Businesses today have the opportunity to create value by becoming owners of real property. Right now, real estate prices are down about 20 to 30 percent, depending on the market, from the peak in 2007. Local banks are in the market to lend, and those with solid businesses can get near record-low interest rates.
It is likely that prices will begin to rise again at the end of 2010, given the constraints on office space and the lack of development that now exists.
“Projections are showing that the Fed will raise rates some time in 2010 to stave off inflation,” says Chris Dray, senior vice president of Investment Services for Moody Rambin Interests. “There are few times in life that all the right components intersect to create a ‘golden opportunity,’ and now is that time.”
Now is the time to buy an office building, but how do you take advantage of this market?
Smart Business spoke with Dray about current and future market conditions and why now is the time to buy.
If I want to buy an office building, where do I begin?
You have to ask yourself certain questions. When do you need the space? How much space do you need? How will you deal with growth or contraction? In what part of town are your clients and employees? How much are you paying now and what can you afford? How will you manage the property? What type of property will you need — Class A or B, traditional layout or open space, etc.?
Is it better to buy an existing building or build new?
When you buy an existing building, you’re generally purchasing the property at a discount to the cost of building. It could cost $100 to $150 more per square foot if you build rather than buy. But, if you own land, have a specialty business and/or have special needs, you’re going to want and/or need a customized building. Determine the selling prices for properties on the market plus the cost to customize and compare to the cost to build a specialized building. Making major interior layout changes will mitigate the value of buying an existing property. But for 85 percent of typical office users, buying an existing building and making minor changes to the layout is the better financial answer.
What are the pros and cons of a single-use or multi-tenant building?
A single-use building means that you are the only tenant. You control the property, its maintenance, upkeep, look and feel. Management is simple because you don’t have to deal with anyone else. But, this also means that you are carrying the full burden.
In a multi-tenant property, you’ll have other tenants to share in the costs of running the property and in paying off the property. However, it also means that you are not only an owner but also a landlord. You have to take care of every tenant’s needs and wants, which can be daunting. Plus, the larger the property, the greater the capital costs are for tenant turnovers and maintenance.
How can working with a commercial real estate broker add value to this process?
First off, you have to find a broker that has financial modeling expertise and a thorough understanding of current market trends. It also helps if your broker has knowledge of the acquisition process and can connect you with certain perks like off-market deals, third-party groups to assist with the inspections, legal counsel referrals, financial contacts, etc. Furthermore, contract negotiations are a sticking point in many deals. Getting to the finish line requires a strong and balanced legal mind paired with a broker who can communicate the deal points to both parties and keep the groups focused on getting the transaction closed.
A knowledgeable broker adds tremendous value. There’s a lot of chaos in the real estate market right now. A savvy broker can help you navigate these turbulent waters. By thoroughly inspecting and researching all the properties in your area, you’ll have a realistic idea of exactly what you’re getting into. Having an advocate that has been through this process means that you will have the peace of mind that you’ve done it right.
What are the consequences of not buying right now?
As previously stated, interest rates are near record lows right now, but they’re expected to go up sooner rather than later. Those selling office buildings today need to sell. Also, there are SBA loans out there, but those stimulus dollars will only be around for the next 12 to 18 months.
At the end of the day, if you don’t buy a property and you keep leasing, you won’t capitalize on your ability to create further value in your business. Owning property is not only an inflation hedge for your business, it’s also an investment vehicle for the owners. You can use your business rent to pay down your note, while at the same time get the benefits of property appreciation, diversification of holdings, leverage and depreciation — the biggest tax benefit available. So when you sell the business, the property can become your retirement vehicle.
Chris Dray is the senior vice president of Investment Services for Moody Rambin Interests. Reach him at (713) 773-5528 or firstname.lastname@example.org.