(June 18,2010, Fort Collins CO), submitted by Steve Kawulok
Investors seeking bargain basement pricing on commercial real estate have just not been active players in this market. These investors typically look for deep discount “by-the-pound” pricing. They have either not been satisfied that the market has reached the bottom, or they do not have the capacity to actually purchase properties. While the inquiry level of these market players has certainly been strong, the ability to act on deals has not yet revealed itself in any significant way in our observation.
Financing is limited for this type of purchase, so we are primarily talking about seller financed or all-cash purchases. This type of investor must employ a turnaround strategy and seek new tenants for the properties they purchase. During a demand-side recession as we currently have, success with this strategy outcome is limited, and will take a longer time to implement. Possible, certainly, but so far not a common scenario.
So, who is “in” the market, then? Investors seeking core properties with existing cash flow are one kind of market player. Another is the owner-user seeing great opportunities to situate and grow their companies.
Investors are quite interested in net-leased properties today. Returns on these properties are drawing interest. Real Capital Analytics tells us that capitalization rates are at historically high spreads over the “risk-free” 10-year Treasury bond yield. Our office recently sold a few properties occupied by a national auto parts retailer with long term leases. These investors are getting spreads of about 500 basis points over the current 10-year T-bill rate. With relatively low cost leverage, these investors are receiving returns over 10 percent in cash-on-cash percentage. This is a handsome risk reward, and is drawing considerable interest from investors for similar offerings.
Users are active players, too. They are taking advantage of the phenomenon of price differential between vacant buildings and occupied buildings. Real Capital Analytics tells us that this differential can approach 40% with some property types. Sellers are anxious to find buyers for their vacant buildings, and savvy owner-users can take advantage of the seller-to-buyer imbalance in the market now. Our office recently sold a vacant bank building to a trade school. The trade school owner was able to negotiate a purchase price below replacement cost. They bought a very nice building in a prime location, with plenty of parking and good access, and they bought at an attractive price. Financing is readily available for this type of buyer, and many are taking advantage of the opportunities.
Core investors and owner-users are leading the way in the commercial real estate recovery. Bargain hunters are still just talking, but aren’treally acting on anything. The “spoils” of this recession are going to the smart investors who can make immediate use of their purchase, either as an investment property or as a place for their business.
For the others, well, they are missing the game.
Tags: bargain real estate, Commercial Real Estate, market players in commercial real estate, real estate opportunities, real estate strategies