April 17, 2010, Steve Kawulok, Fort Collins CO | 2010 appears to be a time when the two-tier commercial real estate market becomes more evident. Good core properties remain at the top of the tier, and distressed “value opportunities” are populating the lower tier . These two tiers have been attracting investor interest, while the great middle market stagnates with little activity.
How can one determine whether a lower-tier property is really a value buy opportunity? A simple model of the playground teeter-totter might help!
When you are on the end of the teeter-totter at maximum height, it is quite exhilarating. However, your mischievous friend on the other end of the fulcrum might just be plotting his revenge and will jump off the lower end. Well, the rapid drop to the ground for you is not pleasant!
A simple metaphor of our commercial real estate market for sure. You don’t want to buy at the heady high point of the market. Rather the time to buy is after the market has hit bottom, and along the fulcrum as you head up, until the level balance is found.
In our market, office condominium properties reached their peak priced at approximately $250 per square foot. Some FDIC controlled office condominiums are now offered on the market for approximately half the former pricing, at about $125 per square foot. Given that our market has just had the first positive office market absorption for over three years, it is possible that we have bottomed out in this segment of the market. Across the nation, employment statistics are firming up and may also start changing directions for the positive. Job gains are a plus signal for office properties.
Knowing the cycles in the market, the teeter-totter theory would suggest that an office condominium purchase from $125 per square foot up to $187.50 per square foot would be a “value buy”. $187.50 simply represents the halfway point between the top of the market and the bottom of the market. Buy now, because the teeter-totter is in your favor all the way up to this balance point!
Tags: Commercial Real Estate, commercial real estate strategy, commercial real estate value-buy, purchasing distressed commercial real estate