CommercialWebPage

Jay Paul Leupp, founder of Grubb & Ellis, talks with Bloomberg’s Julie Hyman and Mark Crumpton about the outlook for the U.S. commercial real estate market. Leupp also discusses his investment strategy and prospects for Associated Estates Realty Corp. and Sun Communities Inc. (Source: Bloomberg)

---

---

Donald Teel is a Senior Associate and Principal with Arizona Commercial, an Arizona commercial real estate brokerage and property management firm, headquartered in Prescott, Arizona. Need more information? Please call 1-877-777-9100 or, if you prefer, you may email Donald Teel

Like many who find themselves connected to the lifeblood of the commercial real estate market, I have been listening, researching and studying the myriad voices and have come to the conclusion that we are entering 2010 in a state of conflict.

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.

---

Donald Teel is Senior Associate with Arizona Commercial, an Arizona commercial brokerage and property management firm. Need more information? Please call 1-877-777-9100 or, if you prefer, you may email Donald Teel

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.
Continue reading “How 2s for Investment Today”

Posted by Donald Teel, Arizona Commercial

Taking the guesswork out of commercial real estate investment requires more than a hope, a prayer and signature.

The genesis of commercial real estate investment is found in the analysis of the basic math surrounding the transaction. Costs, cash flow, depreciation, appreciation, money in and money out. Math is the science of the deal.

While the origin of commercial transactions is found in the science of basic mathematical functions, the art of performance is found in the crafting of the document; this is the model. Well crafted documents are extensions of the numbers and the intentions of the principals.

If there is to be any semblance of predictability of performance such must be memorialized and embedded in the language that constructs the investment, i.e., the purchase agreement or lease agreement.
Continue reading “Upon these Three the Deal Hinges”

Posted by Donald Teel, Arizona Commercial

Commercial investors and real estate brokers/agents toss around the term “cap rate” as if it were some sort of tell-all with respect to commercial property value or the measurement of the strength of a commercial property investment.

Hold your horses!

Can a CAP rate determine a property value? Are CAPS an accurate measure of an investment? Can CAP rates be trusted as a true litmus test for investment?

Answer: No, no and no. In fact, CAP rate determinations are now coming under assault.

Brokers often convey value and pricing by dividing net operating income by a purchase amount, such as 125,000 (noi) divided by $1,125,000 (price) equals a cap rate of 11.1%.

CAP rates are simply the measurement of a property value for a given 12-month period “IF” the property were purchased “cash.” CAP rates are impacted when investors utilize financing and the terms of financing, such as interest rate, points, call date, etc., impact “true cap rate.”

Real World CAP Problems. What happens in a market where the actual or contemplated lease rates fall below levels suitable for so-called “adequate” cap rate?

Savvy investors know how important cash flow is and more importantly, how important predictable and sustainable cash flow is in a down market. Real world cap rate problems occur when the strength of rent rates is compromised by a struggling economy or by tenants who vacate properties due to their business failing to perform.

Example: If the prevailing and sustainable (emphasis on “sustainable”) market rents are anticipated to trend downward for more than 12 consequtive months due to a faltering national economy, cap rates may be a less than optimal way to determine purchase price value.

Welcome to today’s real world problem with cap rate valuation! I have a theory that the accelleration of tenant default has now become the single most powerful force in declining commercial property values. There goes sustainable NOI.

The Assault on CAP Rates. Shopping cap rates is usually a faulty initial premise in today’s market since most investors are unwilling or unable to park cash into 100% of the purchase price of a leased property.

Today, long term tenant performance is becoming less stable and the market competition for “exceptional” tenants is heating up. Vacancies are driving down NOI, lenders know this and are now adjusting their cap calculations to include historical property performance perdictions.

Cap rates as a tell-all financial apparatus are under assault and weighted calculations for financing and property segment performance MUST be taken into account by investors more than it has in the past.

A trustworthy cap rate will always be adjusted by the cost of money and the cost of alternative investments measured against real estate investment returns.

The strength of lease agreements, tenant performance, type of business and the cost of money over time (typically 3-5 years) are now more significant than ever.

Want more information about cap rates and the central and northern Arizona commercial markets? Email me or, if you prefer, call me toll free at 877-777-9100.

Goodwill of Central Arizona has just signed a new 10 year lease offering an 8% Cash on Cash return.

This is an excellent opportunity for an investor to acquire a value added, well located commercial investment property in Prescott, Arizona.

The existing lease is a new 10-year absolute NNN lease with increases and percentage rent and two five-year options to renew.

In addition, the property includes a 4,500 sf pad for retail expansion.

Property Description:
ASSUMABLE FINANCING. 5.75%, 27 year note, 15 years with option to renew at market rates. 8% CASH ON CASH. Single Tenant new 10-year Absolute NNN Lease with Escalations and Percentage Rents. 25,000 sf. Investor opportunity to acquire a well located, value-added asset with no landlord responsibilities. Includes a 4,500 sf Pad for additional expansion. Goodwill of Central Arizona is one of the largest and oldest nonprofits operating in the state of Arizona for more than 60 years.

Location Description:
Located within the Prescott Towne Center, a 53,000 sf retail center comprised of 3 buildings directly across from Village at the Boulders with Super Wal-Mart, Big Lots, Tuesday Morning, JoAnn’ s and Dollar Tree.
Continue reading “25,000 sf Retail Investment in Prescott, Arizona”

NEWS: CB Richard Ellis CRE Investment

CB Richard Ellis (CBRE) commercial investment firm has some things to say about how investors indulge in the current CRE soup. In a Special Report document published in April, 2009, entitled “Advantages of Investing in Commercial Real Estate,” CBRE addresses both CRE stock and invididual investment strategies and states,

A key difficulty in developing and implementing an exit strategy in the current CRE environment is the wide chasm between the bid-ask spread. A contributing factor to this is the relatively high appraisal values prevailing in the U.S., causing sellers to dig in their heels unless they are truly distressed. At the same time buyers are looking for bargain-basement opportunities. As a result, transaction volume has plummeted 74% in the U.S., according to Real Capital Analytics.

On main street America this analysis has real meaning as commercial property owners experience their own “bid-ask spread” in terms of lease and selling prices, i.e., what owners want and need measured against what tenants and buyers are willing to pay. The “bid-ask spread” truly impacts sellers with mortgages created in the 2005-2007 time period, especially if any cash-out factors came into play on these loans or, more significantly, if second position notes and deeds have been created.

The CBRE report is worth reading even by the most casual and low-keyed commercial investor because it helps bring clarity to the current market situation in which we all find ourselves.

Still, the CBRE document makes a good case for looking long term with respect to CRE investmets, whether securities or real property. CBRE’s “Special Report” is a must read document.

DOWNLOAD THE CBRE DOCUMENT: Advantages of Investing in Commercial Real Estate

Arizona Commercial has launched a comprehensive real estate owned services (REOS) division as an investment channel for commercial investors.

Commercial capital and financial experts are predicting that the commercial market will begin to experience an accelleration of “Bank Owned” (REO) properties as more and more owners experience downturns in tenant performance and the inability to service existing mortgage debt, note calls and stringent refinance requirements.

It’s About the Money. Throughout 2009 and well into 2010, commercial owners are going to come under some pressure with respect to turning properties and even exchanging out due to the financial markets.

Sellers are already having problems finding buyers for conventional property investments. Why? It’s about the money AND it’s about the decline in values that buyers don’t want to face after they purchase.

New Market Realities. Savvy investors are thinking about the new market realities and where they need to park their money for the next 24-48 months. The key is minimizing risk.

This investment reluctance is leading investors to pursue real estate owned property (REOs) and that is why Arizona Commercial, my company, has established “REOS” or, Real Estate Owned Services” as am owner consulting and investment service.

REOS involves consulting services for existing owners, bank asset managers and of course, investors who are resisting declining property values found in traditional investments.

Want to know more about REOS? Register with us for confidential inclusion in REOS. Or, if you prefer, email me or, better yet, call me, toll free at 1-877-777-9100.

Sound commercial investment is always based upon a perspective from aloft.

This aerial image of Prescott, Arizona’s downtown commercial area does not tell us much. It simply makes me wonder what is happening north, south east and west of the core area. There is a need to pan.

Market perspective plays a huge role in the analysis and decision making behind NOI, ROI and long term wealth accumulation for an investor. Putting distance between oneself and the market creates a better view.

Today, perhaps more than at any time in the last decade, market perspective counts and can easily impact a commercial transaction’s ability to perform and deliver the desired financial objective.

Lenders are looking at transactions with an eye toward long term performance based upon what I might call property actuaries. If a property segment (type) such as retail, medical, industrial, multi-family is on life support, the lenders are going to factor that illness into the capital risk formula.
Continue reading “Market Aloft: The Birdseye Approach”