The information provided here is better than the far-reaching and biased reports I have read, while giving some real signals as to where the commercial property and capital markets are headed.

Click the image below to be taken to the pre-recorded webcast.

This presentation is Copyright © 2010, Marcus & Millichap and is used for educational and editorial purposes.

Now, some nearly 25 years hence, I truly do recognize the importance of “sorting” and the notion of elimination has become more and more a part of representing my commercial real estate clients effectively.

Of late, and driven by market conditions, there has emerged a new brand of bottom-feeding. It’s a concept I call “LOI Shopping” or, maybe “Networking the Deal” for better terms.

There is no doubt in my mind that this carp-like behavior among prospective tenants is a product of too much inventory and the desire of often marginal tenants to continue their vain attempts to shrink or even collapse the pricing envelope. Mind you, there is no orchestrated conspiracy here; just a glut of inventory and an every expanding population of weak tenants who think if they shake the tree hard enough fruit will fall to the ground.

Well, I am mad as hell and not going to take it anymore! I am implementing new measures to expose and terminate the pretenders…these fakes and would be tenant hypocrites who are representing themselves to my clients as so much more than they really are.

Although I am not ready to strap on a six shooter like Richard Boone did in “Have Gun Will Travel,” and ride into some western town on a mission of settling scores, I am ready for a serious revision of my qualifying language and the way I handle the “wanna be” candidate.

Sorting through Hypocrisy

Since we are using some Latin, let me throw in some Greek too. The work “hypocrite” is derived from the Greek noun “υποκριτής” meaning “one who wears two masks.” It’s the source of the theater icon that depicts “comedy and tragedy.”

I am ready to pull back a few masks and find out what is behind them. I’m ready for a lot less comedy, especially since no one is laughing. Then too, I am not especially fond of the tragedy angle either.

Masks don’t work well in the empirical world of commercial real estate. Masks are only suitable for the stage, where the emotions of an audience are supposed to be toyed with.

I’m going back to what Del Webb taught me as a highly skilled Sales Counselor…the principle of Terminatio Simulatio Velociter or, in plain English, TERMINATE THE PRETENDER QUICKLY.

You see, guys like Del Webb understood clearly the principled approach to professional representation. There are only two types of real estate investors or, in the case of Del E. Webb, home buyers; the ones that will and the ones that won’t…the ones that can and the ones that can’t…the ones that do and the ones that don’t.

Those that will are those than can and those that can are those that do. No mask, no pretense.

To the Webb organization, the deliberately implemented sorting process begins at the first business encounter (give name, get name, use name) and continues as an integral component of all the follows, culminating in securing loyalty, examination, agreement and execution.

For the foreseeable future, the market is going to continue to hammer us all, owners, tenants and brokers. Too many properties, too little time and too few truly qualified tenants and investors.

I’m going back to the principle of Terminatio Simulatio Velociter or, in plain English, TERMINATE THE PRETENDER QUICKLY.

The International Council of Shopping Centers (ICSC), publishes a “Shopping Habits Report” in the first quarter following the end of a calendar year.

As a retail leasing specialist, I digested the entire 2009 report, subtitled, How the Recession has Impacted Consumer Shopping Habits, and discovered that indeed center owners need to be on top of the consumer game.

The “2009 Shopping Habits Report” contains invaluable information about the future consumer trends that will impact center owners, whether large or small in size.

You can read the report for yourself and draw your own conclusions. However, three things stuck out to me in the report:

• 58% of consumers believe their income will stay the same or become significantly less in 2010
• Most consumers have and will continue to throttle their discretionary spending through 2010
• Strip centers and “Lifestyle Centers” attract the highest frequency of repeat traffic

For those of you who are my clients, I want to briefly focus on the strip center/lifestyle traffic models, which run in the 70-75% repeat traffic level. In 2010 and 2011, my Company, is seizing on the concept of “life-styling” centers that have a higher than normal tenant mix by creating “Center Websites” that serve as a marketing destination point for Broker and tenant inquiries and present a center personality to the viewers.

I am working with clients to help them discover and communicate the flavor and theme of a center to prospective tenants via a unique center website. Village at the Boulders is an example of a “Center Website” that communicates lifestyle and quality of tenant mix. It’s hard work to create this themematic message but the end result is an organic marketing message that can serve the leasing needs, tenant needs and of course, the pride of belonging to the mix.

For owners who have nominal number of national brands or, none at all, the concept still has credibility to the leasing and promotional effort because local strip centers that serve small businesses, pizza outlets, exercise studios, coffee shops and an ethnic restaurant can create a local lifestyle image.

The sites also serve as the focal point for Broker-to-Broker dialogue. One of the most powerful features of the “Center Website” is its “PULL” or “SEPARATION” feature. Owners are looking for ways to differentiate their properties and this is but one way to do so.

The spending habits of consumers will continue to remain in flux until we see a restoration of confidence in the economy. In the meantime, I continue to ask my Owner/Clients to look at “out-of-the-box” models that can create more leasing opportunities and a higher consumer traffic count.

In addition, larger centers NEED and SHOULD create center marketing events that can draw large number of consumers to their centers in order to provide exposure and predisposition for repeat visits.

My team at Arizona Commercial is looking at marketing models that join the “Center Website” to tenant exposure, high traffic consumer events and thus create the old fashioned “Win-Win-Win” for owners, tenants and consumers.

“DOWNLOAD THE 2009 SHOPPING HABITS REPORT” and above all, read it and find ways to recreate your marketing approach for 2010-11.

One thing that will not work is sitting still.

Posted by Donald Teel, Arizona Commercial

As we plunge into 2010, commercial real estate market knowledge and a grasp of trends has become an even more essential component to successful investment. If you are a commercial broker/agent it is a requirement.

Grubb & Ellis has put together a top-notch report that analyzes the commercial markets throughout the United States, region-by-region, major-market-by-major-market and property type by property type.

Not only is the data supporting the analysis accurate and well researched, G&E’s online presentation is perhaps the best I have ever seen and is a definitive tool for assessing the regional and local markets for investors and brokerage firms.

In short, I am using the online tool which features a drag-and-drop approach, allowing the user to select a regional sector, a local market and a specific property type report for immediate download.

For example, here you will see G&E’s 2010 market report for the retail sector in Albuquerque, New Mexico.

It’s a concise report that includes simplified graphics, it is easy to read and understand by any investor or broker and it lacks the typical long read format used in most commercial reports.

Another benefit of G&E’s approach is that users can also download the entire report or cherry pick the reports they want by region, state, property type, etc.

This report format model is an excellent approach, allowing those of us in the industry to locate the information we want in a precise and easy to follow manner.

Whether you are an investor or a commercial broker/agent the information has value and accessing it has never been easier. The limitation to the reports is seen in the fact that some markets are not included. However, use of the reports for trend analysis is but one obvious benefit.

Here is the link to the Grubb & Ellis online interactive 2010 report, including the national map of regions, states and major markets included in their coverage.

GO TO THE GRUBB & ELLIS ONLINE 2010 MARKET REPORT

Two camps have emerged. The first is what I will refer to as the “Disaster Camp” and the second is the “Recovery Camp.”

The Disaster Camp (DC) is the illusive analysts whose cryptic research clearly indicates we are entering an era of melt-down. The DC guys and gals come at us armed with their complex charts and narratives that prove conclusively that we are headed into doomsday.

The Recovery Camp (RC) is equally persuasive with their slick, bullet-pointed PowerPoint presentations. The RC camp trumpets phrases like “sidelined investor capital waiting to be spent” and “Bond money waiting to pounce on market opportunities.”

After all is said and done, more will have been said than done! I’m conflicted as a result of the plethora of combative voices that leave me feeling as if I have just stepped off a wild roller-coaster and cannot gain my bearings.

As we enter 2010, I’m a lot like many of my clients, nauseated and bewildered and I am vowing here and now to never ride that roller coaster again.

For at least the opening stages of 2010, I am going to go back to trusting the basic fundamentals of investment and my instincts. In the early part of 2010 I’m resolving to delete all of the emails that are in the DC and RC camp. Away with the charts and the PDFs that tell many tales.

Here is what I am going to do in 2010…return to trusting me, myself and I. Oh, I will be forced to gaze at many more PowerPoint prophets and read many more detailed documents designed to either scare me into sleeplessness or fill me with the phony messages of hope beyond reason.

My thought is that 2010 is going to be a year of disaster AND recovery. We will eat at both sides of that aweful table made up of vinegar and sugar. That is why I am going to return to trusting myself and to a healthy avoidance of investment extremism. I’m inviting you to do the same.

Dent predicts that we will see a foreclosure impact in the first quarter of 2011, 48% will have negative equity positions (mortgage principal higher than the market value) and 50% of those will be “severely” over-levereraged. We have $17 trillion in financial sector debt…all of it based upon leveraged borrowing.

Dent predicts unemployment, mortgage defaults and the worst of the crisis will be early to mid 2011.

According to Dent, “We are going to see the economy worsen again…we are seeing a recovery but it is not sustainable…next year is not going to be the year of recovery that most economists are promising.”

WATCH THIS and post a comment.

Posted by Donald Teel – Arizona Commercial

Everyone, everywhere, is talking about the real estate market. Even people who do not know anything about the real estate market are talking about the real estate market.

Understandably, much of the discussion remains negative. After all, some estimates tells us that the net value of all commercial real estate in the United States has plummeted by as much as 30% since 2006. I would like to address the shiny side of this very ugly coin.

As we come to the end of 2009, how can we successfully invest in commercial real estate?

Many small to intermediate investors have been discovering that buying was the easy side of commercial real estate investment coin…the shiny side! Managing and turning properties in the volatile environment of 2009 has proved to be the tarnished side of our coin.

With respect to the fundamentals of investment, nothing has really changed. Yet, we all know much has changed and continues to change, especially with respect to the acquisition and cost of capital and sustained values. For the purpose of this article, I would like to place a market spin on what I think are the 10 most important principles for small commercial real estate investors to follow in 2010 and beyond.

Property Type. Who could have predicted that the multi-family sector would be where it is today based upon our assumptions ten years ago. We must remind ourselves that our assumptions are merely momentary conclusion based upon ever-evolving data and that the moving data is almost always something over which we have most likely, no control.

Type-casting isn’t just a Hollywood phenomenon, it’s imperative with every real estate transaction these days and in the case of multiple tenant revenues each lease will need to be sifted and ground down in order to determine its viability and value going forward. There are “leases” and there are “Leases” and there are “LEASES.” Nothing works well if the tenants don’t!

Inventory, absorption rates and occupancy rates and CAP rates are imperative to the investment equation. There is no negotiating these issues and they are deal breakers.

Still, it’s Location. It appears that the newest and perhaps safest strategy for small to medium investors is to get big by investing small all over. Just as mix of property types is essential to a sound investment strategy, so also is the principle of multiple locations based upon regional economic dissimilarities. Atlanta’s medical office values and projected demands will be different than those of Seattle and it would be ridiculous to compare Phoenix multi-family to say Manhattan multi-family.

Within macro locations there are micro locations and micro product. For example, if one really must invest in multi-family in Arizona, it would be wise to see investments with 4-8 tenants, under $2 million and perhaps not in the dense market of metro Phoenix but perhaps in central or northern Arizona communities of Prescott, Sedona, Payson or Flagstaff, since these markets are more self-contained.

Sound commercial investment thinking must go beyond the local to the national and even, when qualified and warranted, an investor can think international.

Commercial investment is about the cash flow and it is the cash flow that will ultimately determine the investment property value.

The Pace of Personal Risk. Too much, too fast is what I saw occurring from 2000-2006. Investor appetites were often out of control, money was easy and many believed the returns were going to be sustainable. Not so, we all know now! Pace of investment, especially where the investor is relatively new to commercial real estate is sooooooo important. It’s advisable that a new investor look at one property every 18 months for three years, as a basic formula. There is just too much to watch, more to know and the risks are greater than at any other time in history.

A partnership buffer can help with personal risk. It’s not advisable to put all of your eggs into one basket and it is less than optimal to do so alone. It looks like partnership are becoming more attractive to a lot of previous Lone Rangers who are now mortgage heavy and cash light. On most properties I have owned, there has been a partner behind me, beside me and in front of me and it always helped with both risk balance, capital demands, mortgages and in the end divestiture.

Going slow and not going slow alone is the new formula for smaller investors.

Demand Analysis. I have watched many small investors purchase a property with limited or no demand analysis. Demand analysis looks at the next owner who will step in at year 5 and it looks at the numbers that can indicate current and future user demand.

Questions to ask might be: Who wants the property today and why? Who will want it tomorrow and why? Who are today’s buyers and why? Who are tomorrow’s users and why?

I have never been fond of Las Vegas and I am not a gambler. Dice and I don’t mix well and cards are even worse. Slot machines emanate noises that frighten me. Gamblers eventually fold and there is really no place in commercial investment for risky speculation. Demand analysis can minimize some of the crap shooting that became all too inherent in real estate investment during the first decade of the 21st century.

Earlier in this piece, I talked about inventory and absorption rates. In many cases, investors complete ignore these trend lines and make investments solely on attractive CAP rates at the time of purchase. Understanding the demand cycle past, present and future will tell you a lot about an investment and give you some comfort that tomorrow’s market will serve your interests.

Ask Vs. Bid Strategy. Spread is everything. Spread forms the initial basis and our capitalization model should strengthen it further. We are seeing an incredible amount of stress regarding what owners say they must sell or lease for and what smart buyers are willing to risk. The ask value is no longer valid when risk is high. What an owner paid is almost irrelevant to today’s informed investor and nothing is worse than extremism on both sides of that negotiating equation.

In the past year, more than ever, I have heard buyers talk about things like “we need to adjust our offer (bid) in a way that we are protected for 36 months in case the market continues its decline. Buyers are bidding with a calculator set, not to appreciation, but rather to depreciation. Buyers are actually betting on losses!

The ask vs. bid spread creates a huge set of psychological negatives in a transaction and traditional lenders are taking hard and long looks at projected appreciation based upon property actuary tables, the life cycle of performance.

Better than half of all small to medium sized commercial property owners have seen more than 25% decreases in their property values. This is disrupting lease values, tenant negotiations and ultimately the asking price.

Crafting (another work for Brokering) the transaction involves a lot more patience and skill with respect to coaching the competing interests of the Asker and Bidder so that there is a reasonable expectation of a meeting of the minds. Tilting the transaction to one side or the other can lead to serious financing problems, not to mention ROI issues. Owner who ask too much attract buyers who offer too little. In the end a good commercial transaction will be empirical, not emotional.

Creative Capitalization. Risk is always a function of the market conditions and the cost of capital or, I might say the “capital plan.” These days, I am becoming a big fan of creative capital sourcing, i.e., partnering the capital requirement through partnerships and other structures including, LLC and Sub S corporations (see your legal and tax advisors for input).

The lending streams are parched and institutional lenders are increasingly favor stronger partnerships that can personally and severally guarantee. However, there are other capital marriages that can include down payment partnerships that provide a down payment partner with 30% interest in a single asset commercial LLC in exchange for a 20-20% capital requirement. Today’s numbers need to look very good and provide 12-15% cash-on-cash return. In addition, the exit strategy must be rock solid at the end of a 3-7 year model and will most likely need at least one round of new financing.

Shifting or spreading risk is a good way to think. Formation of partnerships, joint ventures, LLC and corporations that involve multiple players is what I call creative capitalization. Do not over-leverage a property just so you can buy it. In fact, never over-leverage.

Management. Property management for small and medium sized investors is a much larger factor than is admitted. The value of maintenance, attention and presence can create substantive value increases to an investor. Yet, many smaller investors attempt to manage property without management services. This is almost always a mistake. Professional property management services have been known to hold value and in some cases protect owners from factors that can destroy return.

Property Management can be the eyes, ears and sense of touch and taste for a small investor and the cost of management should be rolled into the performance analysis.

A simple rule to follow is that if you do not have to manage your own investment, do not attempt to do so. The marginal savings will not be worth the effort. Typically, if a small investor has more than 4 units to manage or more than a $300,000 investment the management should be placed in the hands of trained Certified Property Manager.

Let me remind you that bad management can also contribute to the decline of property value and selecting, reviewing and correcting property management is a part of the investment model.

Reserve Resources. Capital reserves are as valid for the $200,000 investor as they are for the $15,000,000 investor. In fact, the stakes may sometimes be higher and the risk ratio more dangerous for small investors who do not create and maintain capital reserves as a part of the investment formula.

Capital reserves are something your Broker can assist you with and a factor in property management analysis that helps owners manage for the long term by having funds available for those pesky, yet often expensive “surprise” capital requirements.

One of the key reserve resources is adequate property, casualty and catastrophic insurance, including, when necessary, flood insurance. In addition, a percentage of cash flow should be allocated to a capital reserves account, monitored by your Property Management Company.

Air conditioning, heating, parking lot surfaces, roofing, glass, pools, common areas and other expenses can destroy property value and place capital demands on an owner that are unsustainable. When you invest always, always…let me say it again, always create a capital reserve analysis commensurate with the property and make the property performance fund these reserves.

Reserves can also be in the form of personal wealth or lender commitments. The principle is a simple one; if you are a commercial real estate investor you WILL need a source of capital funds and having access to capital can serve as a hedge against the market. Survival can sometimes be dependent upon having access to affordable funds.

Holding and Folding. There is that popular country western song with the lyrics, “you’ve got to know when to hold ‘em, know when to fold ‘em” that has as much wisdom as it does rhythm. Knowing when to hold and when to fold is a skill, not just an impulse. This skill is true not just in the game of poker but in a commercial real estate investment model as well.

Many investors who were advised to “fold ‘em” waited too long. They should have sold when advised to do so by their Broker but they refused to do so and now they hold properties that are highly devalued in the market.

There are many rules to follow when holding and folding and each property, its location, the objectives of the owner, market trends and the availability of financing all play a role in determining when it is time to sell and walk.

Pay attention to trends. Study the trends. Know the trends. Especially important to the hold-n-fold tension is your knowledge of capital and lending trends. These are often ignored in favor of market analysis. Capital markets are often ahead of broker analysis of market trends. Lenders are typically a cycle ahead of the market and therefore knowing when to hold and when to fold is largely a function of lending strength and the availability of affordable financing.

Let me say one more thing about this subject. If you have a property that is free and clear and the leasing trends are in a downward spiral for that property type, it may be best to fold and carry back the financing for as long as you can in order to offset value losses created by market declines. If you can be the bank, be the bank.

Rotation, Rotation, Rotation. Exchange rules are not such an easy game to play today; however, exchanging property is a key fundamental to building long-term wealth. Once you are in the game, it is not so much about location, location, location as it is about rotation, rotation, rotation.

Flipping property by means of tax deferred exchanges should be built into your investment plan and model at the time of your first purchase. The key to this is that sales are taxable events in the eyes of the Internal Revenue Service, while 1031 exchanges are not immediately taxable events.

The 1031 tax deferred exchange is an IRS approved model for selling one “qualifying” property and from the proceeds acquiring another property of like kind within an IRS approved length of time. The transaction of selling and re-investing is treated as an exchange and not as a typical sale where capital gains are taxed.

Property rotation under the IRS rules of exchange is the most lucrative long term method for building wealth through real estate investment. There are specific rules and processes that must be followed for rotating in and out of properties but a qualified Broker or what is known as an “Intermediary” can explain those rules to you.

With each investment, we must ask ourselves the questions, “When will I sell?” and “What will I do with the capital…pay taxes or, invest again to increase your wealth?”

Posted by Donald Teel – Arizona Commercial

In today’s commercial investment environment, property taxes can be lethal. Many investors are still paying property taxes that are reflective of the market run-up of 2000-2006 and not necessarily on the current valuations of their investments.

The questions are what can you do about inflated tax valuations, where do you turn and more importantly, how can investors challenge property tax values successfully?

Property Tax Analysis. Create an analysis of the assessed value of your property for the previous five years to determine the trend line. The analysis should show the assessed values and compare those with a legitimate Broker Price Opinion (BPO) to show market value trend compared to assess valuation trend. It might look something like the following (Download the FREE sample spreadsheet here).

Assessed Value VS Market Value Sample Analysis - Sample of Presentation for Tax Challenge

Commercial BPO. Secure a commercial property broker price opinion (BPO) for your property to help determine the market value trend line. Arizona Commercial can do this for you for a nominal fee. The report includes photos, recorded sales values, spreadsheet analysis and conclusion.

The BPO must include such detail as location within the market, property style, age, square footage, lot size, parking, vacancy/occupancy rates, number of leasable office/areas, and other issues that demonstrate the empirical value of the property.

Appraisal Approach. If the first two suggestions demonstrate that you have a potential tax overcharge, the final requirement may be to secure a full appraisal with detailed analysis of comparable properties. Appraisals are expensive and should only be used if the economics of the situation warrant such a measure. However, when push comes to shove, a certified appraisal will carry more weight than a commercial BPO.

Challenge Process and Procedure. States have specific procedures for challenging property taxes and the process must be respected in order to be successful.

The process will include forms, time frames and details that must be completed prior to consideration of a claim. Following these procedures and time limitations will be a critical factor. Most likely you will be required to pay the taxes while challenging their validity and if taxes are not paid in a timely manner, other negative consequences can occur in the form of interest and penalties and in severe cases, assessors may sell the delinquent taxes with a lien or even sell the property after a specified time.

Appealing a tax bill is not easy and may include several layers of review including a hearing for the property owner and even judicial recourse. Ask your County Assessor’s office for a copy of their appeal process.

Failure, Refusal or Inability to Pay Taxes. It is unlikely that a refusal to pay property taxes pending the outcome of a challenge will carry any weight and may further exacerbate the problem by creating a hostile situation.

Philosophical, political or principles of conscience are irrelevant to the process. However, in some cases, hardship may be considered as a factor in when and how the taxes are to be paid. Hardship exemptions are difficult when it comes to commercial property and typically are more successful when the property is a primary residence.

Generally speaking if an owner cannot pay the commercial real estate property taxes that owner should immediately communicate with the County Assessor’s office where the property is located and seek advice.

If a challenge is in order, owners may want to contact a competent lawyer with experience in real estate property tax law.

Declining Commercial Values. Most property types have declined in value and this naturally leads to an examination of all expenses related to market value and the cost of the property, including property taxes.

Declining values are now creating a backlog of challenges and yes, it can get very nasty, as some governments are deliberately protracting the challenges and the court cases to their advantage.

There is no doubt about it, however, that some owners are still paying taxes based on unsupportable valuations from previous years. Despite the declines, property taxes have continued to climb in far too many markets. As an example of the lagging, for the first time in 12 years, property taxes in some areas of Los Angeles County declined up to 15% while others increased.