To have and to hold, for better or worse, for richer or poorer, in sickness and in health? This familiar marriage vow now may ring true with many commercial real estate owners. Should I hold? Should I sell? What does the future hold?
There are a variety of investment vehicles available, including stocks, bonds and real estate (hard assets). Historically, commercial real estate investment has experienced high demand because of the ability to leverage and market-value appreciation.
Commercial real estate is fundamental to all businesses. Even for owner-occupants, you often own the real estate rather than leasing, as you expect the investment to provide a financial return.
Here We Are
We are truly in a global economy — world events do impact commerce. Worldwide growth drives fundamental demand for space, while financing (leverage) drives the velocity of transactions.
Real estate demand typically mirrors the general economy with a slight lag; therefore, as the economy improves, demand for space should, too. One caveat is that the current amount of available space may dampen an immediate potential rebound.
For the determined and well-positioned borrower, it is important to note that, in this new phase, financial institutions will be lending, but underwriting requirements will be quite conservative: more cash equity, less leverage, realistic absorption-rate expectancy, 70 to 75 percent loan-to-value ratios based on purchase price or appraised values (whichever is lower), better loan structure, amortized loans, few interest-only or non-recourse loans, and loans based on adjusted or reset property values.
Relationship lending will become more important: stronger cash flows from stronger tenants, longer leases, more information on the tenant’s strength and the borrower’s ability to pay back their loan. Alternative financing options probably will be prevalent, such as private lending institutions and seller financing or land contracts. While cash is still king, the heir to the throne is the low-risk borrower with a strong equity position.
Good news is that the credit freeze should begin to thaw, giving well-grounded firms more access to capital, letting them invest, restock shelves, increase production and add staff, which should drive demand for real estate. Companies desiring financing still will need a strong business plan, better financial statements and a sure (bulletproof) plan of how they are going to pay back the mortgage.
We’ll find lenders that have money ready to deploy for well-located commercial property. There should be accelerated transaction flow in the fall-winter of 2010.
While the commercial real estate market is still fragile, it remains a good long-term investment. Now is an ideal time to buy for those able to do so, as seller’s and buyer’s expectations are realigning to the new market realities. There may never be a time when it is priced better, as an unusually high expectation of risk already has been priced into the market. Motivated sellers and buyers who are realistic on sale or purchase prices can achieve win-win deals.
Barron Rothschild’s adage, “The time to buy is when there’s blood in the streets,” holds true now more than any time in recent memory. Contrarian investing, at its heart, is the strongly held belief that the worse things seem in the market, the better opportunities are for profit and significant future returns.
Labor markets are expected to improve, but modestly. Improvement in the local commercial real estate market will depend upon lending, job growth, and interest rates.
Innovation will create the greatest opportunity in the future commercial real estate market. The transformation is under way.
Future trends are smart buildings, higher energy efficiencies, green buildings, sustainability and environmental awareness.
Social networking is getting hot and will affect the real estate business future. Information is empowering the consumer.
Most everyone in the commercial real estate industry has learned some lessons from this recession. In this post-boom era, the industry will not look quite the same. Going forward, this market will require more in-depth analysis and strategies and more stringent equity requirements, as well as better liquidity, clear cash flow analysis, faster reactions and realistic knowledge of the current market demand.
We need to be aware we are in a new world, a world we must embrace if we are to prosper. Commercial real estate is different now, but there are opportunities for those who adapt to the new market reality. Be proactive, analyze, utilize expert brokers who are specialists, develop sound strategies and succeed in this new phase.