"Economics is a subject that does not greatly respect one's wishes"
-Nikita Khrushchev
For the last several months I have had the same conversation every day with my commercial real estate clients. It basically goes something like this:"Are things really as good as they look?" and "How long will the good times last?"
Anybody who was actively involved in brokering, lending, developing, investing or speculating in commercial real estate from 2008 onward knows how devastating the Great Recession was. In most markets nationally, and certainly here in Sioux Falls, SD, the fear is gone and business decision-making has resumed. My clients are making money again and 2008 - 2010 is a night terror partially forgotten in the daylight.
Despite the overall general good feeling, the specter of storm clouds threaten on the horizon. The stock market is volatile, Ebola dominates headlines, and Canada just got its first taste of domestic terrorism on its soil this week. Despite the echo chamber of the 24/7 media news cycle, things are good and they will stay good for another couple of years.
Here are some reasons why we have at least 2 to 3 years of sunshine to make hay in commercial real estate:
1) Lower Fuel Costs. Unless you are a gas station or a highly levered fracker (Forbes Article) in the Bakken Shale, paying less for gas means more money to spend on other things. The businesses that provide consumers with goods and services pay less too, allowing increased profits to be reinvested or distributed to investors/owners. According to a recent Wall Street Journal article, the US produced 8.5 million barrels of oil per day in July. It's no longer news (Bloomberg article) that American advances in crude and natural gas extraction have catapulted the United States past Saudi Arabia and Russia to the top slot in global production.
As the United States continues to produce more supply and provide downward pressure on global prices over the next several years, look for a sustained drop in energy costs. Less money spent on energy frees up discretionary spending for both consumers and businesses.
2) Low Interest Rates. Inflationary readings remain low (International Business Times Article). This allows central banks to maintain low or easy money interest rates. Cheap money encourages growth and spending.
According to the Congressional Budget Office's August Update, the 10-Year Treasury Notes (key rate for commercial real estate debt) will slowly increase from 2.4% to 4.2% in 2017. That's three years of low interest rates. Nice.
3) Recovering Job Market. The September Jobs report included a 5.9% unemployment rate (New York Times Article). Wow. That's great. Do we have a wage growth problem? Yep. Is this percentage affected by a labor participation issue? I think so.
The good news is that people are going back to work. As more people go back to work and normalize their spending patterns the better off the general economy will be over the next two years.
If you would like to talk about your commercial real estate investing plans give me a call:
Nick Gustafson
605-201-2809
nick@benderco.com
Monday, October 27, 2014
Sunday, October 19, 2014
Commercial Lease Hacks
"Most people will not put in the time to get a knowledge advantage." -Mark Cuban
10 years ago I was new to the commercial real estate business. After grabbing my college diploma, getting licensed, leasing a new car, and spending precious money on a new wardrobe to look halfway presentable I hit the streets looking for commercial real estate deals. While I pounded pavement, during off hours I would pour over commercial real estate books. It seemed as if every book I could get my hands on was written for a first time investor, property manager, or someone other than a green commercial real estate broker.
Then I stumbled across Negotiating Commercial Real Estate Leases by Martin I. Zankel. Check it out on Amazon here: http://amzn.to/1FmEWs6. This was a nugget of gold in a sea of dross. It was about 250 pages of commercial lease advice written by a broker turned lawyer. I stumbled across my copy today and it's well worn and beat up from rereads and reference. Lots of the material went over my head in those early years but I would repeat its wisdom in client meetings and conference calls with conviction. Enough people believed me as I started to broker increasing numbers of office leases.
Here are three takeaways that have helped my clients and might help you too:
1) Controlling the lease document.
Zankel's first gem of advice is to "GET CONTROL OF THE LEASE DOCUMENT. The party who controls the drafting of the lease document will win all the small battles."
Great piece of advice, especially in dealing with smaller landlords or business owners that begrudge every dime spent on attorney lease review. Simply offering to draft the lease or submit a copy during the initial offer gives a tenant or landlord tremendous advantages during lease negotiation and review.
2) Including caps on expenses.
The idea of limiting expenses on tenant or landlord responsibilities was a new concept to me years back and occasionally I will introduce caps during certain situations depending on the situation.
3) Landlord Clauses
Appendix II contains an impressive list of landlord clauses to review and potentially draw from. A simple read is a must, a through understanding makes you sound like you know what you are talking about.
This was and is a great book for tenants, landlords and broker's to read and absorb valuable takeaways from.
If you need help negotiating your next lease, you can reach me at:
Nick Gustafson
605-201-2809
nick@benderco.com
10 years ago I was new to the commercial real estate business. After grabbing my college diploma, getting licensed, leasing a new car, and spending precious money on a new wardrobe to look halfway presentable I hit the streets looking for commercial real estate deals. While I pounded pavement, during off hours I would pour over commercial real estate books. It seemed as if every book I could get my hands on was written for a first time investor, property manager, or someone other than a green commercial real estate broker.
Then I stumbled across Negotiating Commercial Real Estate Leases by Martin I. Zankel. Check it out on Amazon here: http://amzn.to/1FmEWs6. This was a nugget of gold in a sea of dross. It was about 250 pages of commercial lease advice written by a broker turned lawyer. I stumbled across my copy today and it's well worn and beat up from rereads and reference. Lots of the material went over my head in those early years but I would repeat its wisdom in client meetings and conference calls with conviction. Enough people believed me as I started to broker increasing numbers of office leases.
Here are three takeaways that have helped my clients and might help you too:
1) Controlling the lease document.
Zankel's first gem of advice is to "GET CONTROL OF THE LEASE DOCUMENT. The party who controls the drafting of the lease document will win all the small battles."
Great piece of advice, especially in dealing with smaller landlords or business owners that begrudge every dime spent on attorney lease review. Simply offering to draft the lease or submit a copy during the initial offer gives a tenant or landlord tremendous advantages during lease negotiation and review.
2) Including caps on expenses.
The idea of limiting expenses on tenant or landlord responsibilities was a new concept to me years back and occasionally I will introduce caps during certain situations depending on the situation.
3) Landlord Clauses
Appendix II contains an impressive list of landlord clauses to review and potentially draw from. A simple read is a must, a through understanding makes you sound like you know what you are talking about.
This was and is a great book for tenants, landlords and broker's to read and absorb valuable takeaways from.
If you need help negotiating your next lease, you can reach me at:
Nick Gustafson
605-201-2809
nick@benderco.com
Friday, October 17, 2014
Listing Price - Why it Matters
The biggest mistake commercial and investment sellers during the selling process is listing their property too high. Here are reasons why sellers make this mistake:
Here is what happens when sellers list too high:
- Greed
- Need the excess capital to fix another problem
- Ignorance of market
- Want to "test" the market
Here is what happens when sellers list too high:
- Investors pass during the important 1-6 month initial window due to over listing the property
- The property is regarded as "stagnant" or "has something wrong"
- The seller gets angry at their broker due to lack of activity
- Seller fires broker
- Seller has damaged the market value of their asset
- Seller eventually sells asset at price recommended by broker or lower, but takes much longer
The best way to sell an investment property is to price the asset close to market price with a little extra wiggle room for buyers to feel as if they have "won" the negotiation. I prefer to present my analysis on market value (Broker's Price Opinion) along with the marketing material to buyers with sellers permission.
If you would like to discuss the market value of your property give me a call.
Nick Gustafson
605-201-2809
nick@benderco.com
Monday, October 13, 2014
Why I still make Cold Calls
When I got into the commercial real estate brokerage business back in 2004, I was 22 years old. I looked like I was 12. Pictures from this time show a thin, eager looking young man with all of his hair ready to make his first million in commercial real estate brokerage.
I joined a family run real estate services firm well known for three generations of brokerage, management and development. The family had just transitioned to the next generation of leadership and was looking to build back the commercial real estate brokerage division.
Shortly after college graduation I passed my real estate exam and continued to work in the same cubicle that I had labored in as an intern. My new sales manager (great guy) had been hired days before I got my license and while having an impressive sales background did not have commercial real estate experience. Nonetheless he laid some of the most basic sales principles in front of me possible:
1) The more times you pick up the phone or pitch qualified tenants/buyers in person, the more properties you will lease/sell. 2) Get the first part right and we can hone your presentation skills through experience and coaching 3) Track this activity and we will see patterns to effort and results, tweaking efficiency all the while.
While there is clearly complexity involved, he was right. He is still right. The more times I pick up the phone to call qualified buyers to pitch them market priced investment properties the happier my clients (sellers) are.
It takes massive amounts of time and effort coupled with years of diligent data base work to cultivate the proper call lists. But it works. Call me if you have commercial/investment properties and would like to learn how we can help you.
605-201-2809
nick@benderco.com
I joined a family run real estate services firm well known for three generations of brokerage, management and development. The family had just transitioned to the next generation of leadership and was looking to build back the commercial real estate brokerage division.
Shortly after college graduation I passed my real estate exam and continued to work in the same cubicle that I had labored in as an intern. My new sales manager (great guy) had been hired days before I got my license and while having an impressive sales background did not have commercial real estate experience. Nonetheless he laid some of the most basic sales principles in front of me possible:
1) The more times you pick up the phone or pitch qualified tenants/buyers in person, the more properties you will lease/sell. 2) Get the first part right and we can hone your presentation skills through experience and coaching 3) Track this activity and we will see patterns to effort and results, tweaking efficiency all the while.
While there is clearly complexity involved, he was right. He is still right. The more times I pick up the phone to call qualified buyers to pitch them market priced investment properties the happier my clients (sellers) are.
It takes massive amounts of time and effort coupled with years of diligent data base work to cultivate the proper call lists. But it works. Call me if you have commercial/investment properties and would like to learn how we can help you.
605-201-2809
nick@benderco.com
Sunday, October 5, 2014
Real Estate Crowdfunding Cliff Notes
Crowdfunding is a major buzzword in today's startup and tech scene. Simply defined, crowdfunding is the practice of funding a venture or a project by raising money from a large number of people via the internet or a specific website/application platform.
Kickstarter is the most visible crowdfunding site, launching in 2009 and raising over $700 Million dollars as of mid year 2014. Successful recent fund raises include 1) The Coolest Cooler ($13.28 Million) 2) The Veronica Mars Movie ($5.7 Million) and 3) Reading Rainbow Reboot ($5.5 Million).
The 2012 Jobs Act contained provisions that prompted similar real estate platforms to raise equity and acquire their first buildings in 2013 and 2014. This trend will likely grow exponentially when the rule making is completed for the Jobs Act and may lower the bar for non accredited investors to participate.
Real estate crowding platforms raise equity or debt to invest in specific buildings or developments. These platforms can choose debt or equity raises (ownership in shares verses lending on project). The range of minimum investment needed ranges from $100 - $250,000. Note that this investing method is limited to accredited investors.
Why is this important?
To understand the potential here, it is important to understand how things have worked in commercial real estate investing for the last 100 years. A developer or investor would use her personal balance sheet and capital to invest and borrow in a property. Historic returns typically outpace retail investment opportunities (stocks, bonds) with cash flow and asset appreciation. As this model worked very well, it usually limits the total number of projects one individual could be involved in at a given time. Thus, this developer or investor would leverage her network and raise equity from friends, family and local investors in exchange for ownership. Good developers/investors (General Partner) would build a strong networth and would reward her limited partners with strong cashflows during ownership and proceeds upon sale of assets. Institutional investors, hedge funds, and high net worth individuals have access to these partnerships the average investor does not. Private and Public REITS have gotten closer to making commercial real estate investment returns available to the general public, but typically hold large numbers of properties which diversifies risk, but takes away the opportunity to own part of a single property.
What does the future hold?
Potentially this new approach to commercial real estate investing will allow investors to diversify their investments among several large properties in smaller amounts while still taking advantage of strong returns associated with larger, successful projects. Non accredited investors may have access to this platform depending on final ruling making on the Jobs Act.
The risk this approach contains mirrors the risk current investors face while investing in commercial properties 1) The general market 2) Dependence on the General Partner's hundreds of decisions involved in acquiring and operating a commercial asset.
Tons of promise here, the devil will be in the details.
Nick Gustafson
nick@benderco.com
605-201-2809
Kickstarter is the most visible crowdfunding site, launching in 2009 and raising over $700 Million dollars as of mid year 2014. Successful recent fund raises include 1) The Coolest Cooler ($13.28 Million) 2) The Veronica Mars Movie ($5.7 Million) and 3) Reading Rainbow Reboot ($5.5 Million).
The 2012 Jobs Act contained provisions that prompted similar real estate platforms to raise equity and acquire their first buildings in 2013 and 2014. This trend will likely grow exponentially when the rule making is completed for the Jobs Act and may lower the bar for non accredited investors to participate.
Real estate crowding platforms raise equity or debt to invest in specific buildings or developments. These platforms can choose debt or equity raises (ownership in shares verses lending on project). The range of minimum investment needed ranges from $100 - $250,000. Note that this investing method is limited to accredited investors.
Why is this important?
To understand the potential here, it is important to understand how things have worked in commercial real estate investing for the last 100 years. A developer or investor would use her personal balance sheet and capital to invest and borrow in a property. Historic returns typically outpace retail investment opportunities (stocks, bonds) with cash flow and asset appreciation. As this model worked very well, it usually limits the total number of projects one individual could be involved in at a given time. Thus, this developer or investor would leverage her network and raise equity from friends, family and local investors in exchange for ownership. Good developers/investors (General Partner) would build a strong networth and would reward her limited partners with strong cashflows during ownership and proceeds upon sale of assets. Institutional investors, hedge funds, and high net worth individuals have access to these partnerships the average investor does not. Private and Public REITS have gotten closer to making commercial real estate investment returns available to the general public, but typically hold large numbers of properties which diversifies risk, but takes away the opportunity to own part of a single property.
What does the future hold?
Potentially this new approach to commercial real estate investing will allow investors to diversify their investments among several large properties in smaller amounts while still taking advantage of strong returns associated with larger, successful projects. Non accredited investors may have access to this platform depending on final ruling making on the Jobs Act.
The risk this approach contains mirrors the risk current investors face while investing in commercial properties 1) The general market 2) Dependence on the General Partner's hundreds of decisions involved in acquiring and operating a commercial asset.
Tons of promise here, the devil will be in the details.
Nick Gustafson
nick@benderco.com
605-201-2809
Friday, October 3, 2014
I just got fired...
I got fired from a listing last month. The property was a real challenge. The building was in tough shape and the curb appeal didn't light anybody's fire. Interior mechanical systems, roof and just about everything was decades past replacement. I took the listing as I had a good relationship with a now deceased family member. But my listing relationship was terminated and another broker whom I consider a friend got the listing. I consider my former client to be a classy individual and I harbor no hard feelings.
With a long track record and plenty of experience gaining and losing market share, losing one listing isn't going to throw me into a depression or force my family to skip dinner tonight. However it is the equivalent of a check engine light coming on my business dashboard. I worked hard on the listing, I cold called on the listing, I showed it. But I didn't spend enough time with the client this spring and summer as I was busy selling a lot of real estate. So in a sense practically and figuratively I dropped the ball. I should have been more creative. I could have controlled this outcome.
Your car usually doesn't break down without warning. Usually there is a warning sign or a missed scheduled maintenance item. Tires, timing belts, water pumps get old and need replacement. Oil needs changing.
Health usually doesn't disappear overnight. One typically stops exercising, eating well, and loses discipline long before weight gain and issues become apparent.
Who cares? What does this have to do with real estate investing?
Your properties do not suddenly lose value overnight. Tenants do not leave without reason. Here are some practical warning or check engine lights that will flash on your properties below. If you pay attention and fix problems before they eat you alive, you will be free to look for new opportunities.
-Tenants start leaving
-Dips in revenue
-Repair costs increase
-You stop showing off the property to out of town relatives
-Building vacancy rates are higher than market vacancy
-Capital improvement are skipped in good years
-Roof starts leaking
-HVAC stops working
-Vacancies get fewer showing than the past
-Rents have to be dropped to do deals
-Property managers/brokers pass on the opportunity to work with you
-Current tenants complain of a drop of business
With a long track record and plenty of experience gaining and losing market share, losing one listing isn't going to throw me into a depression or force my family to skip dinner tonight. However it is the equivalent of a check engine light coming on my business dashboard. I worked hard on the listing, I cold called on the listing, I showed it. But I didn't spend enough time with the client this spring and summer as I was busy selling a lot of real estate. So in a sense practically and figuratively I dropped the ball. I should have been more creative. I could have controlled this outcome.
Your car usually doesn't break down without warning. Usually there is a warning sign or a missed scheduled maintenance item. Tires, timing belts, water pumps get old and need replacement. Oil needs changing.
Health usually doesn't disappear overnight. One typically stops exercising, eating well, and loses discipline long before weight gain and issues become apparent.
Who cares? What does this have to do with real estate investing?
Your properties do not suddenly lose value overnight. Tenants do not leave without reason. Here are some practical warning or check engine lights that will flash on your properties below. If you pay attention and fix problems before they eat you alive, you will be free to look for new opportunities.
-Tenants start leaving
-Dips in revenue
-Repair costs increase
-You stop showing off the property to out of town relatives
-Building vacancy rates are higher than market vacancy
-Capital improvement are skipped in good years
-Roof starts leaking
-HVAC stops working
-Vacancies get fewer showing than the past
-Rents have to be dropped to do deals
-Property managers/brokers pass on the opportunity to work with you
-Current tenants complain of a drop of business
Thursday, October 2, 2014
Negotiation and Need
During the last 10 years I've seen a couple of negotiations. I've negotiated bill boards easements, coffee kiosks, office leases, retail leases, industrial leases, call center leases, and sales of multi- million dollar investment properties.
I've negotiated for and against a wide range of personalities; straightforward, devious, open and guarded, rich, poor, careless and desperate.
Books, classes, experience have all taught me a variety things that ensure successful transactions and help my client reach their goals.
Negotiation is a real art with winners and losers. There truly is a difference between an experienced negotiator and an inexperienced person running around with family money (daddy's checkbook).
However what is understood by seasoned brokers but is rarely discussed is that most negotiations boil down to one thing. And that is need. Who needs the deal more? Who needs what? Who is facing bankruptcy? Who needs the adjacent parcel to expand and thus avoiding bottle necking revenue?
While the better negotiator will "win" in an evenly matched deal, all the negotiating in the world will not overcome overwhelming (or crippling) need. Imagine the worlds best 13 year old judo champion facing off against a 300 pound NFL linebacker. Not pretty right?
What's the takeaway?
Sometimes the best negotiating is simply reaching out to the other party and explaining your position and intent in a human, straightforward way. You might not squeezed every drop of blood out of the deal, but sometimes that's for the best.
I've negotiated for and against a wide range of personalities; straightforward, devious, open and guarded, rich, poor, careless and desperate.
Books, classes, experience have all taught me a variety things that ensure successful transactions and help my client reach their goals.
Negotiation is a real art with winners and losers. There truly is a difference between an experienced negotiator and an inexperienced person running around with family money (daddy's checkbook).
However what is understood by seasoned brokers but is rarely discussed is that most negotiations boil down to one thing. And that is need. Who needs the deal more? Who needs what? Who is facing bankruptcy? Who needs the adjacent parcel to expand and thus avoiding bottle necking revenue?
While the better negotiator will "win" in an evenly matched deal, all the negotiating in the world will not overcome overwhelming (or crippling) need. Imagine the worlds best 13 year old judo champion facing off against a 300 pound NFL linebacker. Not pretty right?
What's the takeaway?
Sometimes the best negotiating is simply reaching out to the other party and explaining your position and intent in a human, straightforward way. You might not squeezed every drop of blood out of the deal, but sometimes that's for the best.
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