Thriving Not Surviving

I don’t know if your observations have been the same as mine, but I’ve regrettably witnessed broker after broker giving in to this very difficult commercial real estate market. I have watched them adopt a bunker mentality and almost unconsciously slip into survival mode. Many brokers have come to feel comfort in the poor market because it makes them feel better about their poor performance. It’s almost as if it’s a foregone conclusion that this market downturn is going to be protracted, and that the only way to survive is to do just that – survive. My question is this – when has settling for survival ever been a solid business practice? When has status quo ever been the objective? And what kind of message does an advisor send to their clients if his or her mentality is to break even? I want you, the investor, the property owner to know that you do not have to settle for a commercial real estate practitioner with this frame of mind. Don’t confuse surviving with thriving. There are professionals whose goal is to thrive…and they are succeeding.

I will start by saying that I do not deny that the commercial real estate markets are and have been tough. We have been drudging through these market conditions for over two years. It’s only a natural reaction to want to cut back and try to wait out the storm. Needless to say, some people need to cut back. But the issue is long-term. Surviving today doesn’t ensure your prosperity tomorrow. Even though we are in a tough market, practitioners need to be strategic with their capital, their operating strategy, and their clients. There must be a plan for what happens next – what happens AFTER the market starts to recover. Many commercial real estate brokers are doing this by having a game plan, and by knowing which markets will emerge from the ashes first, which property types will be the most profitable, and which banks are going to be there ready to lend. These professionals are in stark contrast to those who are having low sales volume now and are simply calling it quits.

The point of discussing this is for the benefit of those seeking to invest in commercial real estate. Investors need to know that there are professionals who have the knowledge of where to invest, what to invest in, and where to get funding. If you come across a broker who advises you to “wait for the bottom” by sitting on the sidelines and holding on to your capital…GET A NEW BROKER. There are properties all across the country right now that if acquired properly, will produce significant returns. Take, for example, a recent article in CIRE Magazine. They are listing 58 cities that have promising returns in the next 3 YEARS. Opportunities are going to be missed if one waits for a complete rebound before returning to the market. Moreover, those who wait are going to be at a distinct competitive disadvantage to those who invested during the down market.

One question that often comes up when investing during a down market is, “where can I receive funding?” This is a legitimate concern since many, if not most, of the national banks have no intention of being free and easy with their lending practices right now. That said, some of the national lenders are starting to lend again. And where there is a void in funding by the major lenders, regional and community banks are beginning to fill in the gap. The smaller institutions are still able to lend on larger deals while managing risk with participations and syndicated loans.

Syndicated loans are not your only bet either. Many are finding funding in places other than banks. Government sponsored enterprises, insurance companies, REITS, and private lenders are all stepping up to fill the voids that national banks have left. These lenders are also here to stay. Once the market recovers, and many predict that commercial real estate sales will grow in the near future, these lenders will still be here, ready to provide funding.

So getting into the game and securing financing now is more important than ever. Once the market is looking like it will rebound, investors are going to come out of the woodworks, trying to secure as much funding as possible. Lenders are only going to be more cautious moving forward and at least in the near term will most likely not lend as much as they have in the past. If an investor starts now and shows that they can be successful in this market, they will be miles ahead of those who are just starting to get back into things once the market rebounds.

What does all of this mean to you? If you are an investor, it means you must take the time to find the right commercial real estate advisor who is market savvy and has demonstrated expertise is his or her market and asset class. The thriving investors today are the ones who have found thriving brokers. The brokers who are creative, strategically minded, informed, and forward moving despite the market conditions. Property owners who are need of advice will also benefit from the services of a professional advisor. When the time comes to buy, sell, restructure, refinance, or move locations, a qualified advisor is going to make the process go as smooth as possible.

Should You Buy Commercial Real Estate Now?

Should I or shouldn’t I?  That is the conundrum facing business owners, investors and entrepreneurs today.  Should I, or shouldn’t I, acquire (or build) a new facility for my business?  Should I, or shouldn’t I, commit to a lease on the new or additional space our business needs?  Should I, or shouldn’t I, aggressively take advantage of the recent decline in commercial property values and the spike in acquisition CAP (or return) rates?  Should I, or shouldn’t I, rotate some of my investment or retirement funds out of the stock market and into investment real estate?  Even the most astute investors and business owners are perplexed about the best strategy to navigate the volatile commercial real estate (CRE) market during these challenging economic times. 

An uncertain economic outlook and the current disruption in the financial and credit markets may seem to indicate that it is a good time to stand pat until the economic and financial markets have stabilized and the CRE market has bottomed.  However, it is this type of cautious behavior that keeps downward pressure on markets, creates no value for investors and owners and, most importantly blocks your ability to create wealth.  You should focus on whether or not value can be added or created in your investment portfolio or business by making an investment in a commercial property.  If the market happens to move in your favor that is a plus, but you should not rely on an upward moving market as the sole basis for your investment decision.  You need to be able to add value to an asset (the property or your business) through operational improvements, repositioning, restructuring, recapitalizing, re-tenanting, or other proactive strategic or tactical value enhancements.  Here are four points to consider as you contemplate whether now is the time to buy or invest in commercial real estate: 

1. Learn from History:  We know from studying the history of CRE markets that more lasting and substantial wealth is created during down markets than during a bull market due to the shifting equilibrium and the transfer of assets which always occurs.  We also know from history that the more severe the downturn, the greater the opportunities for those who are prepared to execute.  It has been said, “Adversity breeds opportunity.”
2. Look for Opportunities:  Opportunities do exist, now, in the CRE markets in northeast Indiana.  Decreasing property valuations have made commercial real estate more affordable again and, new assets are entering the market due to business failures and commercial loan defaults.  But, you must be looking for the right opportunities and you have to be ready to act when opportunity knocks.  Rarely will you find a static opportunity that will sit idly by and wait for you to act.  It is more likely that the opportunity will be plucked up by another investor or, the opportunity will simply pass you by because you didn’t see it.  Get out of the box too!  Look at creative ways to repurpose an existing building or property that may cost the same or less and can be completed sooner than building new.  There is a lot of great existing commercial buildings on or coming to the market in the area.  I am also trying to connect a client who wants to build a new building with a steel and materials package that was put together for a project outside our area that never got off the ground.  Look for the opportunities, they are out there.
3. Pursue the Money:  That’s all great, you say; but, if I find the right opportunity how will I finance it?  Good question and recently our firm posed that question to the senior lending officers of four regional banks during a panel discussion at a regional broker forum.  The bottom line, these banks have money to lend and are willing to get creative about how a loan is structured.  That said, lending officers will enforce some possibly stricter guidelines on the borrower and the property.  What are they looking for?  Lenders will look at the stability, longevity, profitability and reputation of the borrower, business or tenant.  Cash is king!  What is the global cash flow scenario of the borrower?  Liquidity – how long can the investor or company sustain itself under the burden of the new debt?  Above all, each of the lenders would encourage a borrower to communicate with his/her lending officer.  Start the conversation early in the acquisition or investment process and continue it throughout.  Treat your lender as an integral part of your CRE team.
    
4. Build Your Team:  Commercial real estate investment or acquisition is indeed a team activity.  It has been historically and the importance of a strong team is amplified in the current market environment.  Surround yourself with professional advisors who will challenge you to develop and/or refine your vision and plan, extend your strengths, fortify your weaknesses, improve your access to market knowledge, supplement your network of human connections, and provide greater visibility and broader access to market opportunities.  The right team can mean the difference between seeing, seizing and capitalizing on an opportunity or missing it altogether.  Ensure that each member of your team understands your vision and that each puts your interest and that of your company above their own.  Then hold them accountable for results.

Don’t let the current economic and financial market conditions push you into a defensive posture where you sit on the sidelines supposedly managing your risk.  Get in the game and play offense by seeking out and exploiting the commercial real estate opportunities that could create significant wealth for your business or your investment/retirement account.

Banks Have Money to Lend!

In my last blog post, I had a rather pessimistic view of the current lending environment for commercial real estate transactions in northeast Indiana.  Shortly after I made that post, Sperry Van Ness/Parke Group hosted a panel discussion of the senior lending officers for four regional banks at a regional broker forum.  I am pleased to say that I was wrong to be pessimistic.  These banks have money to lend and are willing to get creative about how a loan is structured.  But, your deal will undergo more scrutiny then it would have eighteen months ago.  So, at/for what are lenders looking? 

1. Stability, longevity, and profitability of the business, investor or tenant.  How long have you been in this business?  And, have you been and are you able to operate profitably?
2. Business (or investment) experience, stability, net worth and reputation of the individual borrower.  Has the borrower been successful in this type of venture in the past?  Does he/she have a strong business or investment plan?
3. Cash is king!  What is the global cash flow scenario of the borrower?  Does this specific deal cash flow?
4. Liquidity – How long can the investor or company sustain itself under the burden of the new debt? 
5. Does the borrower have skin in the game?
6. Communication – Above all, each of the lenders expects a borrower to communicate with his/her lending officer.  Start the conversation early in the acquisition or investment process and continue it throughout.  Treat your lender as an integral part of your CRE team.

Commercial real estate opportunities are out there and banks are willing to lend.  Get your business plan, financials and expectations in line.  Then work with your commercial real estate advisor to find the right opportunity.

Industrial Real Estate – Dying or Thriving?

“The Midwest industrial market isn’t exactly thriving these days.  But it’s not dying, either.”  So states Dan Rafter in Industrial Outlook: It’s a Recovery Year from the March/April, 2010, issue of Midwest Real Estate News (see the article here).  The article makes the following points about the Midwest industrial real estate market based on interviews and comments with key players in the Chicago market:

1.  The market is improving…slowly.  There is still a lot of vacant industrial space to be filled; but, lease deals are being consummated, albeit at lower rental rates.

2.  There is a lot of competing space; so, new spec development will most likely not happen for several years.

3.  There are plenty of potential investors; however, there is an apparent shortage of product in which to invest.  There is a lot of money out there searching for deals, good deals, poor deals, any deals.  There just doesn’t seem to be enough product available – owners are just not selling.  Plus, where are all those distressed properties that people were anticipating to hit the market?

4.  Financing for industrial projects is easier to find now than it was just six months ago.  However, the article elaborates that the financing is available – not for new projects, necessarily – but for stabilized (i.e., fully occupied) projects.

So, are we seeing similar circumstances in the industrial market in Northeast Indiana?  Yes and no.  Yes, there is an abundance of leasing activity for industrial/warehouse space, both large and small.  That activity is driven by both local companies looking to expand or move, as well as by out of town/region/state companies looking to move in to Northeast Indiana.  Yes, there is a lot of good, healthy competition for strong, solid tenants.  No, I don’t believe that there is a shortage of good industrial properties available in the Northeast Indiana market.  In fact, I believe that there are some great opportunities available right now for owner/occupants or investors.  And, no, unfortunately I don’t think the financing for industrial projects has loosened up any in our market.  Hopefully I will come away from a meeting with lenders from five Northeast Indiana banks this Thursday with a more positive outlook on the local lending picture.  I’ll let you know.

What are your thoughts, views, experiences?  Is our local Northeast Indiana industrial real estate market thriving or dying?  Is our market on the way to recovery?  What do you think it will take to improve or accelerate the recovery?