Industrial and retail space

[msa1]

Anyone here into it? It seems like most commercial posts here are about apartments and I havent seen many posts on retail and industrial. This is the area I am interested in.

Anyone have any advice for this part of the market?

 

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[Kontis]

Anyone here into it? It seems like most commercial posts here are about apartments and I havent seen many posts on retail and industrial. This is the area I am interested in.

Anyone have any advice for this part of the market?

what kind of advice lol

 

[msa1]

Anything. Give me your first experience. How'd you find the deal? How did you sell it to the bank? Did you need a ton of cash, or can you get in with no skin?

 

[Kontis]

I'm not an expert, yet :smxB: but here's my contribution.
In NY there is a way to obtain 10% financing on user/investor (51% usage/49%usage) for the property but If you are looking to purchase let's say a retail shopping centers or a multi-unit industrial building, as an investor. The banks that I have dealt with want to see a strong rent roll and 30-40% depending on the size of the deal (typically under $3mm). When shopping around for these properties be sure to get a complete offering memorandum with a copy of the RE tax bill, water & sewage bills, electric bill for common area's and for Tenant's space (whether they are NNN or gross leases), trash removal, etc. With my experience I noticed banks do not like projected figures on the rent that are extreme. It is also best to use the smaller local banks that know the area and what it can do as opposed to one of the big timers.
If you have a chunk of cash to park in a nice retail center with great tenant's in place and a good rent roll, etc. you can do that or you can look for smaller, not so good looking centers that you can do renovations, find better tenant's or possibly even develop. As for industrial, make sure the properties are close to highways/expressways, not too tucked in where people would have a hard time locating them, high ceilings/loading are always a huge plus and plently of parking so the containers maneuver in/out.

 

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[SteveO]

The biggest lending crunch in history is about to hit the commercial market. A very high percentage of commercial loans will be coming due this year. What this means is that unless money becomes available for these owners to refinance, there will be a tremendous amount of defaults.

The past lending environment was allowing people to purchase office buildings and retail centers with much lower down payments than was allowed in past years. That has tightened up. Combine this with the shrinking occupancy and a sour outlook over the next couple years. Lenders are not going to have the ability to underwrite many of these loans for anything close to what is owed.

Expect a major crash in commercial.

Don't expect to be able to get in with little down for a while. Underwriting is going to be very strict for a while. Banks are going to be in protection mode.

There will be some great deals out there for those with loads of cash!!!

 

[msa1]

Thanks for both replies. Steveo, you're making this sound like something I may have a hard time accomplishing with-in my "this year" goal.

Assuming I find a deal that cashflows with the right numbers, will it be possible for me to have owner financing for the 20% and then get a bank to handle the 80% note? Liquidity (right now) is not a friend of mine.:>)

Thank you for the tip about local banks. I plan to go meet some bankers in the very near future.

 

[SteveO]

You may be in a strong position to find your first deal this year. Cash would help you tremendously. Having access to cash will help you also. Find the right deal and the money will follow.

You will also need to show others why it is the right deal. Homework and evaluation will help you here. Look at enough deal and understand the market well enough that you can show others why the deal is good.

Lenders will not allow you to get into the game without skin in the game. Financing is not very available right now. It would help you to talk to enough lenders that you understand what is available. They are probably going to want 30-40% down these days. Apartments are different. They require less down and usually have lower interest rates as they are deemed less risky.

Seller financing usually comes with a price. A high price. But it might be something that can be found with a lot of detective work. They will still want a down payment.

History has shown that people with little skin in the game can easily walk away when the going gets tough. Someone that has put a substantial sum into the deal will make every effort to salvage that money.

It all comes back to having cash available. There are few other options.

Your goals should revolve around figuring out how to put enough money to at least entice investors. There are people that will invest in your great deals but they will still likely want to see you put something into it.

 

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[msa1]

Thanks again Steve. I'm trying to learn as much as I can right now and like I said I plan to start introducing myself to some local bankers and look over a few deals. I figure this will help me build some real world knowledge of the commercials.

As far as cash goes i'm trying to clean up alot of debt right now, so liquidity may be a bit of a problem.

 

[hatterasguy]

Thanks Steve thats excellent advice. Right now I'm trying to build up some "skin" on the residential side.

 

[msa1]

Thanks Kontis,

your advice sounds alot like the book i'm reading right now (Trump 101 Commercial RE Investing). So I guess that puts you in good company.

 

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[reipro]

We have both retail and industiral properties. They both have there pros and cons. We own a 31,000 sq ft warehouse with 21 bays. It has 15 different tennants. It is stable as we always have 1 or 2 vacant, and has a positive cash flow, but not that much. On the other hand we have a retail strip mall, when full on long term leases (5 years) it cash flows great with losts of spendable money. On the other hand when we have just 1 vacancy it is barely break even time. It is all what your risk tolorence and preferences are. I hope this helps

 

[Kontis]

Lenders will not allow you to get into the game without skin in the game. Financing is not very available right now. It would help you to talk to enough lenders that you understand what is available. They are probably going to want 30-40% down these days. Apartments are different. They require less down and usually have lower interest rates as they are deemed less risky.

It came to me as a surprise when I read the highest percent of commercial mortgages going in/already in default were on apartment buildings. The article was from The WSJ and stated that many Landlord's purchased these buildings for above market value and now that it is time to refi, the building is appraised for lower than the balance of the mortgage is b/c the rents did not stay as strong they were in the previous leases.
Being located in the boroughs and meeting diff investors many of them claim multi-family dwellings to be the safest commercial investment to make. There will be some good deals out there for people with cash. The conservative Landlords with deeper pockets are in acquisition mode. Good luck to all

 

[SteveO]

There are some areas that are falling apart at the seams. Vacancy has gone through the roof in areas that were hit hard by the housing glut. Way too much supply.

The construction jobs went away and the market was flooded with rentals. Now the economy is losing jobs in general.

Combine that with lax underwriting standards and you have the right recipe. I have looked at a lot of properties lately that are worth less than the loan that is on them.

But, that does not diminish the retail and office storm that is brewing.

 

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[msa1]

David, I have a friend here (locally in Detroit area) that seems to be doing quite well with commercial. He sticks mainly with smaller shops although he has a couple larger buildings.

He's offered to help me when I have some cash, but I really need to get moving. I dont mean jump in blindly mind you, but I need to start progressing beyond the SFR's I have.

There's not enough money in them to meet my goals.

 

[Kontis]

But, that does not diminish the retail and office storm that is brewing.

retail was right behind the apartment bldgs with offices not far behind. many of the developers that can't move their condo units are holding onto them as rentals until the market turns as well. Long Island City, Queens and Greenpoint, Brooklyn have been devoured by developers in the past 7 years.. finally caught up

 

[hatterasguy]

Steve do you think the low interest rates will help any?

This further bad news isn't very encouraging, now not only do we have the pay option loans and that orgy of bad lending in the residential market to look forward too...we have the commercial side...great.:smx6:

 

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[SteveO]

I'm not sure that the apartment lenders are taking it on the chin on a national level. There are always local markets that will be in different stages of the game. Overall, there has been a slight softening of the apartment market due to the economy. Some localized markets are really screwed up though.

 

[andviv]

I'm not sure that the apartment lenders are taking it on the chin on a national level. There are always local markets that will be in different stages of the game. Overall, there has been a slight softening of the apartment market due to the economy. Some localized markets are really screwed up though.

what markets have made it lately through your screening?

 

[SteveO]

Steve do you think the low interest rates will help any?

This further bad news isn't very encouraging, now not only do we have the pay option loans and that orgy of bad lending in the residential market to look forward too...we have the commercial side...great.:smx6:

It really depends on how much liquidity comes back to the lending market. The commercial market needs funds. Apartments have Fannie, Freddie, and Ginnie to fall back on. Banks and insurance funds don't seem to be giving favorable enough terms to the commercial market. If money begins to flow, this may all change.

 

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[SteveO]

what markets have made it lately through your screening?

Well, there is nowhere that looks as appealing as Phoenix. The problem is that the lenders are tending to hold on for better times. Many properties are worth less than their loans. I am eying properties for 35K/unit that were 65K a couple years ago.

Parts of Florida are on the horizon.

I still like Houston for a lot of reasons that you will hear soon. Working on a deal there that is a stone throw from the Galleria.

 

[hatterasguy]

$35k a unit! What kind of rent are you getting for something like that?

 

[SteveO]

Assume in a very general sense $500 for one br and $620 for a two.

 

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[hatterasguy]

Thats a nice ROI, far better than I have seen in rentals around here. I guess the bigger buildings do much better.

 

[Reefbreak]

If you have a chunk of cash to park in a nice retail center with great tenant's in place and a good rent roll, etc. you can do that or you can look for smaller, not so good looking centers that you can do renovations, find better tenant's or possibly even develop.

I realize this post goes back aways, but I just want to make a few random observations on Kontis's sage advice on re: a good rent roll. As a potential investor in say...a small strip shopping center... I would spend a heckuva lot of time going over that document tenant by tenant. I would want to know which tenants were national/regional, and which ones were local. What tenants were coming up for lease renewal in the next 24 months, and through conversations with the owner or owner's leasing rep, what are the chances for renewal? Someone else posted that it only takes a few vacancies in a small strip center to cripple cash flow...very true. For local tenants, I would even go as far as speaking with them about their future plans. What are the current lease rates, and are they in-line with market? I would want to note tenants that were expected to renew... and at what type of rental rate? What type of rental rates could I expect on potential future vacancies? These are just a few of the questions. Keep in mind that the owner/owner's broker will try to be as optimistic as possible about current and future leasing assumptions. As a buyer, I want to shoot holes in as much of that as I can (if possible), and that takes a ton of due diligence. With all of this information, and some other things... you will want to make your own cash flow projections for several years out.. based on realistic lease assumptions and accurate expense forecasting.

Also, keep in mind that when a commercial building changes ownership, there is normally a new assessment done by the local municipality. I've never seen property taxes go down in these cases. If the lease allows the increased property taxes to be passed through to the tenant, it might impact what that tenant can then afford to pay as a base rent on a renewal deal.

OK. I am fried from too much horseshoes on the beach today. If there any errors or omissions in the above... I'll blame it on that. :smx4:

 

[MJ DeMarco]

I realize this post goes back aways, but I just want to make a few random observations on Kontis's sage advice on re: a good rent roll. As a potential investor in say...a small strip shopping center... I would spend a heckuva lot of time going over that document tenant by tenant. I would want to know which tenants were national/regional, and which ones were local. What tenants were coming up for lease renewal in the next 24 months, and through conversations with the owner or owner's leasing rep, what are the chances for renewal? Someone else posted that it only takes a few vacancies in a small strip center to cripple cash flow...very true. For local tenants, I would even go as far as speaking with them about their future plans. What are the current lease rates, and are they in-line with market? I would want to note tenants that were expected to renew... and at what type of rental rate? What type of rental rates could I expect on potential future vacancies? These are just a few of the questions. Keep in mind that the owner/owner's broker will try to be as optimistic as possible about current and future leasing assumptions. As a buyer, I want to shoot holes in as much of that as I can (if possible), and that takes a ton of due diligence. With all of this information, and some other things... you will want to make your own cash flow projections for several years out.. based on realistic lease assumptions and accurate expense forecasting.

Also, keep in mind that when a commercial building changes ownership, there is normally a new assessment done by the local municipality. I've never seen property taxes go down in these cases. If the lease allows the increased property taxes to be passed through to the tenant, it might impact what that tenant can then afford to pay as a base rent on a renewal deal.

OK. I am fried from too much horseshoes on the beach today. If there any errors or omissions in the above... I'll blame it on that. :smx4:

Thx ...Speed+

 

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