The National Association of Realtors Commercial Alliance has released the first quarter numbers and when compared with the same period last year, the difference is staggering.  Overall commercial volume is down almost 70% when compared with the same time period last year.  What is the reason?  No, it’s not ridiculous pricing or abundant commercial foreclosures, it’s simply the economy and lack of investor confidence. The big drop has been the lack of individual investor activity while the institutional grade investors continue to invest.  The prime reasons for the slowdown are the downturn in the US economy which began  in late 2007, rising oil prices and lack of job creations, all things that effect the commercial market.

 Looking at multifamily in specifics, transaction volume for the same period last year is down by 46%. In addition, 80% of the transaction volume was through institutional grade investors such as REIT’s, pension funds, insurance companies, etc.  This leaves a large gap in the market that is ripe for the savvy individual investor to take advantage of.

With the larger size investments still being traded and the lack of movement on the smaller, more individual investor friendly properties, the amount of available properties continues to increase and the needs of sellers continue to get greater.  Many sellers are getting into time and money constraints which is an excellent situation for buyers with cash ready to go. 

Another important note is that any and all investors wanting to purchase commercial investment real estate should be ready with a minimum of 20% equity to put into any investment as lenders are no longer financing “creative” deals that they did in years past.  Everything is being underwritten based on the numbers now, not what could be in coming years.

It is imperative that you work with professionals who have experience in their local market who can get you connected with the right people to make each transaction as painless, quick and profitable each and every time.

Peter J. Barnett, CCIM

Players in the real estate industry are operating in a challenging new environment. This includes those of us in the multifamily sector, which has had a long run of strong operating fundamentals, an abundance of liquidity and competitive equity investment.

Every day we tune in to see how the financial news and economic indicators are affecting the real estate capital markets. The changes influence acquisitions and our ability to capitalize transactions.

We want to believe there are opportunities in all sectors to buy deals at distressed prices. However, the multifamily sector, particularly in the West Coast’s infill markets, is still showing persistently low cap rates of 5% to 6%. Consequently, more discipline is required in underwriting in this new age of turbulence.

As we underwrite value-added opportunities, we need to be aware of the trends 12 to 24 months down the road. That could mean slower job growth, less leverage for buyers upon exit, fewer equity partners willing to gamble on higher market rents, and exiting cap rates that are stabilized above 6.5%.

Multifamily setbacks

Despite these shifts, there remains a disconnect between the perceptions of buyers and sellers, and the realities of today’s multifamily operating fundamentals. In certain cases, this has led to deals coming back to the market and sellers unable to pull the trigger.

Markets like Las Vegas, Phoenix and the Inland Empire in Southern California have been negatively affected by the “shadow market” supply of condominiums and homes available for rent. This will likely affect vacancy assumptions and the ability to grow rents. Other factors that will dog multifamily include interest rates and the availability and cost of mortgage financing.

With regard to interest rates, we anticipate that the Federal Reserve will continue to favor liquidity over inflation-fighting measures. Thus, we see short-term interest rates remaining at less than 6% over this period. While mortgage rates will also remain low, lenders have returned to fundamentals. Debt coverage ratios need to be 1.10 at a minimum, while loan to values range from 65% to 70%. Lenders have also begun to implement rate floors on quotes.

I think the most telling fact in this article is the 65-70% loan to value ratio, as this is what we are seeing in our local area as well as lenders wanting at least 1.20 or better debt coverage ratios in our local market.  All this shows the importance of using the due diligence period on a property to the fullest along with using a qualified commercial broker.

 Peter J. Barnett, CCIM

This week the Florida Tax and Budget Reform Commission (TRBC) passed CP 002. What does it do? Here’s a summary: 1. Starting in 2009, limit assessment increases to 5% a year on all non-homestead property. This is down from the 10% included as part of Amendment 1 passed in January, and keeps it permanent (Amendment 1st cap lasted only for 10 years.)

2. It requires the Florida Legislature in 2010 to abolish the states required local effort for schools. It will be somewhere between $9-11 billion dollars, and that money can be made up in any combination of 4 ways.

a. An increase of up to one percentage point to the sales tax (The Florida statewide sales tax is currently 6%)

b. Spending reductions for other components of the state budget and revenue increases resulting from economic growth attributable to lower property taxes

c. The repeal of sales tax exemptions, but not including food, health services, prescription drugs, the sale of real property, and items for resale

d. Other revenues identified or created by the Legislature.

3. This will result in lower property taxes between 25-50%, depending on where you live in Florida. More simply, it does away with the School Board portion of your property taxes, though local school boards will retain a very small amount of discretionary taxing authority.

The important part for Commercial property owners is the 5% cap on non-homestead properties. If you own a property that has been receiving large increases each year, that will be no longer the case as the limit will be 5% each year. This is a welcome relief to owners here in Florida who have been hit hard over the past 5 years with tax hikes.

But this amendment is not passed yet…It needs 60% approval by the voters in November to be passed into law so if you live in Florida now’s the time to do your part and help save yourself some money. In this down market all of us need all the good news we can get, and this time we can affect our own pockets for a change.

Peter J. Barnett, CCIM

Now for a brief update on the actual feel of the Tampa Bay Commercial Market:

In the past several months activity from buyers have increased by at least 50-75% over last years levels at this same time. The general consensus I get when I speak to buyers is that they are waiting for the market to stabilize before they invest. So the root of the problem is not a lack of capital or investment desire; the root is fear of the market caused by instability. Whether or not the recent drops in the Federal Funds rate have helped quell that feeling or not is uncertain. However, one thing is becoming more certain; the fact that buyers are once again ready to make actual purchases. This being said we are still seeing our fair share of ridiculous low ball, bottom-feeder offers. As many will tell you from experience, sometimes these low offers will be accepted but I do not believe Sellers in the current market feel their properties have bottomed out enough to start cutting loose their equity in a last ditch effort to simply be rid of their properties.

Another good sign for all investors is the availability of financing increasing. Local banks, conduit lenders and other funding sources were very tight fisted in past years with their underwriting and their desire to take on new projects in our local area but those fists are slowly opening. In the multifamily market many new sources of funding are opening up on both a local and national level.

The bottom line is the market is starting to stabilize at least in my opinion and by the end of the year buyers and sellers may be their closest to a meeting of the minds that they have been in the last 5 years. If that happens, it will be a great time for everyone.

I look forward to any comments or critiques you might have on the subject. A good dialogue is always welcome on this blog.

Peter J. Barnett, CCIM

The apartment rental market ” multifamily housing ” is attracting risk-averse institutional investors. Of the record $98.6 billion spent in this sector last year, 40 percent of acquisitions were from institutional investors such as pension funds and life insurance companies. Private investors were equally active, accounting for another 40 percent of transactions.

Many potential first-time home buyers continue to rent, placing downward pressure on vacancy rates and upward pressure on rents. The number of new multilfamily units remains relatively high, due in part to the conversion of condo projects into rental buildings ” notably in the Washington, D.C., area and South Florida.

Multifamily vacancy rates should average 4.8 percent in the fourth quarter, down from 5.1 percent in the fourth quarter of 2007. Average rent is seen to rise 5.3 percent in 2008, up from a 3.1 percent increase in 2007.

Multifamily net absorption is estimated at 245,800 units in 59 tracked metro areas in 2008, up from 234,400 last year.

The current national vacancy rate is 4.7 percent, below the 5.0 percent level which is considered landlord’s market. The areas with the lowest apartment vacancies include Northern New Jersey, San Jose, Miami, Salt Lake City and San Diego, all with vacancy rates of 2.9 percent or less.

My brief interpretation of this reads that we are on the verge of the next Buyer’s market though institutional investors are in the game the individual and partnership investors are not far behind…

The Property:

Much can be done in the months and days leading up to putting a property on the market that can drastically change the buyers perception of the investment. Curb appeal can never be underestimated at any time. I have seen Buyers reject a property with better financials then one that looked nicer because they perceived it as less “hassle’ though in reality it made them less money. All areas of the property should be neat and clean, no trash or old chairs or other items sitting outside the building. Property painting or just a little touch up painting can also go a long way towards improving the image of the building. Parking lots can be re-striped for relatively cheap including just re-painting the stripes and concrete stops. Make sure any laundry or common areas are looking their best as most Buyers tend to notice these areas first as an indication of the type of tenants in your property. All of the above contributes towards a good “feeling” when buyers are even just driving by the property and it pays dividends at the end of the transaction.

Record Keeping:

Just as a property should be neat and clean the records associated with the tenants and maintenance should be equally clean and easy to decipher. Once in a contract a buyer will scrutinize those records careful and the best defense is always a good offense. Make sure you have copies of leases that are accurate and signed for each tenant on the premises. Make sure rent collection records are up to date and complete. Keep a monthly rent roll that is easily available for use by the broker in selling the property. Rent rolls should include the tenant name, lease expiration date, rent amount, security deposit amount and unit size or number of beds and baths. This wil be a crucial piece of info a new buyer will want right away. Maintenance records are important as well, as any major improvements you make to the property should be noted and ready to give to anyone who asks. These can include but are not limited to; property painting, parking lot resurfacing, new appliances, new flooring, new cabinets or kitchens, additions or major construction, new roofs, landscaping, and other similar big ticket items.

Finances:

In harmony with good record keeping above your financial records are the most important thing to keep up to date and accurate in any transaction as they could “make or break” your sale so to speak. Rental income should be separated by class including Rents Received, Laundry or Other Income, Utility Reimbursement, and Late fees or other fee income. Expenses should be well detailed and separated as much as possible. The more sub-categories you have on your profit and loss statement the easier it is for a buyer to see when abnormalities occur. Say one month you have three air conditioners fail and none in the following six months. If that cost is not broken down and just put in a general “Repairs” column, then it is difficult to explain why those costs were not normal. If a separate “A/C Repair/Replacement” category exists this is easy to explain to any interested buyer.

In the end when getting ready to sell you should have the following ready to deliver to your real estate professional so they can access the highest value for your property; Current Rent Roll, Prior Year Income/Expense Statement, List of Capital Improvements, Property Information on Units and Unit Sizes. Now that you’re armed with this knowledge up front your sale should get off to a successful start.

Next part in the series will deal with “The Search for Truth - Finding a Buyer or Seller”.

Peter J. Barnett, CCIM

Goals & Objectives - Preparing For The Transaction (For Buyers)

Planning ahead is always important in life and purchasing a piece of investment real estate is no different. For many investors their livelihood and sometimes life savings or retirement are tied up in their properties so failure is not an option. For an investor looking to purchase a new piece of investment property there are several factors that should be taken into consideration in order to make each individual property a successful part of their portfolio. We’ll consider 5 major areas that each person should make a part of their decision making process. Those areas are; Property Type,Personal Circumstances, Management, Cash and Market Trends.

1. Property Type: There are many factors that change as you look at investing in different property types. Let’s consider some factors that change over different property types. Retail property is less management intensive than other subtypes as most often retail leases are Triple Net (NNN) meaning all costs, maintenance, and day to day operations are responsibility of the tenants not the owner. Also consideration should be given to the difference between retail tenants and other tenant types. Retail tenants are typically on longer term leases and lease larger amounts of space meaning when a vacancy arises, a large portion of your income can be lost while filling that vacant space. The same holds true for Office tenants as well though they should be given special consideration as well. Office tenants normally have Tenant Improvement or TI costs for making a certain space meet the needs of their particular business. This cost can be worked into the lease amount or made a separate cost and can be paid either by the Tenant or Landlord or a portion for both. This can increase the time that a particular space stays vacant while being augmented to fit the needs of different businesses. Office properties typically have large common areas as well, which depending on the language in your leases, can increase the costs and management of the owner. Multifamily properties can be the most management intensive and require a large portion of time if not properly cared for. However vacancies for multifamily properties do not impact your net income as much as the number of units you own rises. For example, a single vacancy in a 10 unit building will severely impact your bottom line as you are now 10% vacant. A similar single vacancy in a 50 unit property has less impact as you are now only 2% vacant. The same holds true for Office and Retail properties and should be considered when choosing a property type. Multifamily properties do offer a certain advantage that retail and office cannot, that of a shorter time to maximize your revenue. As apartments typically turn over every one or two years on average you are afforded an opportunity to raise your market rents each time thus increasing your income every few months as new vacancies open up. Conversely on Office and Retail properties longer lease terms mean you are locked in to a rate that may be well below market for several years, thus losing opportunities to make the most money as the market dictates.

2. Personal Circumstances: Each individual investor has a unique set of circumstances that should be considered before purchasing investment property. Time is a major factor and can be critical to the success of your investment. A good course of action is to analyze your current situation and take factors into consideration such as secular employment, family, recreation, and travel and notice how much each of these areas demands time from you that might be needed to manage or oversee your investment. For example, a father of 4 with a busy secular job and family needs may not be able to make it every weekend to inspect the property or to repair a leaky faucet or clogged toilet or meet prospective tenants for leasing. On the other hand a retired individual may have the time to do these things, but simply just does not wish to spend time away from the golf course so a property that manages itself would be more desirable. Location is also a factor in your purchase decisions as sometimes the best market is not in your backyard. Ownership out of state can be extremely difficult and worrisome especially if you do not have reliable management on the property itself. Again property type factors in as well as an out of state owner for a retail property will not be nearly as disadvantaged as an out of state multifamily owner.

3. Management: Management is probably the single most important area to be considered before purchasing a property. The best investments on paper can be destroyed by mismanagement and leave you with a property under valued and unattractive to a future purchaser. Self management is always preferred for a few reasons. First, no one will take care of your investment better than you as each dollar spent is a dollar out of your pocket and hits home the hardest. Second, you will be much more motivated to lease spaces, perform repairs, and keep the property clean as it represents you as an owner. Management companies sometimes take a lackadaisical approach to your properties as it can get lost when a company manages multiple properties in the same area. That being said there are reliable management companies to be found, but each potential manager must be scrutinized on past performance, leasing criteria and advertising, ability to handle repairs and maintenance timely and so forth. Also differing levels of management do exist and should be explored from a full service agreement where all bills and accounting will be taken care of by the management company to limited management where leasing and rent collection are the only responsibilities of the manager.

4. Cash: Many times a day I am asked the question “How much will I need down to purchase this property?” The answer is never the same to the last dollar but each market has its own normal levels. In our current market the short answer to that question is at least 20% of the purchase price plus closing costs which are typically around 2% of the purchase price. Most all of the lenders, banks, private equity funds and other financing sources I speak with on a day to day basis agree that the days of purchasing a property with 10% down are gone. Lenders are tighter with their restrictions on both the borrower and the property and want to make sure equity exists from minute one in case of a foreclosure. This is a major factor in your purchase and should be considered first and foremost before anything else. At times creative financing exists and should be taken advantage of such as assumable mortgages and seller financing but each investor should still base the size and dollar cost of the property they are considering purchasing on the above 22% rule.

5. Market Trends: In late 2005 an investor approached me with the desire to buy an apartment property with the intent to convert it to condominiums. At that time the market was saturated with conversions and the market collapse was looming and was evident to those educated enough to see the signs. I advised him against it and he instead purchased an office property which is performing exceptionally well. Another investor did purchase that property and convert it into condos and to this day still has not sold a single unit. Each market is unique but all real estate markets follow somewhat predictable real estate cycles that can be identified to those trained properly. Working with a CCIM can be an extreme advantage as they are not only recognized as the most successful in their practice but the most knowledgeable on the inner workings of the economic cycles of real estate and the driving factors behind each market. For example, a smart broker will analyze an office property and take into consideration not only the number of other similar properties in the area, vacancy rates and lease rates but the economic factors that drive that market. A capable broker will analyze the number of new jobs being introduced into the market and the impact that they will have on demand for that particular type of office space and any newly constructed supply that may be planned for construction near the subject property. There are too many factors to list in this short blog of incidentals that can affect your investment and that is the main reason to work with a professional who will make sure you know all you need to know to be successful in your investments.

Next week we will discuss the goals and objectives as they relate to the Seller’s side of the real estate transaction. For more information on any of the information discussed above feel free to post a comment or to email me directly at pbarnett@jabarnettrealty.com to discuss your individual situation. I look forward to speaking with many of you in the future.

Peter J Barnett, CCIM

Apologies for the lateness again in a recent post, but it is good news as the market is picking up and has been keeping me busy. And since it looks as if 2008 will be a good year with volume and activity of Buyers and Sellers up I thought now would be a good time to start a multi-part series that covers everything that one would need to consider when Buying or Selling a piece of Investment Real Estate whether it be your first investment or your most recent addition to your Real Estate empire.

The series will be titled “What to Expect When You’re Investing” and will be published in 6 separate parts for each side of a transaction for both Buyer and Seller so there will be 12 posts in total. I am attempting to cover any worries you may have in each section so if something is not covered feel free to post a comment as getting a lively conversation going with other investors is always a good thing. I will try and deliver one part each week until the series is complete beginning with Part 1 next week.

The parts will be titled as follows:

1. Part 1 - Goals & Objectives - Preparing For the Transaction
2. Part 2 - The Search For Truth - Finding a Buyer or Suitable Property
3. Part 3 - Negotiation - Tug of War For The Rest of Us
4. Part 4 - In Contract - Time To Get Your Hands Dirty
5. Part 5 - Closing Time - And Other Last Minute Nightmares
6. Part 6 - Beyond The Investment - Preparing For The Future

I hope you will enjoy reading these as much as I will enjoy writing them. Feel free to email me with comments or suggestions in the future and stay tuned for Part 1 next week.

Peter J. Barnett, CCIM

One of the recent breaks investors have enjoyed has been the low 15% Capital Gains tax rate on recognized gain on the sale of real estate over the past years. And while many have been taking advantage of tax deferral using 1031 exchanges these times wont last forever. Or they wont last beyond the end of 2008 to be more specific. That’s right, the end of the year is when this favorable rate ends it’s run and many speculators don’t know what the rate will be in 2009 but they all agree on one thing; it won’t be lower. Depending on the shift in political power in the White House and new policy brought in by a new administration who knows what this rate could jump to.

And that is scary enough to make those who have been deferring multiple sales over the last 10 years or more use 2008 as the time to take their tax hit while the 15% rate is still in effect. If you are curious as to what your capital gains situation could be, talk to your accountant first and then give us a call so we can advise you as to what your property is worth in today’s market. With that information we can assist you in planning your commercial real estate portfolio tax strategy and saving you your hard earned money.

Peter J. Barnett, CCIM

Apartments.com recently compiled a survey of the highest rated tenants amenities and some of the highlights were:

Air Conditioning and more specifically central units were the highest rated amenity on the list, and here in Florida that goes double for most of the year. With many old properties having windows units, an upgrade to new central units would be a smart investment to make, especially if you’re in for a long tenure and not trying to flip your property.

Parking was the second highest rating on the list and is no surprise as well. In urban areas like St Petersburg that offers mostly on street parking, having a property with at least a one to one parking ratio will set your building apart from the others in the area.

In-Unit washer/dryers were also in the top five but having some sort of on-site laundry is always better than offering the tenants no other option but to go to a nearby laundromat. And it’s an excellent source of additional income.

High-speed Internet is also widely coveted by renters in today’s fast paced give-it-to-me-now society. Most of the local cable/phone providers have updated their connections to offer this connectivity so only much older buildings are at a disadvantage in this arena.

Dishwashers round out the top five as no one likes to wash dishes (least of all me). This can be a costly option to add in many buildings as older cabinetry can require a complete remodel in a kitchen to include a dishwasher.

Elevators, pools, and hardwood floors were also high up on the priorities list with fireplaces coming in last, and even less so here in Florida.

Current owners would always do well to stay up to date on these areas and those in the market for properties now should examine their potential investments to make the most out of their commercial real estate investments.

Peter J Barnett, CCIM