize, you must have a ready source of new and off-market availabilites. Our residential counterparts have made on-line searches easy for you - we commercial agents have not. Therefore, you will need to team with a commercial real estate professional to search. Sure, you can check Loopnet, but the reliability of the data is suspect. Regardless, your professional should create alerts for new buildings which match your requirement. When you get the call - regardless how late on a Friday - REACT!

Don't TELL your story, SELL your story. Recently, we competed against four other offers for a building. We believed our buyer could pay the highest price and perform. We encouraged our buyer to offer at the asking price with a very quick close and a limited amount of due diligence time - our buyer complied. Now the task was to prove our buyer's credibility. We did so in person vs an email that could get overlooked - in effect, we sold our story. Our strategy worked and our buyer won the deal.

Thursday, September 7, 2017

How to Finance Commercial Real Estate THURSDAY Thoughts for Commercial...

Today on THURSDAY Thoughts for Commercial Real Estate, I discuss the ways a typical buyer finances a commercial real estate purchase. I discuss this and much more on this edition on THURSDAY Thoughts.

How to Finance Commercial Real Estate THURSDAY Thoughts for Commercial...

Today on THURSDAY Thoughts for Commercial Real Estate, I discuss the ways a typical buyer finances a commercial real estate purchase. I discuss this and much more on this edition on THURSDAY Thoughts.

Friday, September 1, 2017

A Commercial Real Estate Deal is Really 3 Negotiations

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As if one negotiation is not enough, we in the commercial real estate profession insist upon three separate negotiations for every deal. Why you may ask? Let me spend a moment and give you my take.

Negotiation One - The proposal. Once upon a time and not too long ago, a buyer's expression of interest to buy a property from a seller took the form of a binding offer - the deposit receipt and escrow instructions. Outlined were the price, escrow period, loan amounts, representations and warranties requested of the seller, and a period for due diligence and closing. The buyer signed the offer, deposited a good faith deposit with the broker and hoped his representative could convince the seller to make a deal under acceptable terms and conditions. Created, were all sorts of problems with this structure. Few buyers took the time to review the document they were signing. Misunderstandings occurred. Buyers changed their minds. Sellers decided not to sell. The impact of the sale weren't properly vetted. Buyers made commitments to move which backfired when the deals were not closed. Litigation ensued. Quite a mess. What evolved was the non binding letter of intent. Most negotiations now originate with such a letter.

Negotiation Two - The purchase and sale agreement. Because the first negotiation is via a non-binding letter, the agreed upon terms and conditions - such as the price -  must be placed in a document that will commit the parties to accomplish certain things - such as opening an escrow, notarizing grant deeds, delivering clear title to the property, representing the seller is authorized to sell, etc. Ample time is given to the buyer and seller to comment on the specific language of the agreement and request changes - another negotiation. Once the binding purchase and sale agreement is signed by the buyer and seller, a period of buyer due diligence commences. During this period of time, the buyer arranges financing, checks out the physical aspects of the building - roof, fire suppression system, plumbing, electrical, heating and air conditioning, reviews the title to make sure no matters are looming, checks out the condition of the soil for potential environmental contamination, and visits with the city to insure the buyer's proposed use for the building is allowed - quite a bit to accomplish in a 30-45 day period.

Negotiation Three - The end of due diligence. Presumably, the buyer has completed all of their inspections, the lender has approved the loan, title is clean and ready to be transferred and the deal can safely move toward closing - ooops, not so fast. Invariably, something is uncovered in the due diligence period that surprises the buyer and causes another round of negotiations. These surprises can be as simple as a roof repair and as complex as an environmental clean-up. Sometimes, the issues can be fixed with a dollar credit from the seller to the buyer. However, sometimes the problems are more systemic and can result in a cancelled transaction.