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.
When does 3 = 1? The answer is in commercial real estate. When looking at the commercial real estate market, we must actually look at 3 different markets.
I. The space market:
This is the physical space that exists in the market. The measure of the space market generally comes in the form of absorption rates. In the space market, the goal is to predict the future by looking at supply and demand in an area. This is never more critical than in retail properties. As there are more people in an area, more retail is required. As people migrate away from an area, retail will die. As current and future retail property owners and developers, absorption rates are critical as is looking at the migration of the population in a geographic area.
II. The capital market:
As much as you love real estate, it is only one of several places where you can invest your money. Stocks, gold and bonds are examples of other places where you can invest. To determine where to invest your money, you will generally compare the rate of return you can get from alternative investments. Once you set your desired rate of return, you can then evaluate which investment is the best vehicle to get you there.
III. The property value market:
This is the market where cap rates come into play. Any change in the income or expense of the investment will change the cap rate, because the cap rate is only a “snap shot in time”. However, as savvy investors know, you make your money in an investment 2 ways: 1. Buy it right and 2. Control expenses. These are both functions of the property value market. In addition to operating expenses, you will also want to stay aware of legislative and tax law changes.
In order to be successful with your commercial real estate investment, you must be aware of all 3 markets. When you are, you will begin to see when it is time to make your move, either into or out of a market and/or investment.
Working with a qualified professional is an important part of your process. You need to choose wisely as there are very few professionals who are well versed in all 3 markets. After all, you can make a deal by considering just 1 of the markets, like say the property value market (ie: cap rates). However, the question becomes, do you want to make a deal or do you want to make a great investment?
When you choosing to buy Sacramento commercial real estate, hire a professional with the CCIM designation and put their expertise on your side. This knowledge will give you the foundation that will help give you certainty when investing in commercial real estate.
The 2nd Annual Sacramento Strip Mall Conference was held this week. The conference was full of ways for retail property owners to make money. As your retail real estate expert, I will share a few of them.
1. Charge for your monument signage. Make the fee agreement an addendum to the lease. This gives you additional revenue, which increases the value of your real estate. It gives the tenant a way to advertise their business to every car and person that passes the site.
2. Monitor your tenants sales volume monthly. If you begin to see a trend emerge, as the property owner, you can step in to assist rather than wait until the tenant goes out of business. This right should be included in your lease.
3. Use your strip mall for fundraisers. This is a wonderful addition to the community. Since the residents are the ones who frequent your centers, give something back.
4. Charge for an exclusive from a small user. In some areas, there are many vacancies. If the tenant is desirable and brings value to the center, you may opt to give them an exclusive when they pay a higher lease rate.
5. Green construction will soon be mandatory. As you make improvements to your center, consider green construction. You will be ahead of the curve and bring value to your center.
6. Right now, there is a battle called mega grocery, cheap price vs. high experience, high price. As a result, some of the largest grocery chains find themselves in the dreaded “middle”. To address the consumer need, many grocers are renovating their stores. If these chains are your tenants, be aware that once the renovations are complete, property owners are realizing significantly increased rents from those tenants at lease renewal.
7. Be cautious with new construction. Tenant driven retail is preferred over spec retail. Know who the retailers are that are looking to expand in your area and get into relationship with them.
8. There are 2 new categories in the “Structure of the Retail Market”. They are “big box” at the top of the model (that is bigger than malls) and “convenience retail” at the bottom of the model. As our residential dwellings shift from single family homes to multi family (which includes high end condos), so does the need for retail. The convenience retail category will become the giant of the future.
9. If you are developing, know the process. it will go a long way toward getting your plan approved. Skipping a step in the process can really cost you.
10. The fundamentals in the Sacramento commercial real estate market are very good. Cap rates are increasing interest rates are still low. Some property owners are in trouble due to the shift in the market. This combination makes Sacramento real estate a great “buyers” market for the savvy investor. Work with an investment real estate broker who offers information, education and communication so you can capitalize on the “deals” that are available in today’s market.
You own commercial real estate. This property is likely one of the highest performing assets you own. When you have a problem with it, you call an agent/broker to assist. Who ya gonna call?
If you need to have space leased, your needs will best be served by someone experienced in your property type. An agent who has experience with retail is not necessarily familiar with an office or industrial lease. The provisions in each area of specialty are different. Make sure your agent has experience in your property type.
When you need to sell your property, you need an agent who understands there is a difference between an investment property and an owner user property. Owner user properties are generally a little higher priced and require a very specific owner. The investment property is all about the cash flow and the net operating income. Any investor could have an interest in an investment property.
Keep in mind that commercial real estate is a very broad category. The basic categories are land, office, retail, industrial, multi-family and hotels. Whether you need a leasing agent or a selling agent, experience in the property type you own is critical.
In addition to the specialty knowledge, an investment property also requires a thorough knowledge of financial analysis. The really good agents/brokers can not only do the analysis but also explain it to you so that you understand the numbers as well. When you see the CCIM designation after someone’s name, you know they are among the best in the world at financial analysis.
While you may be inclined to use the residential agent you’ve used many times before and trust, be careful here. You wouldn’t trust your general medical doctor to perform open heart surgery would you? The same consideration should be made for one of your highest performing assets, shouldn’t it?
Are you waiting for the bottom of the market to buy more real estate? Whether it’s the stock market or real estate, people try to buy low & sell high. Very few people get the timing just right. But by waiting for the perfect time, most people miss the opportunity to build wealth altogether.
Think about annual appreciation rates for residential real estate in Sacramento. In the past 7 years there have been 4 perfect times to buy. That was Q1 of 2000, Q2 of 2002, Q3 of 2003 and Q1 of 2004. In all 4 of these quarters, appreciation rates had dropped to a low point. If you were only willing to buy at the lowest point in the cycle, those were the times.
However, for all of 2000 and from Q4 of 2001 to Q1 of 2004, the appreciation rates were all less than 15%. The top of the market was 26.58%. Think about that. You had over a 3 year term to buy and get a minimum gain of 12.25% annually in appreciation. Or, you could have set it out because you missed those 4 specific quarters.
When residential real estate is appreciating, rents are generally increasing in commercial real estate. Since the value of a commercial investment property is in the rents, this means a solid residential market affects the value of commercial real estate in a positive way.
Do you have money earning you a low rate of return in mutual funds or a bank account? Consider taking advantage of this fabulous buyers market and buy commercial real estate. If you choose to take action now, you can capture some of the lowest prices in over 5 years and experience all time lows in interest rates. This combination will not stay around forever.
As your local real estate professionals in Sacramento, CA and Boise, ID contact us… we can and want to help you build wealth through real estate.
If you have been thinking about investing in commercial real estate, call 800–613–9852, ext. 402 to get your copy of our FREE report on How to Buy Commercial Real Estate…the Easy Way.
You’ve seen that same commercial sign on the property for years. It’s been there so long that it’s almost a part of the real estate. Does that help the property owner?
Remember, what is familiar often becomes unseen. Availability of a space or building needs to be seen to be leased or sold. To keep a property in the minds of prospective tenants and buyers, it takes an active marketing approach on the part of the broker/agent. A sign is just a part of that strategy.
What about accountability on performance? If the sign remains, the job is not being completed. There can be many reasons for this, not the least of which is pricing. Pricing is set by the market. When the market essentially “rejects” the property, it is generally due to one of 2 reasons: price or marketing.
If the challenge is price, then it is in the landlord/sellers control. The agent who presents the facts about the market on an ongoing basis to the owner gives that owner the possibility of taking action to get the deal closed. The owner makes the decision to either continue to “list” or to get the property sold/leased.
If the challenge is marketing, that is in the broker/agent’s control. Ask your broker/agent to explain their marketing plan as well as the implementation time. Often a major effort is extended on the part of the broker initially only to fall off significantly after a time. Know your broker/agent’s strategy so you can determine it if meets your needs.
A sign on the property is an ongoing advertisement for the firm on the sign. That’s great for the agent, but may not be in the best interest of the client.
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.
In its most basic form, cash flow is cash coming into your pocket. Negative cash flow is cash going out of your pocket. But, let’s be real. The real question is, how do you determine the true cash flow of a property? The right answer can make you money by helping you see if this investment is right for you. An incorrect calculation can cost you big money. Here is a quick example to test your current investment analysis skills:
December 2006
Provided by Sheryl A. Smith, CCIM, CEO of Smith Real Estate Services
Sacramento Retail:
- Street Retail had the highest average asking rent of $2.13psf/mo.
- Average Asking Sales Prices have come down about 3.9% since mid 2006, across all retail property types.
- About 52% of the listed retail properties are between 5,000-24,999 sf.
- 14th lowest retail vacancy market in the USA for Q4/2004.
Average Asking Price by retail building size
5,000-9,999sf $258 psf (31% of available property listed)
10,000-24,999sf $224 psf (22% of available property listed)
25,000-49,999sf $192 psf (7% of available property listed)
