Things we Took for Granted - Pre-Virus

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Plying my commercial real estate craft remotely certainly has its advantages! My commute is now fifteen seconds - even when I encounter a traffic jam of our grandkid’s play things. Never is there a line at the coffee maker. I’ve three potties from which to choose - with only two residents. Food is always available - which can lead to the spread of Dunlap - as in my belly dun lapped over my belt.

But with this extra time on my hands - I’ve reflected upon things we took for granted pre-Covid 19. Indulge me, while I share a few.

Personal interaction. I am very social! My wife and kids - and now grandkids - understand it takes Dad/Papa fifteen minutes to leave any social gathering - and they plan accordingly. Missed are the jaunts to Disneyland, Thursday night movies, church, impromptu gatherings, and chance encounters with friends and neighbors while out and about. The “dial tone” of our days has disappeared.

Face-to-face meetings. I must say, I’m a big fan of ZOOM and employ it frequently. Nothing, however, replaces a handshake, walk to a boardroom, “would you like coffee or water?” and the ensuing exchange. My goal - pre-Covid - was at least three of these prospect meetings weekly. It’s a bit trickier to gain traction with an owner only to ask - “mind if we jump on a ZOOM?”

Networking events. SIOR, NAIOP, IREM, and countless smaller commercial real estate related gatherings stopped dead in mid-March. Ironically, my pre-virus schedule was flooded with such events - maybe triple normal. Attended in the first 75 days of 2020 were more than a typical full year. Looking back - I’m glad I did. Who knows when these will resume.

The BUZZ of our office. Phones ringing, mourning a cratered deal, celebrating a closing, package assembly for a big tour, award lunches with a full conference room, rehearsing for a major pitch, staff drama - have nothing on The Office! Steve Carell as Michael Scott would be envious.

Transactional flow. Deals! Sure. There is some activity - and I’m grateful to those clients who are braving the new normal to transact. But our trajectory pre-lockdown was nothing short of an Apollo moonshot. Houston - we have a problem! I knew the music would stop - actually wrote about it here. Warned against was that Black Swan event that would rankle our status quo. Welcome to 2020 and the microscopic economic assassin.

Open houses. These were just fun! Gather a group of middle-aged professionals in a newly constructed project, mix in a food truck and some cash giveaways and voila! Let the games begin. Although less frequent than the go-go days of the construction fueled 1990’s - open houses provided a respite from the grind and allowed us to greet our fellow warriors on neutral ground. Logoed masks will soon replace cash as giveaways - when open houses return.

Building tours without restriction. Yesterday, I requested a tour of an under construction project in an inland city. The response I received was akin to a PPP loan application. Wow! Hard hats, masks, reflective vests, gloves, 24 hour notice, only two people at a time on site, closed toed shoes, next of kin, date of birth, any prior arrests - you get the idea. Gone are the days where you could stroll by the super’s trailer and take a look.

HAIRCUTS! I’m envious our governor is so neatly coiffed. I’ll leave it there. 

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

How Will Covid-19 Affect Commercial Real Estate Values?

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As California’s stay at home order is slowly lifted, our economic activity - placed into a self induced coma - is also emerging from the ether. The most common question we hear these days is what is my building worth? As recently mentioned in this space - no one really knows. For and investor - value depends upon the capitalized net income of rents. An occupant? The price of utility with which an occupant’s operation relies. In the former - how will rents be impacted and at what return percentage will the market place settle? Pre-Covid found yield requirements in the 4.5-5% range. Now. Anybody’s guess. In the latter? Will business failures cause a greater supply of functional locations from which to transact.

Today, I will take a deeper dive - anecdotally - into where commercial real estate values may be headed. Spoiler alert. In this columnist’s opinion - don’t look up.

Investors - capitalized net income. Those whom rely upon rents generated from commercial real estate approach value differently than residents of their business locations.

Let’s use this simple example. If annual net rents are $12.00 and the market return for this income is 5% - the resulting price per square foot is $240 - $12.00 divided by .05. As you can gather - a change in rents can skew the net income. If returns are no longer 5% but hop to 6.5% - a decline in worth results. Again - annual net rents dropping to $10.00 with a 6.5% return yields a capitalized value of $153 per square foot. Wow! That is a precipitous fall. In reality - the analysis is a bit more complex as things such as length of the lease, credit of the tenant, and sustainability of the income are considered.

But, simply - a decline in rent or an increase in the market return spells doom for the worth of commercial real estate.

A couple of weeks ago, an investor friend of mine shared with me a conversation he had with a tenant. Approaching a lease renewal pre-virus - he and his occupant were discussing a rate of $1.10 per square foot or $13.20 per year. Unable to reach agreement - they hit pause as the virus overtook our society. Settled at $.90 were their negotiations. Simply waiting 45 days saved the tenant $.20 per square foot. As the investor will not be selling - thus the decline in value will not be realized - he will nonetheless receive significantly less income. This illustrates how rents may adjust in the weeks ahead. Additionally, if a vacancy is marketed and takers are few - an owner might sharpen his pencil to lease the space. Yep! Another data point for rent reduction. As these new COMPS filter through our industry - rates are reset.

Owner occupants - utility. Most who own and occupy commercial real estate with their business don’t speak the foreign language of capitalized net income. You see, the value they place upon commercial real estate relies more on their use of the location and the corresponding payment for that utility. Consequently, if a cheap beater of a building has crappy loading, insufficient power, or is miles from the freeway - very few suitors will surface - making it worthless to most occupants. Making, shipping, or servicing goods carries a profit structure independent of the worth of the operation’s home. Sure. Real estate has its place in the cost structure of said products - but ultimately whether that expense is a rent check to a landlord or debt service to a lender is immaterial. The ordinary business expense is the same. I know, I know - there are infinite tax benefits to paying yourself rent vs a landlord but that’s a conversation for another column. Typically, if space is needed, the local inventory of available buildings will be scanned, toured, and analyzed. Culled will be those not fitting the amenity requirements. Considered? What rent will be paid if leased vs what will a mortgage payment harbor. Simply, value for an occupant is largely determined by the number of avails that correspond with the needs. More - fewer takers - cheaper. Fewer - more competition and presumably more expensive. Corresponding interest rates from which a location may be finance? Sure! Low rates can bridge the divide between the price to rent vs own. But, ultimately - the location MUST have the goodies.

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

SBA to the RESCUE!

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Owners of commercial real estate either occupy the building they own or rely upon a third party - a tenant - to pay rent. In the former - owners are known as owner occupants - the latter as investor owners. Occupants of commercial real estate - are in some cases - able to finance their purchases through loans originated or guaranteed through the Small Business Administration. Generally SBA loans come in two flavors - 7A or 504. A 7A loan is an SBA guaranteed first trust deed of typically 90% of the purchase. 504 loans require two loans - one from a bank of 50% and one a government debenture of 40%.

With that explanation as a backdrop - great news! Loan relief is available as outlined below.

The SBA will be making the first 6 months of payments on all 7a loans funded prior to 9/27/20 (for both purchases and refinances). 

The SBA will also automatically pay the principal, interest, and fees of new 7(a), 504, and microloans issued prior to September 27, 2020.

https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/sba-debt-relief

In some cases SBA Loans can offer:

Ø  Appraisal Rebates before MAY 15

Ø  45 Day Interest Rate Locks at SBA 7a loan approval

Ø  25 Year Loan Programs Sub 3.50% Rates (As of April 22,2020)

Ø  12 month Lease Back eligible for 10% down SBA Loans

Your best source for a Small Business Administration 7A loan would be through your existing business bank. However, I would caution you to confirm that your business bank is in fact an SBA preferred lender. This preferred lender status enables your bank to approve your 7A loan in-house without the need of the package being reviewed and approved by the small business administration. Once again - this is a great way to finance 90% of your purchase at fixed interest rates in some cases.

If your choice is to originate a 504 debenture loan - you will need to enlist the services of a Certified Development Company - a CDC. As mentioned - the 504 loan is actually two loans - one from a bank and one from the government. The CDC can review your package, grant approval, and then put you in touch with a capable bank who can loan 50% of the purchase price. In order to qualify for the payment forgiveness program - your loan - including the SBA debenture, must be completely funded by September 27, 2020

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

What’s Next for Commercial Real Estate?

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As I sit here remotely - plucking away on my iPad - my thoughts drift toward what might be next for owners and occupants of commercial real estate - specifically, what might the “new normal” resemble. Can we take clues from past economic downturns? Certainly.

The dip in the early 1990s was initiated by a skirmish in the Middle East followed by a broad failure of the Savings and Loan industry - remember them? What followed was the removal of an entire lending source. During the late eighties - many occupants of commercial real estate financed their building purchases through a combination of an S & L first loan coupled with a seller second. Achieved was a 90% financing structure. Where the industry went awry centered around riskier ventures with S & L proprietors. A bucket called the RTC - resolution trust corporation - was filled with the tainted loans and wholesale liquidation of S & L assets began. Small Business Administration financing became the defacto source of acquisition money for small owner operators. SBA loans are still the “go-to” program today.

9.11.2001 reigned terror upon our society. Never had the United States of America weathered an invasion upon its mainland. 2977 souls perished in attacks upon the World Trade Center, the Pentagon and a foiled attempt on the White House. Our world came to a jolting halt as the dial tone of every day life disappeared. To protect us from a future barrage - a new government agency - Homeland Security - became a thing and boarding a commercial jetliner, attending a concert, enjoying an amusement park, or entering a federal building became a dance of disrobing and disarming.

Overcoming the carnage of the 2008 financial meltdown required all of us to pay off debt, stockpile cash, and live within our means - for a time. Banks were forced to consolidate, shore up balance sheets, and restore cash reserves. Lending policies became much stricter - borrowers had to prove they were credit worthy - imagine that!

The Covid 19 pandemic is so much different than previous resets. A healthy economy was placed into a self induced coma akin to a virus patient. Atrophy has certainly set in and none of know how the business climate will respond. Suffice it to say - it will be different. No kidding! What follows are my predictions on what may be coming.

Working Remotely. Yes it’s challenging to have a call with a screaming little one participating. Yes office culture is cratered. But guess what? We are all learning to be a bit more mindful and selective in the meetings we schedule and attend. Plus no time is wasted in freeway traffic. My bet is we will occupy fewer square feet of office space and more of our work will be from home.

Mass testing. For sure! This may be a pre-requisite to our governor loosening the reigns and allowing businesses to open. Look for a chip or sticker affixed to your driver’s license - much like a donor card - that proclaims your status.

Covid-19 free certifications. Without a doubt. There was even an Irvine, California startup willing to provide assurance a workplace was Covid free by conducting serology and/or PCR testing. I, for one, thought it was brilliant. For $200 per employee - the testing was to be conducted and workplaces given a clean bill. Unfortunately, they were “right to soon” and forced to shutter.

Distancing. Social distancing is probably with us until some sort of vaccine is discovered, tested, and readily available. What this could mean to collaborative working, bullpens, or other close contact office space arrangements is in question. Suffice it to say groups like We-Work and other co-working operations are going to feel the pinch. But what about manufacturing operations that employee dozens of people? Will the new normal include spacing among those plant workers? Will there be a requirement to have a certain amount of space between machinery, racking, raw materials, and finished goods,? My guess is yes. I also believe we will see a dramatic reshoring of some of our manufacturing of key components - used in autos, medical equipment, and injection molding.

Temperature testing. Already being done in China! Imagine not being allowed into a concert, baseball game, or amusement park without first passing a temperature test. I don’t believe this is that far-fetched. Rumor has it that some of the major amusement parks locally are already considering such a program.

GPS tracking of infected contact. If you doubt big brother. Doubt no more.

Facility disinfecting. Similar to a food manufacturing operation or a restaurant - I foresee offices, retail establishments, and manufacturing operations, requiring daily or numerous times daily a complete sanitization of the buildings, surfaces, and common areas.

Masks, gloves, and hand sanitizing. A given!

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

Five Weeks Down - How Many to Go? AKA What I’ve Learned from Stay at Home Mandate

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Commercial Real Estate is a contact sport - requiring face to face, arm in arm, hand to hand interaction - or does it? On March the 16th in the year of our Lord 2020 - we made the decision to allow one of our employees to telecommute. She was in the high risk category for Covid infection. The next day - we sent our staff of five hence to work remotely. All agents were encouraged to engage off-site as well. This was three days before our governor’s executive shelter in place order took effect on March 20th.

Full disclosure. I prefer to toll my craft mobily and have worked since 2014 to replace any legacy desktop program in favor of those I can access from anywhere - driver’s seat of my car, coffee shop, front porch of my house, client’s lobby. Those mobile platforms include CoStar Go, Reonomy, ClientLook, Dropbox, Zoom, and Mailchimp.

However - woven into the fabric of my vocation is a steady stream of client meetings, prospect discovery discussions, building tours, group conferences, networking events, lunches, coffees, and the like. With a full stop on any physical contact - lest we endanger the weaker among us - what follows is what I’ve learned from sheltering in place.

Meetings can still occur. How many people - just four short weeks ago - had never heard of ZOOM - let alone used it. I’ve been a ZOOM user for several years but I’ve become quite proficient in requesting, scheduling, hosting, and recording individual and group meetings. Maybe not quite as effective as in person - but very close.

Building tours are challenging. Probably the biggest obstacle to the stay at home order has been touring availabilities. A combination of FaceTime, virtual tours, and yes - ZOOM are the work arounds.

Working remotely is more efficient. Roll out and get to work - simple! No driving allowance or delays. Just pure work time.

I’m spending less on dry cleaning. Who cares if you wear the same shirt twice or more. No starch please. I’ve not shimmied into a suit in weeks. I’m a bit nervous about the Covid-19 - not the virus but the pounds.

I’ve not sat in traffic for weeks. Brilliant! Plus I’ve not been late. In the absence of driving to appointments everyday - I’ve found two or three hours not claimed before.

Deals are happening. Especially essential ones - tax deferred exchanges, lease renewals, and marketing vacancies.

Folks are talking about “what’s next”. What’s next will be the subject of next week’s column.

Stay well, dear readers. That light you see is in fact the end of a tunnel - not an oncoming train.

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