AND before you can get green shoots like these in the commercial real estate markets … the first step is the market fundamentals have to stabilize. At some point rent and occupancy simply must stop falling and enter the category of “No Change” as the analysts in our industry survey the national markets. Only then can the turnaround … and those little shoots … begin to emerge.

Here’s a sign we may be seeing some stabilization sooner than most pundits had predicted.

Most of the national “experts” reported in the press over the last several months have gone on record predicting it will not be until the 3rd quarter (and most then say “at the earliest”) until we see the Commercial Real Estate Markets recover.

Here is a report showing 16 of 28 major markets in the US where multifamily rents are NO CHANGE in the fourth quarter of 2009. See the report at this link …

Could this be the first sign that some “green shoots” are on the way – might they be curled up under the surface yearning to emerge when the sun comes out all the way? Stay tuned …

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The Gross Rent Multiplier – the Rubber Chicken of Commercial Property Value Indicators.

GRM is calculated by dividing the Property’s sales price or value by the Gross Potential Income. 

1) We’re talking about “Potential Income” based on the Broker’s most optomistic projections of attainable rents.  The basic number has no basis in reality – especially if you are looking for a property with upside. Think about it for a second … if the Seller could get these rents for this property they wouldn’t be selling!

 

2) Gross income starts at the top of the financial statement.  For any particular property there is absolutely no relationship between the Gross Income, and the Net Operating Income (NOI) down on the bottom line. You have to know the Real Income and the Real Expenses to understand the actual NOI this property can produce.

Here is a bar graph of US Commercial Property Sales closed from January 2000 to June of 2009. It so clearly tells a tale of Boom and Bust. A picture is so worth 1000 words.

Interestingly the peak is earlier than you might think. It is centered around April of 2005 – April of 2006.

This graph is taken from the just released First American CoreLogic “Commercial Market Monitor” August 2009. Get your copy here.

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It cost $54M to build in 1975. Just think what that is in today’s dollars !!

 
The Glory Days?

• Back in 1994 Brazil beat Italy in a world cup game in this building.
• Michael Jackson, Madonna and Elvis all played there
• Pope John Paul II, once delivered Mass from the field
• But the Silverdome’s biggest event was Wrestle Mania III in 1987, when 93,000 fans packed into the stadium to watch Hulk Hogan body-slam Andre the Giant. That was the biggest turnout ever for an indoor sports event.

The Detroit Lions NFL team hasn’t played there since 2002 and the buidling was costing the city of Pontiac $1.5M to keep up.

The new owners are going to host MLS Soccer Games (GO SOUNDERS!)

Here’s the full article.

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In Default:
An Owner is in Default when they fall behind on the Loan Payments. Non-payment violates the loan agreement and can result in the Lender taking the Property back if the Default is not “Cured”. Foreclosure is the name for the process of taking the Property back.

 

At this stage:
You can find out what local Owners are in Default and approach them directly.

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In Receivership:
The Court can appoint a “Receiver” to manage the Property while the Foreclosure process proceeds. The Receivers are Property and Asset Management Companies or even Attorneys you can connect with.

 

At this stage:
You can find out which Properties are in the hands of a Receiver and which Property Managers take on receivership work. Then you can approach the Owner, Receiver or Lender directly.

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Real Estate Owned (REO):
Real Estate Owned is a term for a Property that is now through the Foreclosure process and is actually owned by the Lender. All REO Properties need management to preserve the value of the Asset. In this case the Lender hires a Property and Asset Manager to do the job

At this stage:

You can find the Lenders holding REO. You can find the Property Managers who manage REO Property. You can approach either the Property Manager or Lender directly.

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Listed and/or Sold
At some point, the Lender will sell these Properties. However, the decision to sell can take a significant period of time for one simple reason. If the Property sells for less than the Loan Amount, the Lender will have to realize the Loss on their books. This decision to take the loss and move on is usually one made in the higher levels of the organization. While the “Sell” decision can be delayed … once it comes you can see a flood of Property on the market as the Lender attempts to clear their REO inventory quickly.

 

At this stage:
The Lenders will often have preferred buyers by this point. Many times these properties are sold without being listed … often in large portfolios.

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• Default
• Receivership
• REO

• Your Broker Network
• Your Mortgage Broker
• Your Property Manager
• Your Real Estate Investing Group
• Your Local Property Association Meeting – such as the local Multifamily Housing Association meeting

In every conversation, let the other person know you are in the market for distressed Commercial Property. Ask them who they know who is .. 

• In Default or in trouble
• In Receivership or managing Property in Receivership
• What Lenders have REO Property and who are the companies that are managing REO in this market

The Real Deal is reporting Tony James, president of the Blackstone Group (they have $12B ready to spend on Real Estate) as saying …
“We’re just beginning what will be the best period in decades for private investing,”

And yet deal volumes remain at all time lows because banks continue to hold troubled loans on their books, hoping conditions will improve.

There does appear to be movement amongst smaller banks and smaller deals however. Ofer Cohen of  TerraCRG says,

“Smaller or local banks are more proactive about either unloading bad debt or taking over the deeds on distressed notes and disposing [of] them.”

Here is the full article

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She reports that her contents are pointing to the 3rd quarter of 2010 as the expected time when sales volumes will pick up. We’ll see …

One of his partners, Lance Sallis, a 20-year real estate veteran, was previously managing director with Trammell Crow Co.’s Austin office. Here is what Sallis had to say about the commercial markets. Basically FULL SPEED AHEAD!

“Now’s the right time,” Sallis explains. “There’s been a re-pricing of institutional quality commercial real estate assets, and all of this creates a huge buying opportunity for groups willing to buy, hold and reposition properties.”

Here is the full article

Learn Commercial Property Investing inside and out … Investortours.com

“Apartment Vacancy Rate Hits 22-Year High !” and I murmured to myself … here we go again.

It just reminded me why newspapermen are NOT Real Estate Investors … they are just out to sell papers and a sensational headline will always beat out a rational article.

But wait … there’s more …

If you read the last line of paragraph three you found that, “Of the 79 Markets tracked by REIS, 45 showed an increase in Vacancies.” That sounds really BAD now doesn’t it? We should panic … right? Hmmmm … Remember now, this is coming from a newspaper and there is most certainly more to this story. Hold on just a minute …

As an Investor, what I find MOST interesting in this article is this.

• In the face of the worst economic downturn since the great Depression.
• In the face of the worst residential housing market in anyone’s living memory
• In the face of hundreds of thousands of foreclosed / vacant / rental single family homes competing with apartments for renters
• In the face of ALL of this …

43% of the markets tracked by REIS showed STABLE OR DECREASING VACANCIES !!

That’s right 34 of those same 79 Markets preserved or decreased their vacancy rates. That statistic is truly amazing given the national economic circumstances. And that’s not all … In the next to the last paragraph we learn that suburban Maryland and Washington, D.C. even saw a 0.3% rent increase in the second quarter. WOW.

What is the Press Missing here?

The media propagates one of the big myths in Real Estate when they report on national statistics in this fashion.

Here is the myth … “There is a “National Real Estate Market”  That statement is simply not true … never has been and never will be.

Here is the truth…

You can aggregate statistics and report on the national data with big screaming headlines, but All Real Estate Is Local. There is no mythical “National Apartment Market” that moves in sync from coast to coast taking all Multifamily Projects up and down with its gyrations.

The Profit is in the details

The savvy investor is still doing the same things despite this article …

• Working to find a market in the right phase of the market cycle
• Then finding well priced properties where they can make a profit by improving the performance under their management.

And those local markets exist right now.

The timeless rules still apply … LOCAL market conditions will determine much of the profit in your Commercial Real Estate projects. One of the key skills for Commercial Property Investors is understanding Market Cycles and timing the markets to ride the LOCAL wave. If you are invested one of the 43% of Markets where vacancies are stable or falling … you and your investors are doing just fine. These headlines may cause your investors to give you a call with concerns … AND the cash flow from your property is probably stable.

Here is the biggest challenge for Project Sponsors in Multifamily as a result of this article … Your Investors and potential investors read this article too … darn.

Now you have to provide some education about the myth of the “National Apartment Market” to bring them on board.

It won’t be that difficult to do. Some local market research will quickly prove to them that you know more than the Wall Street Journal about your local market and why Apartments are still an excellent investment. The ability to find a profitable apartment project may actually be increasing in this economy because of distressed commercial property for sale in many solidly performing markets at once in a lifetime prices.

Here is my advice. Don’t believe ANY headline in ANY article claiming to report on ANY national trends in Real Estate in your chosen niche. All Real Estate is Local … from now until the end of time.

Your job is to find those local markets where you can make a buck. And there are a lot of them still out there despite the WSJ blaring, “Apartment Vacancy Rate Hits 22-Year High” last week. Then show your investors the difference between what you know about Real Estate as an Investor and what the Wall Street Journal says as a bastion of the media.

I am sure both of us would have written a different headline.

All the experts lamented the puny deal volumes this year and none of them seem to have a clear prediction of when deal flow will pick up however …

When asked, “How would you invest $3M in this Market?” Here is what they said …

Most responded that they would look for small, quality assets. May said that he would buy good core real estate on the west side…small retail that has long-term potential. “I am seeing a flight to quality,” he said.

Salis said that a lot of the volume that you are seeing right now is on the residential side, such as the 10- to 25-unit multifamily projects in infill locations such as Anaheim or Santa Ana, so that is a place he would look.

Roth would also look for quality. “The nice thing about quality properties is that there will always be tenants who want to park themselves there ”

Click here for the full article