Sick from the sudden evaporation of wealth recently experienced in the stock markets? Some investors have sworn off equity and bonds investments, preferring to invest in “real, tangible investments” such as gold and, oddly enough, real estate. The logic is that when a stock’s value goes to zero, what's left? Only the paper the stock certificate is printed on or, nothing. If real estate markets suffer a severe shock, an investor will still be able, in most instances, to collect rent from the tenants in that handsome pile of bricks and mortar the investor owns. Yes, there’s something comforting about being able to drive by a neat, fully leased, 4-unit apartment building while so-called real estate professionals are claiming that cap rates have risen, the secondary markets for CMBS pools is dead and loan-to-value ratios have decreased to 60%.
If you would like to join the millions of ordinary Americans who successfully own and manage investment properties, then this blog entry is for you. Consider the following words of advice:
1. Pick your team BEFORE you pick your investment - Don't even think about making an investment in real estate until you have a team identified. At a minimum, the team should include: (1) an experienced real estate broker, (2) an accountant, (3) an experienced real estate lawyer, (4) your banker, (5) a general contractor, (6) an electrician, (7) a plumber/mechanical contractor, (8) a roofer, (9) a carpenter, (10) a painter/dry wall specialist, (11) a handyman/lawn service, and (12) a property manager.
2. Don't expect immediate cash flow - There is a misperception held by many novices or would be real estate investors that magically after closing, cash will start flowing. Typically, this is not true. Typically, investment real estate is priced and should be purchased such that for the first few months, the cash flow is nominal as miscellaneous closing fees are recovered, deferred maintenance is corrected, neglected capital improvements are completed and vacancies are filled. I usually counsel investors not to expect positive cash flow until at least 12 months after closing.
3. Don't be cheap - Err on the side of fixing problems correctly the first time, by experienced, licensed and insured tradesmen who will stand by their work.
4. Cash is king - Don't jump in until you have enough cash saved to cover (a) the down payment, (b) all closing costs, (c) unexpected repairs during the first few months of ownership, and (d) cash shortfalls due to unexpected vacancies during the first 12 – 24 months of ownership.
5. Easy does it - Don't jump in trying to make a big splash. Invest carefully, incrementally and thoughtfully, building your cash flow, experience and comfort levels with your portfolio and your team. Don't rush. Remember, "Flip This House" is a cable television show, not a prudent real estate investment strategy.
6. Think synergy - Focus your investments by (a) asset class (retail, multi-family, office or warehouse); or (b) neighborhood. The objective is to develop expertise and experience that will help protect your investment. Focusing on one asset class brings you expertise in types of tenants, construction costs, rents, cap rates and income yields. Focusing on a particular neighborhood can bring a thorough awareness of community dynamics that can potentially impact your investment - good or bad.
Stay tuned! I will offer more advice for Novice Real Estate Investors in future blogs.
Tuesday, April 14, 2009
Friday, April 10, 2009
It's A Tenant's Real Estate Market
Seldom are businesses rewarded for procrastination. However, if your business leases office, industrial or retail space and your business has been hesitant about renewing its lease, relocating, or opening a new location, listen up! Today you have been put on notice that now is the time to begin taking action.
Thanks to what some observers claim are the worst economic conditions since the great depression, most primary and secondary real estate markets across the nation have softened to the point where tenants now have leverage over landlords. And they will continue to soften over the next twelve months, I predict, until the recession abates. We are currently in a “Tenant’s Real Estate Market.” What does this mean for tenants? The attributes of a Tenant’s Market include: (1) abundant choices; (2) discounted rents to previous asking rates; (3) increasing concessions such as free rent, free or reduced parking, and larger tenant construction budgets; (4) flexible terms and conditions in the lease document; and (5) respect from landlords, even for the smaller tenants.
Here’s a quick example. My firm was recently retained as a tenant representative to help a small law firm relocate its offices. The tenant had selected its then current location years earlier during a strong market when landlords enjoyed leverage over tenants. The result was this small firm could only afford to lease office space in a tertiary office location, in a Class C building. Upon being retained, we searched within that tertiary market, but were unimpressed.
My client then asked me to search a prime office market that she had always found desirable but previously could not afford. We were pleasantly surprised by the abundance of choices – both listed in CoStar, a national commercial real estate listing service, and unlisted but available due to various landlords knowing that certain tenants were struggling. The final deal we struck was for great space in a Class B building, well located within this prime office submarket. The negotiated rent was approximately $2.00 per square foot per annum below recent asking rates, including a turn-key build-out and several months of free rent.
The financial benefits dropped directly to the bottom line of this law firm. But as important, this firm was able to improve its image, thereby aiding its ability to attract clients and employees. This move in the commercial real estate industry in known as a “Flight to Quality,” whereby a tenant purchases higher quality space in a better location at no appreciable increase in rent.
In a later post, we will tell the other side of this story – the landlord’s side. Stay tuned.
Thanks to what some observers claim are the worst economic conditions since the great depression, most primary and secondary real estate markets across the nation have softened to the point where tenants now have leverage over landlords. And they will continue to soften over the next twelve months, I predict, until the recession abates. We are currently in a “Tenant’s Real Estate Market.” What does this mean for tenants? The attributes of a Tenant’s Market include: (1) abundant choices; (2) discounted rents to previous asking rates; (3) increasing concessions such as free rent, free or reduced parking, and larger tenant construction budgets; (4) flexible terms and conditions in the lease document; and (5) respect from landlords, even for the smaller tenants.
Here’s a quick example. My firm was recently retained as a tenant representative to help a small law firm relocate its offices. The tenant had selected its then current location years earlier during a strong market when landlords enjoyed leverage over tenants. The result was this small firm could only afford to lease office space in a tertiary office location, in a Class C building. Upon being retained, we searched within that tertiary market, but were unimpressed.
My client then asked me to search a prime office market that she had always found desirable but previously could not afford. We were pleasantly surprised by the abundance of choices – both listed in CoStar, a national commercial real estate listing service, and unlisted but available due to various landlords knowing that certain tenants were struggling. The final deal we struck was for great space in a Class B building, well located within this prime office submarket. The negotiated rent was approximately $2.00 per square foot per annum below recent asking rates, including a turn-key build-out and several months of free rent.
The financial benefits dropped directly to the bottom line of this law firm. But as important, this firm was able to improve its image, thereby aiding its ability to attract clients and employees. This move in the commercial real estate industry in known as a “Flight to Quality,” whereby a tenant purchases higher quality space in a better location at no appreciable increase in rent.
In a later post, we will tell the other side of this story – the landlord’s side. Stay tuned.
Sunday, April 5, 2009
Dead Men Walking
Every quarter, the FDIC publishes a "State Profile," which summarizes economic indicators, banking trends and a banking profile for the banks under the jurisdiction of the FDIC in each market. The Q4-2008 State Profile issued for the Maryland and Washington, D.C. markets reflects the doubling of past-due and non-accrual loans as a percent of the total outstanding loans, increasing from 1.81% in Q4-2007 to 3.87% in Q4-2008. That's an increase of $629.5 million in bad loans over and above the $611.3 million in bad loans at Q4-2007.
So who holds these loans? What is the underlying security? Why haven't they been sold?
The answer to these questions will not be found by the listening to Treasury Secretary Timothy Geitner who is busy performing stress tests while the patients rapidly die. Let's 'fess up. A lot of the American banking system is insolvent. New FASB rules on "mark to market," while providing a bump to the stock markets, won't suddenly bring current the $1.24 billion in bad loans in the Baltimore-Washington, D.C. region as of Q4-2008.
So what to do?
Sheila C. Bair, Chairman, FDIC Board of Directors, has the proper approach. Under her leadership, the FDIC has picked up the pace of closing failed banks. The FDIC has closed 21 banks year-to-date, versus 25 in all of 2008 and 3 in 2007. Someone should conduct a pool as to how many will be put down by year's end. I am guessing 200. Only when these insolvent are closed can the banking system return to normal. In a capitalist, democratic society such as ours, operating under fair rules, profitable enterprises live long and prosper, while failed enterprises close their doors and have their remaining assets, people and inventory scattered to the winds.
There is an abundance of equity capital standing on the sidelines today looking to acquire the real estate securing many of those non-performing loans. Let's put that equity to work! Every day this process is delayed is another day that the employees in those failed banks aren't working in another profession. Its another day that the depositors of those banks aren't sleeping soundly knowing that there bank is solvent. Its another day that the bankers who created the mess are collecting a paycheck trying to perfect a cover-up. And another day that a failed bank is sitting on the sidelines quaking at the thought of being outed as a dead man walking.
So who holds these loans? What is the underlying security? Why haven't they been sold?
The answer to these questions will not be found by the listening to Treasury Secretary Timothy Geitner who is busy performing stress tests while the patients rapidly die. Let's 'fess up. A lot of the American banking system is insolvent. New FASB rules on "mark to market," while providing a bump to the stock markets, won't suddenly bring current the $1.24 billion in bad loans in the Baltimore-Washington, D.C. region as of Q4-2008.
So what to do?
Sheila C. Bair, Chairman, FDIC Board of Directors, has the proper approach. Under her leadership, the FDIC has picked up the pace of closing failed banks. The FDIC has closed 21 banks year-to-date, versus 25 in all of 2008 and 3 in 2007. Someone should conduct a pool as to how many will be put down by year's end. I am guessing 200. Only when these insolvent are closed can the banking system return to normal. In a capitalist, democratic society such as ours, operating under fair rules, profitable enterprises live long and prosper, while failed enterprises close their doors and have their remaining assets, people and inventory scattered to the winds.
There is an abundance of equity capital standing on the sidelines today looking to acquire the real estate securing many of those non-performing loans. Let's put that equity to work! Every day this process is delayed is another day that the employees in those failed banks aren't working in another profession. Its another day that the depositors of those banks aren't sleeping soundly knowing that there bank is solvent. Its another day that the bankers who created the mess are collecting a paycheck trying to perfect a cover-up. And another day that a failed bank is sitting on the sidelines quaking at the thought of being outed as a dead man walking.
Hello Blogosphere!
Hello blogosphere! This is my very first post to my very first blog. While late to the party, I hope that I can contribute to the dialog about commercial real estate during these most distressing times.
I am a commercial real estate broker who has been in the commercial real estate industry since 1986. But really, my experience is much longer. That's if I receive credit for performing maintenance and property management services in my mother's portfolio of five multi-family buildings in Baltimore City beginning in 1967. Over 42 years! And I have loved every minute of those years, though some of the experiences were not so pleasant in hindsight.
So that readers can understand my perspective, I would like to share a little about my path to this blog. I grew up in the Windsor Hills neighborhood of northwest Baltimore City, one of five children. I attended public schools, ultimately earning a high school diploma from Baltimore Polytechnic Institute, A-Course, Engineering Option. Back then, I was convinced that my future lay in designing and racing automobiles. Upon entering the University of Pennsylvania, I majored in Bioengineering with a Mechanical Engineering concentration, receiving a BSE in 1981. By the time I graduated, the country was racked by runaway inflation, US hostages in Iran and 18% interest rates for car and home loans. I secured a job at Westinghouse Defense near BWI Airport as Reagan's defense buildup had resulted in great salaries for new engineers.
As the years clicked past, I became very interested in business, but couldn't satisfy this need at Westinghouse while working on classified projects. From my low level, I seldom knew the ultimate end-user, or received feedback on cost, performance, and quality. Those were critical components that every businessman ought to know. In reality, Westinghouse managers knew those facts but my clearance was not high enough and I didn't have a "need to know."
Oh, well.
I left Westinghouse after five years to earn an MBA in Finance with a concentration in Real Estate from The Wharton School at the University of Pennsylvania. My experiences at Wharton opened my eyes to a whole new world. The flow of international capital, risk adjusted returns, arbitrage! Amazing!
Next stop, USF&G Insurance where I worked my way up to running the corporate real estate department after five years. Again, my experiences were eye opening. This time in understanding national real estate submarkets, construction costs, commercial property management, asset management, and the direct impact of real estate - both used and held for investment - on the bottom line of a corporation. I also learned a thing or two about downsizing a large corporation during a recession and while in a dire financial crisis.
Next stop was a small regional brokerage shop in Baltimore for two years and then on to Cushman & Wakefield, on of the world's largest international commercial real estate brokerages. During my seven years in the Tysons Corner (McLean) Virginia office of Cushman & Wakefield, I learned every aspect of large, complex, commercial transactions. You could say I learned how to be a broker and a businessman.
Finally, in 2003 while in the middle of the dot com recession, I founded Kington Commercial to focus on commercial real estate within the region. My goal was to offer to a select group of clients - both large and small - the same quality of commercial real estate counsel demanded and enjoyed by Fortune 500 firms. That has proven to be a winning strategy.
My goal with this blog is offer thoughtful commentary to the blog's followers on current issues in Commercial Real Estate. I hope that you find this blog both interesting and informative.
I am a commercial real estate broker who has been in the commercial real estate industry since 1986. But really, my experience is much longer. That's if I receive credit for performing maintenance and property management services in my mother's portfolio of five multi-family buildings in Baltimore City beginning in 1967. Over 42 years! And I have loved every minute of those years, though some of the experiences were not so pleasant in hindsight.
So that readers can understand my perspective, I would like to share a little about my path to this blog. I grew up in the Windsor Hills neighborhood of northwest Baltimore City, one of five children. I attended public schools, ultimately earning a high school diploma from Baltimore Polytechnic Institute, A-Course, Engineering Option. Back then, I was convinced that my future lay in designing and racing automobiles. Upon entering the University of Pennsylvania, I majored in Bioengineering with a Mechanical Engineering concentration, receiving a BSE in 1981. By the time I graduated, the country was racked by runaway inflation, US hostages in Iran and 18% interest rates for car and home loans. I secured a job at Westinghouse Defense near BWI Airport as Reagan's defense buildup had resulted in great salaries for new engineers.
As the years clicked past, I became very interested in business, but couldn't satisfy this need at Westinghouse while working on classified projects. From my low level, I seldom knew the ultimate end-user, or received feedback on cost, performance, and quality. Those were critical components that every businessman ought to know. In reality, Westinghouse managers knew those facts but my clearance was not high enough and I didn't have a "need to know."
Oh, well.
I left Westinghouse after five years to earn an MBA in Finance with a concentration in Real Estate from The Wharton School at the University of Pennsylvania. My experiences at Wharton opened my eyes to a whole new world. The flow of international capital, risk adjusted returns, arbitrage! Amazing!
Next stop, USF&G Insurance where I worked my way up to running the corporate real estate department after five years. Again, my experiences were eye opening. This time in understanding national real estate submarkets, construction costs, commercial property management, asset management, and the direct impact of real estate - both used and held for investment - on the bottom line of a corporation. I also learned a thing or two about downsizing a large corporation during a recession and while in a dire financial crisis.
Next stop was a small regional brokerage shop in Baltimore for two years and then on to Cushman & Wakefield, on of the world's largest international commercial real estate brokerages. During my seven years in the Tysons Corner (McLean) Virginia office of Cushman & Wakefield, I learned every aspect of large, complex, commercial transactions. You could say I learned how to be a broker and a businessman.
Finally, in 2003 while in the middle of the dot com recession, I founded Kington Commercial to focus on commercial real estate within the region. My goal was to offer to a select group of clients - both large and small - the same quality of commercial real estate counsel demanded and enjoyed by Fortune 500 firms. That has proven to be a winning strategy.
My goal with this blog is offer thoughtful commentary to the blog's followers on current issues in Commercial Real Estate. I hope that you find this blog both interesting and informative.
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