Market Cycles for Commercial Properties

Now you might not all be fans of The Apprentice, but certainly you can appreciate all that The Donald has done for Commercial Real Estate! If you’re ever feeling like you need a motivational read, pick up one of Donald Trump’s books. I like “The Art of the Deal” and I also like “Trump - Strategies for Real Estate: Billionaire Lessons for the Small Investor“ which was written by Trump’s long time attorney, George Ross.

They said all markets have phases that they go through — some phases favor the buyer and others favor the seller. Let’s take a look at the phases in real estate market and see what we can expect.

The the first phase is the Expansion Phase. This is a time of prosperity and market growth as the name implies. People are buying, and building, and selling – the money flows freely in many directions. What eventually happens however, is that the market becomes over-built. So many people see the incredible profits being made, they all jump on the building band-wagon at once, causing huge numbers of unsold inventory to come online at the same time triggering the next phase which is the Decline Phase. The economy may begin to slow, unemployment creeps up and property movement becomes stagnant - seller’s aren’t selling, buyer’s aren’t buying. Finally, the market moves into recovery, the over-building is becoming absorbed, and the flow begins again. This is called the Absorption Phase and heralds the beginning of recovery.

Someone like George Ross, who is 80 years old, has seen markets go through these phases many times over the years and its always the same — like winter, spring, summer and fall. The phases come in exactly the same order over and over again. The only difference is how long each phase can last. A complete cycle of Expansion, Decline and Absorption can last anywhere from 8 to 12 years — no exact science here!

He is very quick to point out that The Donald loves being in the Decline and beginning of the Absorption Phases as those are truly the market in which you can make the most money.

If you read either of the books I mentioned above, you’ll read the story of when Trump bought one of his first buildings in a horrible part of town, in an economy in which New York City was in dire straits financially. The entire purchase of the Commodore Hotel was literally pieced together one tiny step at a time. Donald was able to purchase the old hotel in 1975 for $1 million! Today it is the Grand Hyatt Hotel at Grand Central Station — one of the most luxurious Hyatts in the world and worth hundreds of millions! It’s a great story with all kinds of twists and turns, but the point is this:

At the time, the real estate market in New York City was in serious Decline, which makes for a buyer’s market. The old hotel was purchased for only $1M by 27 year old Trump and he’s turned it into a thing of beauty. So Trump’s motto is to buy in the Decline Phase and during the first part of the Absorption Phase, then fix the property up and sell it toward the end of the Absorption Phase into the Expansion Phase.

Another thing to keep in mind is that one area of the country may be in a very different phase from another. Let’s take a couple of examples. Phoenix, Las Vegas, Miami and the like were in an Expansion Phase just a few short months ago. But what happened is that over-building flooded the market with excess inventory and building came to a halt. When building shuts down, many jobs are impacted. Construction workers migrate to where they can find work, construction wholesalers and retailers lay off workers, the service industries are impacted by people tightening their belts — its a chain reaction that causes the Decline Stage to trigger. Now Phoenix, Las Vegas, Miami and other areas have inventory just sitting.

On the other hand, places like Dallas, Atlanta, Denver, and Chattanooga to name a few, were in the Declining Phase several years ago. The excess inventory in those areas has been used. Over time the population continues to expand, people begin to move in and eventually, the supply of housing has reached equilibrium with demand. Now building starts are beginning to increase, and those areas of the country are in the Absorption Phase. This is a GREAT time to buy in these areas as demand is picking up and when demand exceeds supply the advantage shifts from buyer to seller. Right now, buyers who are savvy enough to read the signs in the market phase can end up making large profits very quickly!

This is an excellent time to be buying in MANY areas of the country — find areas where the over-supply of housing is declining, where job growth is increases, where existing properties are being rehabbed, where rents are beginning to rise. These are the market areas that are ready to move into the Absorption Phase — buy with both hands!!!

So take some time and find out what phase your area is in and plan accordingly. Also, find an area that is moving into the Absorption phase and network with the broker's in that area, because good things are about to happen.

Happy scouting. Go to http://nacreps.org to become a commercial property scout.

Commercial Real Estate is not Folding, Just Slowing Down

While the housing market continues to decline in a lot of the nation, the multifamily sector is still growing. Let's face it, people need a place to live. Apartments, duplex, triplexes, fourplexes, etc are in great demand, especially ones that are cash flowing and have a good upside. Or even ones that have gone into foreclosure due to any number of reasons and are now being bought at prices will below market value.

There is money out there for commercial aquistions, but you can rest assured the properties are vetted and number are verified really work before they are purchased. The big boys on wall street are buying defaulted mortgage notes for both single family residences (SFR) and commercial property.

Land banking is not happening, except in very hot growth area's and only in the path of progress. Developer after developer of SFR's are unloading some, if not all of their land holding to free up cash and stop the bleeding. Some few builders/developers are converting to apartments, which are marketable the majority of the time.

While Fannie Mae and Freddie Mac are in the SFR mortgage business, it is interesting to see them get on the multi-family housing mortgage train. While their investments tend to be on the smaller order of multi-units, they are building their mortgage portfolio.

The Federal National Mortgage Association (Fannie Mae) and the Federal Home Mortgage Corp. (Freddie Mac) hold or guarantee more than $6 trillion in mortgages - nearly ½ the nations total. Most of that is for single-family residences, but the two agencies and the Government National Mortgage Association (Ginnie Mae) also held $157 billion in multifamily debt in their portfolios at the end of the first quarter of 2008 and nearly $143 billion in mortgage-backed securities.

These agencies hold more than a third of the nation’s multifamily mortgage debt. Even though experts believe Fannie and Freddie are too large and too important to fail, some investors worry about their continued role in multifamily mortgage financing.

But in a article I read yesterday, a Fannie Mae representative came out touting their current role in supporting the apartment industry. In fact, the volume of deals done the first half of 2008 was larger than it was in the first half or 2007. The spokesperson reiterated, “We plan to continue investing and growing the multifamily mortgage market.”

The article was extremely optimistic about the assurances from Fannie Mae and Freddie Mac of their financial health and their ability to continue sponsoring loans. With the regulators and the Fed’s willingness to provide additional liquidity, the risks seem minimal.

Jamie Woodwell, vice president of commercial/multifamily research at the Washington-based Mortgage Bankers Association had this to say: “From my perspective on commercial real estate and commercial real estate finance, the commercial and multifamily mortgages have been performing extremely well. They’ve been strong assets for those investors in the mortgages. So I think there are a lot of reasons for those investors to continue to look to commercial real estate finance as a place to put their money.”

This is good news for us. Multi-family properties will continue to do well AND with the commitment of Freddie Mac and Fannie Mae to continue to support multifamily mortgages, this is one segment of Commercial Real Estate that is remaining strong.

If you are interested in getting into commercial real estate at a scouting level, check out http://www.nacreps.org

The National Association of Commercial Real Estate Property Scouts stays on top the shifts in the commercial real estate market and keeps their scouts looking for the next deal.

Isn't Commercial Property Really About the Numbers?

I was in a meeting just the other day and the speaker was saying, "Listen guys, it is really all about the numbers, it is simple math." I got me to thinking. Are not, all of businesses about the math at the end of the day?

Every commercial building started with the land and an idea of what to do with the land, did it not? Next came the money men, did the numbers work to start the project? Would he make his money back after getting it zoned and entitled? Then the builder is brought in, could he build the building with in the budget? Would the developer make his money based on his projections of construction? Could he get a loan to pay off his construction loan? Then the leasing and management company, could they lease enough of the building to start paying for itself? When they got it fully leased, did it make the money it was projected to make?

All these things came down to math at the end of the day. Did they make more then they paid out? Is that not the true nature of business? Win and take the money to the bank? Lose and close up shop, file bankruptcy and start again.

Look at some of the developers in this current real estate down turn, a lot have folded, some are still standing, much smaller in size, however; they are still in business and still selling homes.

Commercial buildings have been built, only to stand vacant, because the tenants downsized or closed up shop.

At the end of the day it is all about the math, dollars and cents. Do the numbers work?

This is part of the training provided by the National Association of Commercial Real Estate Property Scouts. Check them out at http://www.nacreps.org/

Ted,
Professional Commercial Real Estate Property Scout

What is Commercial Real Estate Scouting?

O.K., you are looking for commercial property. You find one, o.k., now what? Do you have the investor or partner to buy the deal? How do you know it is a deal? How do you know, what to do?

Commercial Real Estate Property Scouting is a learned art and a practiced art. You have to know what you are looking for to know if the property you found is a deal or not. So you do you know? You get yourself trained.

So how do I get trained? You can buy books on the subject and learn the mechanics. You need a money partner or investor to make the deal work. What are their critirea? What do they think is a good deal. Every broker or owner thinks they have the best deal, and they can show you on paper. Unfortunately, paper does not pay the bills or buy the property.

You can attend a boot camp on how to find commercial property and the basics of how to tell if the property is a viable deal. Again, I ask, how can you know for sure it is a deal and who will buy it?

If you network with people and find partners and investors and do your homework, verify the numbers and other information you have gathered, then maybe you can put a deal together.

So to be a professional commercial real estate property scout, you have to get trained and find investors that will look at your deals. You have to find out what makes a good deal for them. You then have to scout for the property that meets their requirments and verify the numbers and particulars that make it a good deal. Then the investor has to make the offer and get an accepted contract. The deal has to close and you as the scout get paid. Then you are a Professional Commercial Real Estate Property Scout.

You can find out more at http://www.nacreps.org/ They provide training and have investors that will take the deals.

Successful Commercial Brokers, marketing kings?

What makes commercial real estate brokers so busy? Why do some do so well and others just kind of get by? In today's commercial real estate market, what role do the commercial brokers play? Are they just the listing agent or the buyer's agent? Do they not market for commercial properties?

While it is true a commercial real estate broker is one who has the client with the property that needs to get sold, how did they get that client? They have personal and business contacts and bird dogs that do the looking for their next client. They also advertise their business and all the things that make them different then the next broker. Some brokers work hard at networking and building a client base and other do not, making it clear that some make more money then other brokers.

In today's commercial real estate market, what role do the commercial brokers play? Commercial brokers do provide a great service and get paid very well for their expertise. They work with buyers and sellers of commercial properties and close the deal.

Do they not market for commercial properties, seller and buyers? Whether it be by full page ads or word of mouth, is it marketing (aka scouting for prospects)?

How do they find a buyer for the property? Broker's can advertise locally in the paper, nationally in real estate magazines and on the world wide web on places like Loopnet and other commercial property web sites depending on the property. They can go through their customer list and see if there is a match. They can contact fellow brokers and pitch the property to them. At the end of the day, they are scouting.

So I see a new niche in the commercial real estate world. Professional Commercial Real Estate Property Scouts.

There is one forward thinking groups that has established an association for commercial property scouts. It is called the National Association of Commercial Real Estate Property Scouts, NACREPS.

NACREPS is a true association that provides training on how to scout, what to look for in a commercial property. They provide the guidelines for the scout to look for and evaluate each property. They provide a place to get coached on the finer points of analyzing a property.

They also have investors that will take the deals that meet the criteria for the various types of properties.

If you are interested in finding out more about the Association, go to http://www.nacreps.org

Professional Commercial Property Scout
Ted Stevens

Commercial Scouting? for Apartments

The apartment market is a place to focus in the commercial world of real estate. You can have income to pay for the property, while you turn the property around.

Where do you look? How do you know the best places are to look? It is called research, whether you do it personally or get it from other sources. You can search the web, you can listen to the guru's of real estate, you can subscribe to newsletters and buy books or pay for someone to do the research for you. The information is available and the properties are advertised one way or the other. You can look at the statistics, like the ones following this paragraph, but you need to look in order to find commercial properties.

Nationwide, the numbers of renters is projected to increase by 4.3 million households over the next decade, said a spokesperson for the National Multi Housing Council. Additionally, apartment demand is forecast to increase by 430,000 units ANNUALLY!

Wow! Those are BIG numbers!

Just a month ago, there was concern that the possibility of a national recession would drive down sales and returns for investors. But the official ruling is that we are NOT in a recession. That’s good news for us.

Unfortunately, the housing market in many areas of the country has suffered so much because of the sub prime mortgage debacle. This naturally drives the increases in the rise of the number of apartment dwellers. Much of the country can no longer afford home ownership.

Some experts, with ties to Washington are hearing rumors of putting the empty houses back to work. While that’s a great strategy for some, and while it may ultimately impact the number of apartment dwellers, we still see apartments being a strong investment.

People continue to point to problems in the financial markets and the tightening of credit as being responsible for a downturn in activity. But in actuality, total volume for 2007 exceeds $91 BILLION.

Overall apartments performed well as an investment with returns to privately held apartments, in the first nine months of 2007 achieving an annualized rate of 12.6%. That rate is off from the 2006 return of 14.6% and down significantly from the 21.2% returns of 2005.

Still, in this current market a 12.6% return is a respectable showing. I wish some of my other investments would have done as well!

The nation’s apartment stock of buildings with at least five units is valued at $1.6 trillion, and rental revenues from apartments total more than $120 million per year. With this much inventory around, it is likely there are many units which will fit our buying criteria.

Apartments are a solid investment strategy - especially when we can buy it right.

I have talked to several Property Scouts are among the best trained folks in the country, and they are sniffing out the great properties. One's that need a problem fixed, whether management, remodel or both. They are looking for value add and finding the super deals that are out there. They were trained by the National Association of Commercial Real Estate Property Scouts (NACREPS). Visit http://www.nacreps.org if you are looking to start scouting.

Till next time.

Ted

http://visit.dirtintocash.com

Are you still commercial property scouting?

Why would you want to be scouting for commercial properties in this market? Where do you look?

To answer the first question, it is real easy. You want to look because commercial property is everywhere. Even in this market of doom and gloom, if you believe the news media. For those of you who do not listen to the news or just do not care, know the answer is the commercial market is going strong.

The one area that is not moving is raw land for residential development. Raw land for commercial in the path of progress is still going strong. Apartment houses are doing well, as are mobile home/RV parks and self storage.

Where do you look? Again, you look everywhere there are building and there is a pattern of growth. You do research to find the growing areas and look in those areas. Or areas that are starting to turn the corner from having bottomed out.

So now is a great time to be scouting. You just have to look, look, look and look. The ask for the information about the property to see if it fits the needs of you investor.

visit http://visit.dirtintocash.com

Happy scouting to you all.