Twenty Something Sense

Tom is a good friend of Brad’s who I had the opportunity to meet a few years back while camping in the middle of Indiana for some quality Dave Matthews shows. He grew up in Cincinnati, OH and graduated from The Ohio State University with a degree in Finance. After college Tom moved back to Cincinnati and has been a commercial real-estate broker and appraiser there for several years. With all of the turmoil I read about daily in the residential market I thought it would be interesting for Tom to share with us how things are holding up on the commercial end.

Investing in Commercial Real-Estate? Better have lots of CASH.
by Tom Fairhurst

Investors are beginning to take a major hit in the Commercial Real Estate investment market. Tenants are defaulting on their payments and new development has slowed. Investors who overpaid for properties a few years ago when the economy was good are taking the biggest hit. Owners cannot achieve the rental rates they expected and must settle for much less in order to just to cover their mortgage payments (or what’s commonly called - “weathering the storm”). Let’s take a deeper look at what is driving these behaviors.

As a commercial realtor, I have come across some owners that are “upside down” in terms of their mortgage and value of their property. I came across an investor who overpaid for their retail center property a few years ago when it was close to 100% occupied. Now they need to sell their retail center property, which has lost half of it’s tenants and is now 50% vacant. In the current market conditions their property is actually worth less than what their mortgage is which makes them “upside down”. This is a scary reality that many investors are facing and they are being forced to default on their mortgages.

Another factor that is making it difficult for the investment market is the banks. The banks are no longer freely lending which makes it tougher to finance commercial investment properties. Some banks have completely cut off all lending for commercial investment properties and the banks that are still lending are being extremely cautious and without 20% down it is very difficult to get financing. I have talked with some banks for which 20% down won’t even cut it and when you are dealing with multi-million dollar properties this can add up to a HUGE down payment requirement.

On the other side of the equation if you do have lots of cash this could be a great opportunity. Over the next 18-24 months many retail centers, office buildings, and industrial buildings that are owned by investors, and have suddenly lost tenants or are having to rent at below market rates in order to keep tenants, could be forced to sell. Owners who needed a certain level of income to fund their obligations for the property are now being forced to come out of pocket just to stay above water. Unless you have lots of cash, most owners cannot afford to fund their investment properties out of pocket. They bought the property based under the assumption that the lease and rental payments would stay constant. However, investors who have very deep pockets can capitalize on these properties. They will be able to purchase properties at significantly reduced prices and fund the properties with their cash during the down cycle. When the market picks up they will be able to sell the properties with a tidy profit. As the saying goes - Cash is King - especially in the commercial real estate investment market.

On a side note, for those of you looking to buy depressed commercial real estate without the multi-million dollar price tag, look into REIT’s (Real Estate Investment Trusts) which are basically mutual funds that contain real estate instead of corporate stock.