Action items for investment real estate owners
I’ve heard the aphorism, “awareness, acceptance, then action,” and I think that applies in today’s environment for investment real estate owners.
What’s going on out there that owners need to be aware of? By now, it should be clear that there are threats posed by the economy that include loss/lack of tenants, more stringent lending requirements and a lack of readily available inventory for investors looking to trade properties as part of a 1031 transaction. CAP rates have also risen, adding further downward pressure on values.
Acceptance is a difficult step for many investors, especially those who became accustomed to engaging in many transactions earlier in this decade.
I had a call recently from the owner of a small strip center who was thinking of selling in order to take the proceeds and buy multifamily properties that are being foreclosed on in large numbers in a nearby urban area. However, he would only sell at a price in excess of what he knows his strip center is worth in the current market, despite having tenant issues and having to lower his rents to either keep existing tenants or attract new ones. My advice to him was that it is not a good time to be a seller if you don’t have to be, and he seemed to accept that.
At the same time, I have many investor clients who are looking for real bargains, thinking that there must be as many distressed commercial properties as there are residential ones.
Based on conversations with commercial lenders, I think the opportunities to acquire distressed commercial properties will come at some point in the next year or two, but not to the extent some would like. At this time, therefore, owners and potential buyers simply have to accept that things are at a standstill and to do whatever they can to maintain their positions for when the opportunities come up.
For buyers, the action steps include developing a good cash position for when the buying opportunities arise. Unless they plan to pay all cash, they will need a higher down payment than they did earlier this decade. They also can monitor what is happening with particular properties they might have an interest in acquiring. Fewer tenants, lack of proper maintenance, empty parking lots and property tax delinquency are all telltale signs of trouble (aka opportunity).
For owners, I think the key action step is a high level of communication with all of the professionals on their team. They should be in touch with their lender, not only in supplying the required reports, but in being proactive as to rates and terms that might be available to them that could improve their positions. They also need to be up-front with lenders about any issues they are having, either financially or with tenants. Lenders appreciate getting this information, and will generally work with their borrowers to prevent defaults, preferring to see their borrowers succeed rather than taking over properties.
Owners also should visit with their legal and tax advisers. Although there is not much that can be done to modify loan documents or leases, I have found that many owners are not as conversant with the terms of those documents as they should be. Such consultations may uncover opportunities for cost segregation analyses or tax abatements.
Property managers and insurance agents can advise owners on how to cut costs on operating expenses, and can point out maintenance or risk issues that need to be addressed in order to preserve the property and keep it attractive to current and future tenants.
Owners also should be in touch with their commercial broker/adviser to develop appropriate long-term strategies. Brokers can help owners to think about the mix of tenants, how zoning affects the ability to attract certain types of tenants, and how to best position the property for disposition down the road.
Brokers have access to current lease and sale comps, and can provide realistic information on what the property is currently worth. All of these services can be provided on a consulting basis, since they involve valuable services in a non-transaction context. Brokers also often act as the quarterback for the entire team of investment property advisers and can refer the owner to appropriate advisors if they need one in a particular area.
If investors take the time to become aware of their particular situation, accept the realities that go with it, and take appropriate action steps, they will have done all that is within their control.
Dan Scanlon, a retail investment adviser with Grubb & Ellis|Coldstream Real Estate Advisors Inc., Bedford, can be reached at 603-206-9605, or firstname.lastname@example.org.