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Profits That Lie Hidden In Your Real Estate

12.02.2007

Cents & money Last week the Housing Price Index came out with the 3^rd quarter housing appreciation numbers. The great news is that Sacramento real estate has appreciated in value 56.9% over the past 5 years. Do you realize that represents an average growth rate of 11.38% per year over the past 5 years? So, if you bought real estate in the Sacramento MSA in 2002 or before, you made a great investment.

Of course that’s only part of the story. As you read in Found In Translation, Sacramento real estate has been continually dropping in value since the market peak of the 3^rd quarter of 2005. So, if you bought in 2005, you bought at the top of the market and your property is likely worth less now than when you bought it.

For Sacramento commercial real estate, particularly retail properties, this does not bode well for property values. The old adage that “retail follows rooftops” is true. In 2003–2005, throughout Sacramento you saw a glut of new homes going up. In Elk Grove, Roseville, Folsom and Natomas, new retail was everywhere because that is where most of the homebuilding was occurring.

Those areas were able to charge increasingly higher rents for retail space because of the demographics of the people moving into those areas. Because the value of a retail property is in its leases, that made the value of retail inordinately high. As a result, many property owners noticing the high values were selling in an effort to lock in these uncharacteristicly high profits.

This increase in value did not just affect new retail properties. Owners of older centers also saw an opportunity to raise rents as leases came up for renewal and/or spaces became vacant. While its true they couldn’t charge the same amount that the new center owners could charge, they could charge more than they had in the past due to simple supply and demand.

Then the appreciation market shifted to a depreciation market in Sacramento. Now homes were rapidly depreciating and many people lost their source of cash. How’s that? Unfortunately, many homeowners recognized that their homes were appreciating rapidly and they used re-financing as a tool to continually take cash out of their homes. With the cash, they started new businesses, bought new toys, etc.

Now that the “cash flow” of appreciation is not there for the consumer, shopping has slowed and many retail businesses are failing. The percentage of rent that a retailer pays as compared to their now reduced income is simply too high for many of them. As their businesses fail, retailers leave their stores and the accompanying leases behind.

Since “retail follows rooftops”, retail properties have also lost value. During the Christmas season, pay attention to what the media is saying about retail spending. What you will see is the increasing percentage of internet sales. When money is tight, consumers have to choose where they can get the most bang for their buck. As people buy more online, they buy less in stores.

This is not to suggest that shopping in stores is dead. It is not. However, the face of shopping is changing and keeping abreast of those changes will make the difference in the profit you get from your retail real estate investment.

This change in the market it just one part of the value of commercial real estate. As you read in Creating Certainty With Real Estate, there are 3 markets that can affect the value of your property. We are only addressing the space market here. Sign up at Smith Real Estate Services to receive future information on the remaining 2 markets, namely the capital market and the property value market.