The Turning Point for a New Era of Wealth Creation

March 2011

The last two years in commercial real estate have been challenging to say the least.

A year ago, I was skulking around our office whining and moaning about the phone not ringing. Nothing was moving. Sellers were stuck in a 2007-era valuation time-machine; tenants alternately begged and demanded rent concessions; and banks were treating real estate investors like red-headed stepchildren (my apologies to freckle-friendly families everywhere).

Something had to give.

A great analogy is a story told by the late comedian, Jerry Clower:

A hunter chased a wildcat up a tree, and they commenced a vicious battle, fangs bared and knives drawn. They chased each other around the tree branches, scratching and slicing each other to ribbons. The hunter calls down to his buddy, “Shoot him, shoot him!” His buddy yells back, “I can’t shoot. I might hit you!”

The wildcat lunges at the hunter, drawing blood with the swipe of a claw. The hunter stabs back at the cat, and then screams, “Just shoot up here amongst us! One of us has got to have some relief!”

Markets on the move

Fast forward a year: We’ve definitely gotten some relief, and the wildcat of uncertain markets seems to at least be on a leash, if not yet caged.

Our phones are ringing with tenant inquiries for space and brokers offering well-priced, quality properties with sellers anxious to deal. In the past few months, we’ve put two properties under contract to purchase and are working on two more.

We’ve acquired new tenants and renewed leases for over 30,000 square feet of space; been engaged by two clients for new site-location projects; and have two redevelopment projects underway.

Miracle of all miracles, local bank loan officers are scheduling visits to our office with their CEOs and regional Presidents. Since it says “Commercial Real Estate” on the sign out front, it’s safe to say they’re not here looking for car loans.

Seriously, the fact they are out asking for business again is huge–the best indicator yet that we’ve reached a turning point.

Finally, after two moribund years, securitized financing for commercial real estate is showing signs of life.

Real estate rises and falls with the availability of capital, and CMBS (Commercial Mortgage Backed Securities) financing provides exit-strategy financing with long-term, non-recourse loans. This is the critical component for stable commercial real estate valuations and the key to increased transaction volumes.

Now I’m whining and moaning about having too much to do and not enough time to do it, which just proves that I’m a card-carrying grumpy old man.

Summary outlook by property type

Those who read my 2010-2011 Forecast last year will remember I was prospecting for deals with banks and distressed owners, but mostly waiting for the bottom. In my estimation the bottom occurred about mid-year 2010. This is the point I’ve been waiting for and, as with past downturns, investing in the right sectors and markets will provide historic opportunities for gain.

However, the upturn is in its early stages and not evenly spread. Some of the areas hardest hit economically are still struggling. Recovering markets have different characteristics driven by uneven population migration and job growth, so my comments regarding general trends for property types must be evaluated in light of your specific market conditions.

Multi-family

Leading the pack in performance fundamentals is multi-family. The trends have rarely been better for rental housing. Demand is coming from all directions, including foreclosure refugees, echo-boomers, and empty-nesters.

Supply is constrained by the lack of development funding for any speculative projects, producing superior pricing power in rents. Mobile home parks are once again resurgent in providing affordable housing.

Office space

Not far behind are office properties. Whatever your politics, the recent expansion of government programs for everything from highways to GSA renovation projects has created a growth spurt for professional services firms and relocating government agencies.

Medical offices are expanding in anticipation of the coming wave of an additional 30 million insured patients. Small firm start-ups are increasing, while some larger firms are still downsizing, creating space absorption from the top and bottom of the market.

The retail sector

Retail is the sector I still consider schizophrenic. Single-tenant retail property transaction volume is strong. Broker specialists I talk to in the sector tell me their biggest problem is lack of supply due to low numbers of store expansions. Demand is coming from retiring baby-boomers looking for secure income streams with tax benefits.

However neighborhood strip centers are suffering from high vacancies and a surplus of space constructed during the building boom of the 2000s. A lot of distressed loans and properties in the headlines are retail.

It’s a buyer’s market, but caveat emptor (buyer beware). That property advertised at fifty cents on the dollar may really be worth a quarter due to tenant failures or relocations to newer space at cheaper rents.

2011 Forecast: The time to act, intelligently

With all this positive activity, I believe the waiting is over. When we look back years from now, 2011 will be considered the foundation year for a new era of wealth-creation in commercial real estate.

But don’t fall into the trap of doing deals just to be doing something.

A rising tide may float all boats, but it also hides a lot of stumps. –Jim Clayton, founder of Clayton Homes

Times like these are rife with the pitfalls of unfocused strategies. I’ve written an article about¬†the importance of having a predetermined plan to guide investment decisions. This is the only way to distinguish “stumps” from true opportunities.

It is not overly dramatic to say there are huge changes in demographic and financial trends you shouldn’t ignore. They have major implications for structuring commercial real estate investments to fit the realities of the “New Normal” economy.

My 2011-2012 Forecast for Commercial Real Estate details:

  • The market forces that will shape the coming years
  • The indicators that reveal which property types and markets will out perform, and
  • How to avoid the quagmires of those that won’t

About the Author:

Ray Alcorn

ray alcornRay Alcorn is the CEO of Park Commercial Real Estate Inc., a real estate acquisition and development firm headquartered in Blacksburg, Virginia. In a career spanning three decades, through all types of economic conditions, he has been involved with the acquisition, sale, development, financing, and leasing of commercial property transactions valued over $250,000,000.

Ray is a renowned expert in commercial real estate with experience in apartments, office buildings, shopping centers, mobile home parks and hotels.

Ray generously shares his wealth of knowledge and experience in dozens of articles about commercial real estate.

Ray is the author of The Dealmakers Guide to Commercial Real Estate, THE definitive work on commercial real estate investing.

His book provides real-world information written by a true dealmaker, including how to identify opportunities, determine value, and how to structure deals for maximum returns. It is an invaluable resource for creating and building wealth in commercial properties of all types.