Surviving the Apocalypse

Surviving the Apocalypse

I am an unapologetic apocalypse fiction buff. Climate change, aliens, zombies, vampires, you name it. I love anything that involves the near total collapse of civilization and the efforts of a few enterprising individuals to survive and thrive in the ruins of the devastation.

In college I would ply my friends with a couple of beverages for a spirited discussion of our “apocalypse contingency plans” after watching a movie in the genre. While our plans varied greatly depending on the disaster, a couple of topics were recurring themes for continued survival in an apocalyptic/post apocalyptic world:

·        Shelter

·        Weapons for offensive and defensive efforts

·        Food

·        Hope

What does this have to do with real estate? If are still reading this commercial real estate blog after the difficult years of 2008 – 2010. Congratulations, you survived a commercial real estate apocalypse. No doubt you learned some lessons depending on your experience. Here are some lessons I have for surviving the next apocalypse and thriving in our rapidly improving environment today.

• Maintain a fortress balance sheet. Commercial real estate investing survival depends on your financial ability to withstand a downturn. Maintaining a strong balance sheet is key.
• Keep some powder (capital) dry. Always keep some cash on hand to cover an unexpected event or to take advantage of an opportunity.
• Maintain a strong professional network. If you are actively involved in real estate investing, make sure you are in “the know”. Take time to grow your relationships with individuals who are in the front lines of the commercial real estate business. Property managers, brokers, attorneys, and yes other investors.
• Review your goals and dreams. Without a vision or goal it’s easy to get off track in your investing efforts. Why continue owning real estate? What is important to you? Keeping the big picture in mind will help you overcome the daily grind of staying on top of your investments.

Spring is late to Sioux Falls Office Market

Spring is late to Sioux Falls Office Market

Last week I toured a 4,000 square foot office user around the Sioux Falls Market. It's a large national company and they have outgrown their current space. The original availability study contained 37 properties that could meet their needs from a functional standpoint. Our showing list was 12 properties, and our final RFP list is comprised of 4 properties. 

If you are a tenant this is great news. While many struggling office building owners have adapted to this new normal with better financing or perhaps selling troubled assets, there are some amazing deals to be had out there. 

This is not good news for office building owners. Think about it. You are competing against nearly 40 properties for every office building tenant that comes along. Here are some things I noticed last week.

1) With so many options in our small market many properties were discarded by my client out of hand due to the exterior building photo. Older, peeling paint? Out. A confusing or vague specification sheet? Not on the showing list. Bad location or landscaping? No way. 

2) The listed price points were all within 10% on 90% of the properties. The remaining 10% of the properties were true Class A or Class C properties and were priced accordingly. 

What does this mean? If the office space is not turn key, meaning ready to move in to, the space will not be seriously considered. Worn out carpet or interior paint? Not on the RFP (offer) list. 

3) The Sioux Falls Office market is still very sick. Sure leasing has picked up and new office construction has largely ceased. But demand clearly still is tepid at best.

It's a competitive market out there. Landlords need to be using the best brokers to ensuring their space makes the original showing list and properties need to be at their best for these showings. These spaces are getting 3 minutes tops to make a positive impression.  

Spending Money on Attorney Lease Review

I like saving money. Ask my lovely wife how cheap I am, and I am sure you will at least a couple of humorous stories, some dating back to college. For example, in my first apartment I slept on the floor of my room rather than spending money on a bed or even a blanket. I’d still be doing that hundreds of commercial real estate transactions later if I hadn’t married my wife.

So I get it. Landlords and business owners in our great state of South Dakota hate spending money to have an attorney review their lease document prior to execution. Sure, it costs money. Sure it slows the transaction down by a good week at least. But it is definitely worth it. Without legal review, Landlords and Tenants open themselves to tremendous risk. A classic penny wise pound foolish arrangement which can have serious repercussions in the future.  

A good real estate attorney can save you thousands if not hundreds of thousands of dollars by simply reviewing your lease document from a seasoned legal perspective.

Quite some time ago a got a panicked call from a Landlord I had completed a lease transaction with in the past. The Tenant was in their office asking to be let out of the long term lease agreement due to changes in his organization. After several conversations regarding the subject, my client (Landlord) had decided against my advice to not have their attorney review the lease agreement prior to final review and execution.

It turned out to be a non event. My client was iron clad and in good shape with no issues what so ever. But imagine if they had made a mistake in the Lease drafting that allowed the Tenant to walk free from their commitment. I never asked, but I bet that my client spent that night reviewing their agreement in a cold sweat.

I have other examples that did not turn out well. We’ll save these for another day. Bottom line, spending a little money with your real estate attorney is insurance well spent.  

  

Change

“All great changes are preceded by chaos.” -Deepak Chopra

Every day we are confronted by the fact that our modern world is changing, and that change is accelerating. If you are reading this blog you know exactly what I am talking about. Let's think about it for a moment. 

Remember when you wanted to look something up you went to the library? Google changed that in the course of a few years and has made a $40 Billion Dollar Annual Business in the process. Today I have been tweeted, texted, called, and may Facetime all on my cellphone. Nobody had cell phones when I graduated from high school! I'm only 30 years old. 

I remember when my dad, an IBM sales manager at the time, brought home the first family computer. It had a green screen and the keyboard made a funny kind of a click-clack like the keys were spring loaded.  With a good deal of excitement my Dad plugged the computer in the phone line and we booted up Prodigy. Remember Prodigy? In 1990 it was the world's 2nd largest search provider. Today it is a distant memory after being swallowed by what is now the reenergized AT&T.

Think about how Facebook has changed our interaction with old friends and classmates. Now you know what everyone had for breakfast on this Easter morning.

In this time of unprecedented change, think about all of the new businesses that have built their castles on this new digital ground. Norton Anti Virus (Symantec). Netflix. LinkedIn. Ebay. Zynga.

Older companies can get into the mix too. Apple placed itself firmly in this new landscape by controlling digital content (iTunes) and creating a simple yet innovative user interaction with iPods, iPhones, and iPads.

What does this have to do with commercial real estate?

Today nothing beats face to face interaction and a relationship built on trust and performance. However, the methods in which we reach potential buyers and tenants will change substantially in the next 10 years. As the younger, digital generation obtains the means and decision making power to make commercial real estate decisions, brokers and owners need to communicate effectively to this audience. It also means that strong companies of yester year (Blockbuster, Best Buy, etc.) will face increasing competition and decreasing profits. A realistic plan for tenant turn over in commercial properties needs to be reviewed on a quarterly basis.

Contract for Deed

Contract for Deed

Over the last eight years a question I hear at least once a week is, “Will your seller accept a contract for deed?” The agent or prospective buyer is asking if the seller will finance the sale of their own property in a creative arrangement.

In other words, the buyer is asking the seller to accept a sale arrangement that forgoes a 100% cash payment at closing (from the buyer or combination of buyer and lender) and instead sets up an installment payment schedule with a full payment balloon at some point in the future. Usually around 3 to 5 years. At that time the seller will sign over the deed.

Buyers like this scenario because does not involve a bank financing process, usually involves a lower down payment than a traditional deal, and allows them to build equity in the property before utilizing a traditional lender at the balloon period. If things get bad the buyer simply gives the property back to the seller.

Sellers may like a contract for deed as it may have advantageous tax consequences and can provide positive cash flow even with a loan in place.

Contract for deed are a great method of purchasing a property as long as the buyer and the seller keep their word for the length of the contract, nothing bad happens to the property over that course of time, the buyer operates the property in at least in the same level of care as it was in at the time of purchase, the seller continues to pay any remaining mortgages, and the buyer and seller do not allow any encumbrances on the property not previously agreed to.

In other words I strongly discourage my sellers to entertain this method of purchase!

Have additional questions? Call Nick Gustafson at 605-201-2809. Learn more about Nick here. Check out Bender Commercial here.  

Survival Guide to the 2012 Sioux Falls Office Market

Sioux Falls currently has approximately a 6.5 year supply of office space vacant and on the market for lease as we start 2012. If you are a tenant this is great news. If you are an owner of a multi tenant office building you, this could be a value killing environment.

Perhaps you have several more vacant suites/spaces than usual. If you are lucky enough to be fully occupied, you have more than likely had a tenant or two try to renegotiate their lease ahead of a pending expiration date. Most commercial property owners have a mortgage and bankers demand payment in spite of one’s cash flow situation. Regardless of your situation, it is a tough time to own a multi tenant office building.

However here are some survival tips in order to minimize your vacancy and maintain your property’s value even in the toughest of times:

Have a good relationship with your tenant.

This increases your chances of keeping a good tenant or at least having an open dialogue about their long term plans. Little things go a long way. Responding immediately to maintenance and management issues, knowing the names of their kids and what is happening in their lives. Never underestimate the power of a relationship. If a tenant likes you and is happy with the property they are more likely to stay.

           

            Maintain your property.

                        It is time consuming and expensive to maintain an office building. The

exterior and interior will need periodic updates to keep the property competitive and attractive. You might get away with that 80’s era landscaping and 15 year old common area carpet in a landlord’s market, but when times get tough, tenants have options and will leave a dated building in a heart beat for a better maintained building upon lease expiration.

Take a commercial real estate agent out to lunch for some advice.

            Self serving? (Hint: I prefer Minerva’s or Jimmy John’s for a quick business lunch.) I have been involved in so many situations over the last 8 years where an office building owner didn’t get professional advice and it cost them big money. I’m talking up to a million dollars in losses simply because they didn’t have a professional opinion that they could have gotten for the cost of a cup of coffee or a sandwich. (I cost a lot more than that for a completed transaction!)

It’s a competitive world out there right now. Your building has competition. Be sure to position your asset in the best possible light.

  

Learn more about Nick Gustafson. Or give him a call at 605.201.2809.

Welcome!

Welcome to South Dakota Commercial Real Estate Blog!

My intention is to give you the reader an accurate, informative daily update on the South Dakota Commercial real estate market. This blog will contain thoughts and observations as I broker South Dakota Commercial Real Estate.  I live and breathe South Dakota Commercial Real Estate as I've been brokering leases and sales for the last 8 years. I have the good fortune to work for Bender Commercial Real Estate, a market leader in the Sioux Falls market. Here is a little bit about me here: Nick Gustafson's Profile Check out Bender Commercial Real Estate at benderco.com.