Last week the Housing Price Index came out with the 3rd 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 3rd 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.
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.
Yes, I am referring to Apple Computer Stock. We have friends who bought 100 shares for $19.95 each. They are a great example of someone who bought low and sold high in the stock market.
What is easy to overlook here is that 20 or so years ago when this purchase occurred, they were very strapped for cash and really had to suffer to buy the 100 shares.
We have a similar situation with real estate. The owners of commercial real estate who bought before the recent increases generally had to scrape their money together to buy the property. They had to do without in the hopes of buying low & selling high. It paid off for them if they sold in the last 2 years or so because of the escalating real estate prices.
If these owners choose to sell their real estate today, they will still experience extremely high returns due to the appreciation of the property. Now the bigger concern for them is the tax consequence. The good news is that this is an area that can be controlled in a number of different ways, many of which I will be talking about in future posts.
What is happening now is that investors are looking to lock in their future returns on properties by buying low and selling high. In order to do this, they will realistically need to buy:
- properties in bad neighborhoods that are experiencing redevelopment
- properties with high vacancy rates
- properties with deferred maintenance issues
In a word, properties with problems. Buyers might stumble into someone who will give the property away for less than the value but those deals are few and far between. Today’s owner is more savvy than in years past and they often have a feel for what they think the property is worth.
Since prices have generally dropped for commercial properties due to the interest rate increase and the return to negative leverage (among other things), you should buy commercial real estate now. Obviously, to actually own the real estate, you need to be realistic in your expectations, don’t you?
Otherwise you may wish you’d bought AAPL at $19.95 rather than $135+ per share. Whether its the stock market, real estate or life, timing is everything.
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.
The Sacramento landscape is changing. Are you keeping up with the changes? Take this quick quiz to see how well you know the new “Sacramento”.
If you are from outside of Sacramento, you may consider all of the towns listed “Sacramento”. However, the numbers show some separate and distinct characteristics of each area. This information is critical for you to know when deciding on where you will buy real estate.
1. Which area has the highest growth rate from 2007 – 2012?
A. Folsom
B. Roseville
C. Elk Grove
D. W. Sacramento
2. Which area has the highest 2007 Average Household Income?
A. Roseville
B. Elk Grove
C. Folsom
D. Fair Oaks
3. Which area has the highest unemployment rate?
A. Sacramento City
B. W. Sacramento
C. Rancho Cordova
D. Arden-Arcade CDP
4. Which area has the highest percentage of owner occupied homes?
A. Folsom
B. Elk Grove
C. Roseville
D. Fair Oaks
Depending on your demographic preferences, you may choose one area over another. For more detailed information on a specific location, contact us.
Demographics are a start to making an informed decision about your new location. Making informed decisions is how you will build wealth thru real estate. Whether it’s commercial, residential or investment real estate, let Smith & Associates show you the way that best meets your requirements.
Answers: 1. B; 2. C; 3. C; 4. B
Yesterday, the OFHEO announced the annual appreciation rates for homes across the nation for Q2 of 2007. Sacramento has dropped to -6.07%. Our high was back in Q3 of 2004 at 26.58%. In less than 3 years, that’s a drop in rate of 32.65%!!!!
Ok, what does that mean to you? If you are a seller, you must understand that the value of your home has probably significantly dropped. The annual appreciation rate has dropped 12.58% in just 1 year! The good news is that homes are selling…lots of them. To be among the “solds”, you must price it for today’s market, not yesterdays.
If you are a buyer, it means you are likely to pay less for a home in the Sacramento area than a year ago. Before you dance too high, remember that interest rates are higher than they were a year ago, too. So as usual, it’s a balancing act between interest rates and home prices. If you wait for the market to keep dropping, you may also see the interest rates rising. Where is the balance? Remember, we won’t know where the bottom is until the prices start going back up. So, now is a great time to buy.
Ok, ok, that’s residential real estate, but what is happening with commercial real estate in the Sacramento area? For 1 thing, cap rates are coming up. As cap rates come up, it means prices are decreasing. Additionally, tighter lending guidelines are coming into play. And again, interest rates are going up.
I just spent a day at a technology seminar. One could get the idea that people are being replaced. After all, with games like War of the Worlds, parents are communicating with their children via text message. Are bedtime stories and helping with homework at a table a thing of the past? Am I being a June Cleaver by not staying up with the times?
Which brings up another point. In the past, the real estate agent’s value was clear. If you wanted to know what properties were available, you needed an agent. That was in the dark ages before computers, of course. Now, you can go to Zillow or Redfin to find out the value of a property…or can you? Is the value of a property as simple as looking at the recording data from each sale? You could have 2 homes in the same area with the same floor plan. One has upgrades galore and one just the builder basics. The one with upgrades is $20,000 more than the “basic” model. How does Zillow and Redfin account for those differences? If it’s an average, that won’t give you a clear picture of your property’s value. A real estate professional is still needed to help with the subtle nuances that make each property unique.
Now let’s look at a piece of commercial investment property. Value can be determined in 1 of 3 ways: income, comparables or replacement cost. Which one do you use to establish value and who do you work with to help you determine what is in your best interest? A big part of that answer depends on if you are buying or selling.
If you are buying, you want a low price. The lowest price is typically yielded by using the income approach. If you are selling, you want a high price, which is typically derived by using replacement cost. A good commercial real estate broker can help you determine how to close the “gap” between those numbers and get to a closed transaction. Sellers who list a property above what the current market will bear have chosen to hold on to the property. After all, they have made the highest bid and no buyer has agreed to match it. Buyers who want a “deal” may pass on a property that meets their objectives because they got stuck on not getting the “deal” they wanted. Five years from now, they may be kicking themselves for the deal they let get away in this “buyer’s market”.
When you have a professional that understands your objectives and takes their fiduciary responsibility seriously, you have someone worth their weight in gold. They are not the transactional broker who just wants to close the deal and collect a check. Rather, they want a relationship with you for this transaction and the next and the next. To do that, they may not get what they want today. However, they are willing to trade truth today for your business tomorrow.
For commercial and residential brokerage services in the Sacramento area, get to know us as Smith & Associates Real Estate.
You have listings and they just are not selling. Translation: You aren’t making any money. Relief is here!
There are a couple of tools that can be used to find ready and willing buyers for your listings. The first is called Real Buyer Direct. This service is a place where buyers can register the particular type of property they are looking to buy. You go to Real Buyer Direct and put in your parameters and Shazam! you have a list of potential buyers for your property.
The second is called a listserv. This is similar to the program referenced above except you send a broadcast email to people looking for your property type. First you register for the service. Next you pick the groups of buyers who you want to send your message to. There are thousands of listserv’s out there but many of them have only a few registrants. I am about the share with you how you can do one “post” and reach 10’s of 1,000’s of people looking for what you have! How cool is that?!!!
This is great stuff, but as is true in life, “there ain’t no free lunch”. These are just 2 tools of the Top 25 Top Real Estate Cyber Tools that are available at NO CHARGE to Real Estate Cyber Society members. Yes, you must join the Society. That cost is about $13.00 per month, paid as an annual fee. Let’s see…$13.00 to bring buyers to your door…is that a fair trade? With commissions on just 1 closed deal well above $10,000 in most cases, that’s a great trade!
I share these tips that have changed the course of my business as a fellow commercial real estate professional. As a member of Smith Real Estate Services , a “niche” real estate firm with licensees in California and Idaho, we continue to provide “value” to the real estate community. We do that with educational tips like this or as brokers on your next real estate transaction. Call us…we are always working for you!
A couple a months ago, I posted Will You Make Money on This Deal? This article created a good deal of interest because it is common knowledge that the value of a commercial investment property is generally in the leases. This new post gives a little more detail on the answers from my previous post. Test your lease knowledge.
1. A triple net lease is most commonly associated with what property type(s)? A. office; B. retail; C. industrial or D. all of the above
2. Operating Expenses include: A. property taxes, insurance, advertising; B. capital reserves, property taxes, insurance; C. property taxes, utilities, leasing commissions; or D. all of the above
3. Cash flow before taxes includes: A. property taxes & insurance; B. advertising & capital reserves; C. property management fees; or D. all of the above
4. Which property type is closest to a true triple net lease? A. strip center; B. office building; C. ground lease; or D. industrial building
5. Which property type has the lowest average cap rate in the Sacramento MSA? A. office; B. industrial; C. retail; or D. multi-family
Answers: 1B, 2A, 3D, 4C and 5D
How did you do? If you got 100%, great. Of course, if you did, you probably know this is a very simple quiz. To really understand how to come up with a value on a commercial investment property, take my Deal Analysis Basics course where we go into detail on each of these topics. Knowing the facts about a piece of commercial investment property just makes good sense to your bottom line.
Buy-Hold-Sell: Let Smith Real Estate Services help you create wealth every step of the way!
It’s that time of year again…taxes! As we compile our information, the similarities between the different methods of filing tax returns is strikingly similar to the commercial real estate business. What do I mean?
With our taxes, we can file by TurboTax (or some other software program), we can go to H&R Block, an accountant or a CPA. Each of these methods costs a different amount and as a result, we expect more out of one than the other.
Likewise with commercial real estate. You can do it on your own, seek out a residential agent, seek out a commercial broker or seek out a commercial professional with a designation that proves their level of expertise in a certain area. Let me explain.
Finding a piece of commercial real estate on your own is like using TurboTax. You may end up with a “return” but was it the best “return” you could get?
The H&R Block method I equate to using a residential agent. They know their business and can do the leg work for you. However, they don’t have the depth of knowledge that an accountant or commercial broker does and you may leave “something on the table” by using this method.
The accountant is a seasoned veteran and is similar to a commercial real estate broker. They have experience and depth in their industry. They would generally be more equipped to provide a higher level of expertise than the other 2 methods, thus yielding you a “higher return”.
Finally, the CPA is like a CCIM (Certified Commercial Investment Member) or SIOR(Society Industrial Office Realtors). In order to hold the designation, they had extensive educations requirements, a proven track record in their field and had to take and pass an extensive exam on their subject.
Either method can get you a “return”. The question is are you looking for just any return or the best return? Your choice in a service provider can make the difference.
