When President Obama signed the $787 billion stimulus package last month, it was done with the intention of providing banks with money to lend consumers in an effort to jump start an ailing economy.
“I believe that Houston is somewhat insulated from the national economy,” says Paul Gianelli, a vice president at Wells Fargo Bank. “I’ve seen energy consulting firms still spending money on exploration, still investing money in capital and equipment; so we are still seeing a steady stream of business in that field, although it has dropped off since the decrease in oil prices.”
Smart Business asked Gianelli about the state of commercial real estate in Houston and if banks are still lending money.
How has the economy affected commercial investor real estate in the Houston market?
With the softening of the economy, which is really the result of a contraction in the overall spending as well as a reduction in wealth due to an adjustment in real estate values, you have increased unemployment and a lack of market confidence. I’ve seen a reduction in start-up businesses and also a reduction or an adverse effect on existing business expansion. That translates into an overall decrease in the need for commercial space. I have clients who have sidelined their expansion projects and others who have pushed forward their anticipated plans to purchase real estate in lieu of leasing.
In my opinion now is a great time to purchase if your business model allows you to, just because of the depressed real estate prices. There are some good deals out there and some good prices. I think the cost of funds at this point is at historical lows, so financing is relatively cheap. So it’s a great time to buy if your business is cash-flowing and you have some good anticipated cash flow going forward.
Are banks making loans available?
Yes. Just today I learned that the Small Business Administration, due to the stimulus package under the Obama administration, plans to guarantee loans of up to $1.6 million with a potential 90 percent guaranty. It gives banks the ability to aggressively pursue those loans.
In 2008, the overall growth rate for loans within the Houston region has increased year over year for both business lending and SBA lending. So I know the dollars are available and if the business model makes sense and the repayment is there, we have the dollars to lend.
Is it better for a business owner in this economy to own or rent the facility?
There are many factors when comparing owning versus leasing and I’ve narrowed them down to four. The primary factors I look at are the cash outlay/opportunity costs, the growth factor in the business, relative market valuations and the desire for property management.
Cash outlay/opportunity costs. When you’re purchasing the property there’s a certain amount of equity that needs to go into the project. Usually it can range from 15 percent to 50 percent, depending on what kind of project it is. The business really needs to take a look at its finances and see if that is a down payment they are willing and able to make, and then weigh the opportunity costs of that against leasing. Leasing is a much cheaper form of location ownership, when compared to purchasing. And associated with that, you need to take a look at the cost of funds used to acquire the real estate. Is the interest rate associated with the purchase inexpensive enough for you to go ahead and purchase the property?
Growth factor. In most instances, if your business is new and experiencing significant increases in growth, a more viable option might be leasing, just so you can acquire additional space relatively fast. For a mature, stable business, purchasing may be a better way to achieve your financial goals.
Relative market valuation. If the primary goal in achieving long-term increase in value is through price appreciation, then purchasing is the way to go. The customer may want to look at purchasing real estate as another form of retirement savings. Also, compare real estate values to the local market as well as to historical values. There is the potential for appreciation there as well.
Property management. Business owners need to take into consideration whether they want to manage this property or not. When you purchase property there’s going to be a certain amount of time that you will have to spend managing the property, such as managing capital expenditures, and that could take away from the time that you have to manage the actual business. Or there could be a cost associated with hiring a property management firm, which would need to be figured into the company’s cash flow performance to make sure it makes sense from a cash outlay perspective.
PAUL GIANELLI is a vice president at Wells Fargo Bank. Reach him at (281) 362-6656 or firstname.lastname@example.org.