You had a vacancy in your center and after a few months, you finally have a new tenant. Hurray!…or is it?
As with all of real estate, it depends. Let’s look at what that new lease might do to the value of your shopping center.
I. Local or National: If you signed a local tenant, that means you’ve said no to a national one, in practice. Investors generally prefer the stability of a national or regional tenant, so when there is a choice, go national.
II. Market Rent: Your agent has shared with you what market rents are but no one has agreed to pay your rent so you accepted less rent to lease the space. Let’s look at one scenario of how this might affect you.
Assumptions: Market Rent is $2.00 per square foot (psf) net net net (nnn). Vacant space is 2,000sf. Lease term is 3 years. Actual NOI is $349,400.
If you accept a tenant at $1.90psf nnn, that adds $45,600 to the equation making the actual net operating income (NOI) $395,000. If you cap the NOI at 6.5%, you would have an asking price of $6,076,923.
If on the other hand you had a vacancy showing $2.00psf nnn, that would add $48,000 to the equation making the Proforma NOI $397,400. When you cap that NOI at 6.5%, you would have an asking price of $6,113,846.
That’s a difference of $36,923 potentially coming out of your pocket just because your tenant is paying $0.10 below market rent. Remember, a vacancy can be considered a positive if: A. Your bottom line can take the hit; B. If the buyer has tenants who could fill the space under his management; and C. If you plan to hold the center past the term of this new lease.
III. Tenant Mix: Let’s look at another scenario which illustrates how the tenant mix could affect your shopping center’s value.
Assumptions: 20,000 sf center. 4,000 sf are vacant. Tenants: Nail salon, insurance agent, restaurant, mailbox store, bookstore, spa and karate studio.
You elect to sign a dry cleaning plant to fill the space. Prior to this tenant, there were no environmental concerns with your property. With this new tenant, any buyer who needs a loan to buy your property will have to pay for both a Phase I and a Phase II to confirm that the ground is environmentally sound. If problems are found, they must be remedied prior to the loan funding. Additionally, as the owner, you will have some additional environmental guidelines that must be met while you own the property as well as some potential liability.
Clearly, this increases the buyer’s due diligence cost but more importantly it raises questions as to lifelong responsibility for the affected land. These questions can directly translate to a reduced value of your shopping center.
When you consider the type of tenant, the market rent and the tenant mix, it is critical that you keep in mind your long term goals. If you plan to sell within the next 3 years, consult with an investment professional now.
These examples are very basic and not intended to be exhaustive in nature. To have more specific information about your property, Smith Real Estate Services, Inc. is a great place to start.
It simply makes good sense to work with an agent/broker who has your long term goals in mind, not just one who wants to earn a quick commission. When you work with an investment professional, you will have access to all the value they can bring to you. This value runs through the decisions you make during your holding period as well as when you sell your center. Choose your agent wisely.
The S.I.R.E. Report
February 2007
Provided by Sheryl A. Smith, CCIM, CEO of Smith Real Estate Services
The national view tells us that real estate remains a “darling” of investors. However, since real estate is a local business, here is a look at Sacramento specifically.
Sacramento Retail
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Street Retail had the highest average asking rent of $2.17psf/mo.
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Average Asking Sales Prices are flat as compared to Aug 2006, across all retail property types.
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About 51% of the listed retail properties are between 5,000-24,999 sf.
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14th lowest retail vacancy market (6.2%) in the USA in 2006.
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5th highest average retail rent ($2.13 psf/mo) in USA, across all property types.
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Net absorption in 2006 14,000sf
Average Asking Price by retail building size
5,000-9,999sf $265 psf (28.7% of available property listed)
10,000-24,999sf $222 psf (22% of available property listed)
25,000-49,999sf $199 psf (6.1% of available property listed)
Snapshot: Compared to last month, average rents are slightly up and asking prices are ever so slightly down. Even though there is about 5% more product listed, there is still only about 1.3msf listed. Now would be a great time to sell! Call me today for a free investment analysis of your property.
Sacramento Industrial
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Flex/R&D had the highest average asking rent of $0.93psf/mo.
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Average Asking Sales Prices have gone up about 4.6% since Aug 2006, across all industrial property types.
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About 60.5% of the listed industrial properties are between 5,000-24,999 sf.
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Net absorption in 2006 1,001,000sf
Average Asking Price by industrial building size
5,000-9,999sf $144 psf (26% of available property listed)
10,000-24,999sf $128 psf (34.5% of available property listed)
25,000-49,999sf $ 97 psf (9.4% of available property listed)
Snapshot: Compared to last month, average rents are down, asking prices up. There is about 5.8 msf of inventory listed, which is about 5% less than last month.
Sacramento Office
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Office buildings had the highest average asking rent of $1.82psf/mo.
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Average Asking Sales Prices have gone up about 1.5% since Aug 2006, across all office property types.
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About 70% of the listed office properties are between 0-9,999sf.
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Net absorption in 2006 804,000sf
Average Asking Price by office building size
0-5,000sf $356 psf (45.7% of available property listed)
5,000-9,999sf $287 psf (24.2% of available property listed)
10,000-24,999sf $247 psf (20.1% of available property listed)
Snapshot: Compared to last month, average rents and asking prices are flat. There is about 4.6msf of inventory listed, which is down about 4.7%.
Sacramento Multi-Family
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Du/Tri/Fourplexes had the highest average asking sales price of $188,238 per unit.
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Average Asking Sales Prices are flat as compared to Aug 2006 prices, across all multi-family property types.
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About 66% of the listed multi-family properties are between 1-9 units.
Average Asking Price by unit mix
>5 units $189,061 per unit (51.6% of available property listed)
5-9 units $113,434 per unit (14.4% of available property listed)
10-19 units $104,240 per unit (9.2% of available property listed)
Snapshot: Compared to last month, average asking prices and inventories are both significantly down. Lots of inventory on the market…about 4.3msf.
Western Region Average Cap Rate
Office 6.9%
Industrial 7.3%
Retail 6.4%
Multi Family 5.4%
The S.I.R.E. Report is published monthly with results from the previous month. Stay current on property in Sacramento. Sign up to receive my posts by automatic email each month.
Sources: Loopnet Local Insights & the NAR Commercial Real Estate Outlook Reports
The goal of making an investment is to make money. Often, the amount one makes comes from taking a hit or miss approach. If that doesn’t work for you, consider these 6 steps to getting a higher return on your real estate investment.
1. 1. Know your holding period
Knowing the amount of time you plan to hold an investment property is an important consideration in determining what you will pay for a property. You make your money going into an investment.
Changes in the market and/or area could dramatically affect the value of your property. For example, if you buy in a redevelopment area, you may plan to buy the property at a low price, renovate it an then lease it out for significant cash flow. If you are among the first to renovate in the area, it may take you awhile to lease out the space.
If your goal is to hold this property for 2 years and you are the only one in the block renovating, you may not realize a very dramatic return, even after you renovate. However, if your holding period is 5 years and others are making significant improvements in the area, you would most likely see a dramatic increase in your property value.
2. Choose the right agent/broker
There are four key factors to consider when making your selection:
- Specialty (retail, office, industrial, land, apartment);
- Leasing agent/broker vs. Investment agent/broker;
- Time to dedicate to your property;
- Ongoing communication with you about your property.
