Leverage real estate advisers to navigate unprecedented challenges

The COVID era is affecting us all, but its impact on real estate is uneven. In any economy, certain real estate sectors move more than others, and today’s uncertainties are no different. Reliable, expert advice is key to successfully navigate the challenges today’s market presents to buyers, sellers, landlords and tenants.

“We’ve been talking nonstop to clients, all of whom have different goals and challenges, but all of them are impacted by today’s market uncertainties,” says Eliot Kijewski, senior vice president at Cushman & Wakefield | CRESCO Real Estate. “Anyone that says they have all the answers during these unprecedented times is posturing. But we can improve a client’s position with data, experience and the benefits of knowing what else is happening in the market.”

Smart Business spoke with Kijewski about the importance of expert advice in an uncertain market.

How is the market affecting buyers?

This market is tough on buyers because of the lack of real estate inventory — the available spaces for businesses to move and grow with ease. The record-low 3.8 percent industrial vacancy in Northeast Ohio makes it a crowded field for tenants looking to move. Low interest rates put more pressure on demand as buyers are searching aggressively as well. Despite COVID impacts in other real estate classes, industrial real estate remains in high demand for manufacturers and distributors that are changing and growing in response to changes in the economy. In many instances, these changes have become localized.

When a property is for sale or available, it goes fast. In many cases, landing a property in this market means finding an off-market transaction, or uncovering hidden availabilities. That’s where deep experience and a broad network are most valuable.

Moving fast can also create haste, and due diligence cannot be overlooked. Increased demand and COVID-related challenges have made it tough to quickly examine a property. A knowledgeable real estate adviser, however, usually has strong relationships with those professionals to ensure excellent due diligence with reasonable turnaround to not jeopardize that hard-to-find property.

Real estate agents have exclusive means to show properties to help with COVID sensitivities and eager buyers. Sometimes a well-known agent ican get prospective buyers in to see a property early. Others have used virtual and video tours to showcase a property so prospects can be safe and see available properties in a timely manner.

What does the market look like for sellers?

Sellers are seeing increased demand and the market is responding with higher prices. These conditions have also created an opportunity for owners to leverage their property to capitalize on the market while largely staying in place. Industrial real estate prices are as high as they’ve ever been per square foot, but finding available properties is a challenge. That’s created opportunity for owners who are willing to think outside the box to capitalize on the market.

Owners of office properties may be able to increase the value of their real estate if they’re able to adapt it to an industrial use. This won’t work for some office buildings, multi-floor buildings, for instance, but if it’s flex space or industrial, owners should convert as much as they can to shop space.

There are lots of indicators that suggest office properties won’t realize anywhere near their historic values anytime soon. But with high demand for industrial property, the faster a landlord can convert their building to something that has utility to an industrial business, the greater their chances of realizing a high price in a sale.

What’s the best way to navigate the uncertainty in the real estate market?

Experienced real estate advisers can work with landlords and tenants to find a way to reshape existing agreements, making them more comfortable for both parties at an uncomfortable time. They can work with sellers to advise them on how to reimagine their office properties to get top dollar in a hot market, and they can give buyers an upper hand because what they want or need isn’t likely to be found with a web search.

In a time of uncertainty, it’s best to have expert advice and guidance to resolve difficult challenges.

Insights Real Estate is brought to you by Cushman & Wakefield | CRESCO Real Estate

Commercial real estate mostly holds steady, for now

The Northeast Ohio commercial industrial real estate market hasn’t changed much since before the pandemic. Prior to the start of the year, office and industrial property values were very strong, industrial especially, and the outlook for them was continued strength and growth. Retail had a similar outlook, but not as strong as other property categories because of the competition brick and mortar has been facing from ecommerce.

Overall, there was a very positive outlook heading into 2020. And though many businesses have been disrupted by the pandemic, values have generally held steady, though there are weak spots in some sectors that could worsen if the recession continues.

Smart Business spoke with Simon Caplan, SIOR, a partner at Cushman & Wakefield/CRESCO Real Estate, about the state of the Northeast Ohio commercial real estate market and what the remainder of 2020 could bring.

How has the pandemic affected Northeast Ohio commercial real estate?

There are a lot of people in the market looking for industrial properties and they’ve been faced with a shortage of functional available space for lease and quality buildings for sale. Fortunately, there was a lot of new construction started last year that is occupiable this year. It is being gobbled up by companies that are doing well and need more space for manufacturing or distribution.

The office market has been negatively affected. Most companies have been very slow to address leases that are expiring this year or next year. There is some lease renewal activity, but instead of wanting to renew for five years, they’re more likely signing for one or two years. Occupants are making fewer improvements to their space because of these short-term leases, instead wanting flexibility for the future.

What’s happening when it comes to lease agreements?

Most companies want to do shorter terms. They want the flexibility. And if they’re taking ‘as-is’ space, they can get short-term deals. Landlords who normally are looking for five- to 10-year leases are now willing to do two-year deals with tenants, especially if it’s a lease extension with a business currently in the space. Tenants, in many cases, are looking for rent concessions or are negotiating to renew leases at their current rent or below to avoid the normal increases that tend to come with renewals.

Ultimately, landlords still have to make their mortgage payments and generate a little bit of a profit. That’s been made more difficult recently because there are tenants who haven’t been able to pay their rent for a few months. In some cases, lenders are working with landlords that can prove that they have not been receiving full rent and are accepting lesser payments on those mortgages.

How has the pandemic affected commercial real estate investors?

Overall, there’s significant demand. There’s still solid interest in industrial where prices, at the moment, are holding steady. There is also a lot of interest in vacant or about to be vacant big box retail space for repurpose uses. However, there are categories that are slowing down. In those sectors, prices are getting depressed.

Interestingly, the vacancy rate in Northeast Ohio’s industrial sector was just under 4 percent at the end of 2019 and reached 4 percent at the beginning of the year, where it has stayed. There hasn’t been any negative absorption — absorption being the amount of occupied square footage.

What’s the outlook for Northeast Ohio commercial real estate for the rest of 2020?

Industrial should stay strong, in part because it’s propelled by ecommerce right now, which is definitely going to continue to thrive. The office market this year is on pace to experience negative absorption for the first time since 2009. It’s unlikely that anything that happens in the second half of the year is going to change that.

And there is no doubt that retail is changing. Operators in that sector are going to have to adapt quickly, or real estate in that category will see significant price decreases. Right now, it’s not wise to buy into that sector unless it’s an amazing deal or it’s a subcategory like grocery that’s resilient.

Insights Real Estate is brought to you by Cushman & Wakefield | CRESCO Real Estate

Property owners can turn assets into cash with a sale-leaseback

Many businesses have taken a massive hit because of the pandemic. In the real estate market, current conditions are affecting both tenants and property owners. Tenants, many of which have seen a huge dip in income, are having difficulty paying rent. That’s put a strain on landlords, who often have lenders to pay. More important, if you are an owner/occupier, this quickly becomes a double-edged sword.

The situation has led some property owners to seek out liquidity and mitigate some of their risk. They’re finding that sale-leasebacks, which bring in investors who can provide immediate cash, often provide a logical and time-sensitive solution.

Smart Business spoke with Joseph V. Barna, SIOR, a principal at Cushman & Wakefield/CRESCO Real Estate, about sale-leasebacks and what property owners should consider as they look for investors.

Why should commercial property owners consider a sale-leaseback now?

Many property owners are looking to convert assets into liquidity, and there are a lot of qualified investors and institutions that are flush with capital looking for places to put it. Many regional and national investors are interested in Cleveland as there is less competition for deals compared to top-tier markets such as Los Angeles, New York or Chicago.

In sale-leaseback transactions, the owner sells their property to an investor, gets immediate capital to deploy elsewhere and retains use of the asset.

Property owners that also run businesses may need to invest in equipment, want to expand or need to pay down other debt, and the capital required to accomplish those things may be tied up in their property. Through a sale-leaseback, they can take the equity out and put it where they can get a higher return while getting the benefit of using and occupying the property.

What should property owners look for in an investor?

It’s important for sellers that operate out of their property to recognize that once the sale-leaseback transaction is complete, they’ll be a tenant and there’s going to be a new owner. It’s a partnership — the new owner is looking for a return on the investment and the former owner needs a property that can meet their business’s needs. Both parties need to understand the other’s objectives and long-term goals.

One consideration as sellers talk with potential investors is how experienced the investors are with this type of investment and property — how capable they are of being a landlord. For instance, if the building needs a new roof, can the investor write a check and make it happen? It really comes down to experience, how well capitalized they are, and their history.

While investors are eager to put their money to work, they’re still selective. It may be tough for retail property owners to find investors right now because this specific market sector is struggling. Also, office investments are not as hot as they had been as more people work out of their house and it’s unclear how many people are going to return to an office environment. That could be made worse if businesses downsize their office space to accommodate this potential new normal.

What might deal negotiations look like?

Investors may want the tenant to sign a long-term lease — eight or 10 years. In that case, they’ll want to make sure that the tenant is capable of being in business that long, so they will need to be comfortable with the financial stability of the business.

The tenant should have a clear understanding of their future business requirements and the trajectory of the business should be reflected in the lease. For instance, if the business is expanding, provisions should be included for the investor to renovate or expand the premises to accommodate that growth. On the flip side, the tenant might want to include contraction and/or sublease rights.

Property owners who are looking to convert their asset to cash should work to understand the current market conditions and talk with the right experts — accountant, legal and financial advisers, real estate consultant — to determine where the market is and where it’s going. That will help them make the best decision, and ensure a positive outcome despite the current challenges.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

Talk with your landlord if you’re struggling to make lease payments

As the coronavirus asserts its outsized influence on the market, the industry that’s being hit the hardest is retail. But nothing in a modern economy happens in isolation.

“There is a domino effect that is happening to the warehousing and manufacturing sectors,” says George Pofok, senior vice president at Cushman & Wakefield/CRESCO Real Estate. “Retailers here were hit first because they were the first ordered to close their doors. Now many of them are asking for rent relief from their landlords.” 

This has elicited a variety of responses from landlords. Some are giving a blanket, 90-day moratorium on rent. Other landlords might effectively pause rent but still expect tenants to make up payments at a later date. And some landlords are reducing rents while others expect payment in full. But for many tenants, there won’t be any relief unless they ask. 

“When you’re asking a landlord for some form of rent forgiveness, it’s critical that it is realistic,” Pofok says. “Most tenants have an existing lease and they’ll want to make sure to preserve the relationship with the landlord on a go-forward basis.”

Smart Business spoke with Pofok about what tenants affected by the coronavirus can do if they’re struggling to make lease payments. 

Why should landlords consider leniency on tenant lease payments?

It makes a lot of sense for landlords to be understanding because the alternative is an empty building, and that means down time. There are also costs landlords will bear while they look for and put up a new tenant. 

Conversely, the real estate market, at the moment, is extremely strong. The coronavirus will no doubt impact vacancy rates, but it’s unclear to what extent it will contribute to that in the long term. Many small businesses won’t be able to survive this and larger more established companies will face negative consequences as well. So there’s a chance that landlords could end up with net gains if they drop a tenant that they might have been looking for a reason to cease relations with. But, for the most part, landlords are cognizant of what’s going on in the world and have been working in the best interests of the people they currently have in their buildings.

What should tenants focus on when talking to their landlord about rent payments?

It’s important for tenants to be realistic. They should make a request for something like a moratorium on rent when they’re really feeling the pain. Those that can still afford to pay even a portion of the rent should pay.

Keep in mind that landlords may also have a mortgage to pay, so they might not be able to offer much in the way of forgiveness.

Whatever the situation, tenants should be realistic about their request, and patient and polite throughout the conversations.

How does a tenant’s contract situation play into this?

Tenants that have an existing lease agreement might find there are some terms within it that could be favorable to them in negotiations. For example, tenants that have a year left on their existing lease agreement with an option to renew might want to go to their landlord and negotiate a freeze in rent payments while also exercising their early renewal option. That will likely make that landlord a bit more comfortable knowing they have a lessee for a longer term. 

Tenants with lease agreements that have a right to terminate clause may have leverage in rent negotiations if they agree to waive that option in their existing lease agreement. It’s really part of a back and forth in which landlords and tenants potentially give on specific items in the lease agreement that might be mutually beneficial for all parties. 

It’s possible that, moving forward, there is new language inserted into lease agreements to account for something as damaging and unforeseen as what we’re experiencing now. But in the meantime, tenants should realize they’re not alone. There are professionals who are capable of helping tenants figure out the best path forward, whether it’s a financial adviser, attorney or real estate practitioner. Connect with an expert to find the best solution for the situation.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

Capitalize on the tight real estate market before conditions change

Real estate investors are increasingly choosing to buy a building occupied by tenants, which increases the value of their investment. Of course, the return on that investment depends on the structure of the leases and the quality of building. Given the strength of the Northeast Ohio real estate market right now, there are compelling opportunities for landlords.

“In this market, there is tremendous opportunity if you’re a landlord or property owner,” says Eliot Kijewski, senior vice president at Cushman & Wakefield | CRESCO Real Estate. “Prices are at their peak. Nonetheless, investors see rising rents coupled with very low interest rates and decide to keep putting their money to work.”

Smart Business spoke with Kijewski about the real estate investment market in Northeast Ohio and why landlords interested in selling should act sooner rather than later. 

What opportunities exist for property owners given the state of the NEO market?

The market is tight: many years of record occupancy and strong demand from investors looking to buy have created a ‘seller’s market.’ The best opportunities to capitalize on the current market are for landlords who own an occupied single-tenant building. If the tenant has quality credit and has more than four years left on the term of a market-rate lease, the landlord could sell the asset for far more than it’s worth vacant.

Industrial properties offer an added benefit. In addition to capitalizing on a tenant with a market-rate, long-term lease, the investor could still own a useable asset at end of the lease term. 

While it’s a good time to sell, landlords should consider, among other things, the buyer’s history. Not everyone is capable of being a good landlord, so sellers should ask about the buyer’s record as a landlord if they’re at all attached to their tenants. 

What is it that investors are looking for in the Northeast Ohio real estate market today?

Some of those who are investing in the current market are those looking to diversify their portfolio by getting into another category of real estate. A popular target for diversification is also experiencing peak demand and broad investor interest: multi-family properties. 

Also capturing interest are investments that match investors’ estate-planning strategies. Selling now may reap the best gains while values are high and tax treatment is favorable. One strategy for this investing purpose is to use a 1031 exchange, which allows for the deferral of capital gains on certain types of properties when a buyer upgrades to a higher priced investment property. 

What’s important for sellers to know about financing in this circumstance?

Interest rates are expected to stay low for the foreseeable future, so money is still ‘cheap.’ Banks are eager to lend and are competing for business. Real estate investors can’t use an SBA loan with a financed property, so they need to use a 1031 exchange and available capital to deliver a significant down payment. Another option is to make an upfront payment, much like a conventional loan, of 20 percent or more.

How soon should a property owner to act to take advantage of these conditions?

Those who intend to use a 1031 exchange should act now because there are specific dates by which the buyer needs to identify another property for purchase — the buyer needs to specify the property to which the capital gains will be deferred. That next property has to be of equal or greater value to the original property to qualify under the 1031. More specifically, the seller is required to identify three properties and close on a property within the mandated time period. The proceeds go towards a 1031 exchange via the title company. 

Connect with a real estate broker to determine what options exist before the sun sets on this opportunity.

Insights Real Estate is brought to you by Cushman & Wakefield | CRESCO Real Estate.

Why a real estate broker is such a valuable asset

Real estate professionals provide clients with indispensable knowledge, tools and techniques that allow them to make a more informed decision when looking to buy, sell or lease a property, says Simon Caplan, SIOR, a partner at Cushman & Wakefield/CRESCO Real Estate.

“The access to market information, the negotiating skills and the ability to manage the various components of the transaction provide the client with tremendous value that is worth its weight in gold,” Caplan says.
Brokers have access to information that allows you to look beyond the basics. Their market knowledge and experience can help you make the right move, Caplan says.

Smart Business spoke with Caplan about the benefits of using a real estate broker.

Why should you hire a real estate broker when buying, selling or leasing a property?
A good broker should always suggest to a seller or landlord multiple ways to improve their property value by making it more enticing to prospective buyers or tenants. You only get one chance to make a first impression.

Good or bad, that first impression can greatly influence a prospective buyer’s valuation of your property. These improvements should be done on a priority basis to minimally make the client’s property equivalent to similar available properties.

This might include things such as cleaning, painting, fixing lighting, replacing damaged or stained ceiling tiles or repairing obvious building code violations. The increase in value achieved through these improvements typically is much greater than the cost of doing the work.

If your property looks like it has not been cared for or has been poorly maintained, most offers to purchase or lease will be below expectations. Your property needs to look sexy and appealing so that prospects want to come back for a second date. A broker should be able to show interested parties why your property is worth the asking price by talking about its amenities, as well as comparing it to recent deals in the same part of town.

What should you know before going to market?
A good broker will want to understand multiple things about you and your company. What are your space requirements? Why are you looking to move? What benefits are you looking to achieve in your new space? What amenities do you require and what constraints are you placing on the search?

Expect to answer a lot of questions from your broker and depending on your requirements, have multiple people in your organization ready to share their perspective on the project to provide your broker with a good understanding of what you want to do.

Once everything is clear, your broker will be ready to start showing you properties. A good broker should be a consultant to you, explaining the good, the bad and the ugly about the properties you tour and in a short time, be able to provide values to the properties that have piqued your interest.

In today’s market, quality industrial buildings are in short supply and are often difficult to find. However, there is a fair amount of office space available throughout the market.

What’s the next step once you have selected the right property?
Initial offers are usually made through a broker’s non-binding letters of intent to negotiate the major business terms of the transaction. Once you have a basic agreement between the buyer and seller or tenant and landlord, a purchase agreement should be prepared and negotiated including all business and legal terms.

What are some key points with regard to your due diligence process?
The due diligence process of checking out the property should be done prior to signing a lease or if it’s a purchase, during the inspection period allowed in the purchase agreement. There are several areas that should be addressed during this process.

Look for potential governmental concerns such as zoning, lot coverage, fire code compliance and economic incentives, as well as possible title issues like liens or easements. It’s also important to do a physical review of the property to examine for structural, mechanical or roofing concerns, as well as possible environmental issues.

Addressing problems at this stage, before you finalize the transaction, can help you avoid a lot of headaches down the road.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

How today’s industrial users can fulfill their requirement

Companies operating in the industrial sector today are looking for facilities that are user-friendly, rich in amenities and can be adapted to enhance the work experience of fickle employees.

“Historically, most users just focused on amenities required to produce product,” says Joseph V. Barna, a principal at Cushman & Wakefield/CRESCO Real Estate. “Preferences have changed significantly today, and that’s making most older buildings in the market borderline obsolete.”

He says some of the buildings in the market can be renovated, but often the required investment is cost prohibitive.

“Employers in the industrial sector are increasingly concerned with keeping employees happy, which translates to keeping employees — something that’s important in a market in which skilled workers are in high demand,” Barna says. “That shows up in the amenities they want in their facilities, and it has meaningful implications for landlords.”

Smart Business spoke with Barna about identifying suitable demand industrial properties in a tight market.

What factors are contributing to the change in the way manufacturers choose real estate?

Industrial has become more high tech, which has exacerbated the already severe shortage of skilled tradespeople at the local, regional, national and global levels. There are a few other reasons for that shortage.

The population is aging while the birthrate is decreasing, so there are fewer people entering the workforce with these desired skill sets.

The young people entering the workforce have tied personal fulfillment and contribution to their professional lives. So if they’re not happy, if they don’t feel their job is meaningful, they’re not interested. That’s put an emphasis on job retention. Therefore, keeping employees happy is now seen as essential to retention. A facility’s amenities can go a long way toward that end.

How does this change affect the market for real estate in the Greater Cleveland area?

The site-selection process in the Greater Cleveland market has become more complex. Our industrial inventory is about 505 million square feet of property. But most of that product is aged and either functionally obsolete or not up to current standards.

Class A industrial real estate represents about 3 percent of our total inventory; everything else is B, C, D or obsolete. In addition, our 3.5 percent vacancy rate is the lowest in history, so when buildings do come on market, there can quickly be multiple offers from qualified buyers. The industrial real estate market is now very competitive.

How can industrial real estate users get what they want in this market?  

Plan in advance. When a lease is coming up or sales are rising to the point that fulfillment will require a larger facility, get ahead of it. Then, define the requirement. Companies should think about the need they’ll have in five to 10 years, not in the next two. Once their needs are defined, they should start analyzing the market as soon as possible.

It’s also advantageous to explore new construction. It can be expensive to build as construction costs continue to increase. However, incentives through municipalities, the state and county can offset the cost of new construction. 

Buying an existing property means making a significant investment in what is still, essentially, in terms of the brick and mortar, an aged building. New construction could have tax advantages that can help close the financial gap and get the buyer exactly what they want. It means having new mechanicals as well as structure, which suggests the cost of operations will be lower than dealing with an old building and its often-obsolete non energy-efficient mechanicals. 

Also, think outside of the box. If a company only needs a 30,000-square-foot building, consider buying a 50,000-square-foot building and finding a partial tenant to offset the costs. Or buy a larger building from a company that’s looking to downsize and keep them as a partial tenant.

There are a lot of approaches for industrial companies to get what they need in this market. Accomplishing that can be made easier by assembling the right team — an accountant, real estate specialist and attorney — and exploring all options to maximize the results of the end user.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

How the rising costs of construction are affecting tenant perception

The construction of new industrial and warehouse space in Greater Cleveland has increased about 15 percent over the past three years. But, demand for new space is even greater than the increase in supply; developers and contractors have been very selective and are pricing both new construction and renovation projects accordingly. These conditions are also driving up rents, creating a trend that is difficult news for buyers and tenants alike. 

“Buyers and tenants tend not to want to believe the numbers when they get quotes,” says Eliot Kijewski, senior vice president at Cushman & Wakefield|CRESCO Real Estate. “Market prices have been steadily on the low side for a long time. Today’s pricing can cause some sticker shock.”

Smart Business spoke with Kijewski about the effect higher commercial real estate prices are having on buyers and tenants in the Northeast Ohio market.

How is the cost of construction affecting the local commercial real estate market?

Northeast Ohio prices haven’t caught up to the rest of the Midwest for flex space or office space; the region is still a value compared to Columbus, Pittsburgh, Detroit, Indianapolis and Cincinnati, and is well below Chicago. Area owners are being crunched by the investments expected by tenants. When times were tough a few years ago, landlords were doing anything they could to attract and retain tenants. Today, incentives such as free rent are gone, and landlords are contributing less, dollar-wise, to keep rents low.

One new trend is that landlords are more transparent; they’re more likely to rent space at an as-is number, and another number with tenant improvements. There are instances where landlords will become lenders and investors with tenants, too. 

Prices on existing buildings are rising, so much so that they’re nearing the price-per-square-foot of new construction. However, the time, cost and financing of new construction is a challenge to most tenants, who have an urgency in their space needs. Buyers in this market can feel as if they’re paying a lot up front to not have a building immediately. The advantage of building, though, is the owners get what they want — a brand new roof, building shapes and heights that meet their exacting business needs, modern sprinkler systems, etc. There is a narrowing of the lease-versus-buy gap happening in the market. 

How would you characterize tenant perception today, and how is it a factor in the market? 

Many prospective tenants are surprised at the cost of rent and renovations. That’s pushing prospects to keep searching for a property that’s priced closer to their expectations, or to take properties on a more as-is basis. In some cases, they’re willing to not get exactly what they want for either a better price or to save money on renovations. Location, however, is still a critical factor in the buying decision. 

The Greater Cleveland area currently has an incredibly low vacancy rate. If a property is not moving, it’s likely because the condition is very poor and the landlord hasn’t made the necessary improvements to make the property appealing. All properties have a chance to move in this market. Experienced commercial real estate brokers can help landlords find the best ways to move a property, which range from significant investment to decluttering and patching up an old roof. 

How should buyers and tenants approach today’s commercial real estate market? 

Buyers and prospective tenants need to know what they want, so that they’re ready when an opportunity exists. The market is so tight that the windows for great opportunities are very narrow. If they’re priced appropriately and are in a condition that’s saleable, a commercial property will go faster than a house in a hot neighborhood. Have financing and a down payment ready so when a deal opportunity arises a transaction can be executed quickly. Having a broker helps to source off-market opportunities and to evaluate opportunities to make sure you’re getting the best value for your business.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

Tips for first-time commercial property investors

Investing in commercial property is a great opportunity, but it means more than just accepting checks from tenants. 

“Property owners must pay attention to the asset to make sure it stays in good shape — both in terms of structure and occupancy — because eventually it will be sold,” says George J. Pofok, CCIM, SIOR, senior vice president at Cushman & Wakefield/CRESCO Real Estate.

Smart Business spoke with Pofok about what first-time investors in commercial property should know before committing to a deal.

What should investors understand about investing in commercial property?

It’s important first to understand the market being considered and the type of product — industrial, retail, commercial office — for investment. 

When it comes to location, investors should study the market to understand the difference between the value of the bricks and mortar vs. a property’s cash flow potential. For instance, if the building goes vacant, the investor should determine ahead of time the rent that can be charged when backfilling the property. If the occupant companies at the time of the investment are paying $7 per square foot, but the true value of the market if a new tenant were to enter is $4, then the investor will need to account for the disparity between what’s being paid now and what the market will bear.  

Does investing in commercial property mean becoming a landlord?

Investing in a commercial property usually means becoming a landlord. There are absolute triple net investments through which tenants are wholly responsible for the property, but with most investments investors are responsible for the maintenance and upkeep of the main building components. This is something investors need to understand from the start. They won’t just get a check every month. They will have management oversight responsibilities. 

Where should someone interested in investing in commercial properties start?

Start by consulting with a real estate practitioner to find out what investment opportunities exist in the market — currently, industrial and multifamily are generating a lot of investor interest in the Northeast Ohio market. There are many outside investors buying into Cleveland and other Tier 2 cities, principally because the rate of return is higher than they’d get in Tier 1 markets like Chicago or Los Angeles where there’s a lot of competition, which is driving down the cap rates and creating higher barriers of entry. 

Real estate practitioners have a complete database and market knowledge. They can also connect investors who are looking to partner with others on larger properties or building larger portfolios. 

How long until investors realize a return?

Investors can make a return in that first year, as long as they invest intelligently. But how long an investment is profitable depends in part on market conditions. In today’s conditions, there is limited product and lots of investors chasing deals. Acquisition prices are high compared to recession prices, the latter of which led to conditions where cash was king and property owners were willing to take less money to solve a problem and get out. 

Who should first-time investors work with?

Talk to an attorney to make sure the corporation used for investing in commercial property is set up appropriately. In addition to the real estate practitioner and legal adviser, it’s a good idea to consult with an accountant on any real estate investment. Work the due diligence with this team, and along the way make connections with trade professionals such as roofers, structural engineers, plumbers and electricians to ensure the property is structurally sound and that it remains attractive to existing and prospective tenants. 

Also, pay attention to the tenants and make sure they’re in good financial shape because it’s a significant setback if one is lost before its contract term ends. Pay attention to lease dates and stay ahead of any renewal option dates because it’s easier to renew than to find new tenants. Many real estate practitioners watch lease expiration dates and will poach tenants when owners aren’t paying attention.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate

Technology and its impact on commercial real estate searches

Technology has changed how buyers and tenants explore the commercial real estate market. Multiple online listing services showcase the available commercial properties in a given market, putting a great deal of information at a prospect’s fingertips. 

“While these services are valuable for getting a sense of the market, there’s a lot of information that’s not included that could change the value proposition of a property considerably,” says Joseph V. Barna, a principal at Cushman & Wakefield/CRESCO Real Estate.

Smart Business spoke with Barna about the role of commercial real estate brokers/consultants in an environment increasingly touched by technology.  

What information might not be available through online searches?

Listing services can’t illuminate incentives designed to court business, such as free rent, tax abatements, graduated lease rates, below-market financing or tax credits. These valuable incentives affect the total occupancy cost of a property. Buyers and tenants do themselves a disservice if they make a decision without first consulting with a knowledgeable broker/consultant who is aware of these offsets.

Lease comparisons in submarkets often aren’t tracked correctly through listing services. Brokers/Consultants, however, track completed lease transactions, which are recorded in their database after transactions are made. This real-time information can help brokers guide clients in submarkets to find the sweet spot in a deal price and structure.

Similarly, buyers can use brokers to get sales comparisons for specific types of properties in a specific submarket. Accurate, up-to-date comparisons guide buyers and tenants toward a property’s realistic true market value. With that guidance, buyers aren’t taking a stab in the dark on price. Rather, they’re making a business decision based on facts.

How has the role of the commercial real estate agent changed?

Commercial real estate brokers have become well-rounded consultants. They’re active in the market every day and, because they represent specific product types, are a wealth of knowledge in a given marketplace. 

In a consultative role, brokers talk with buyers and tenants about market trends, sale and lease prices, and provide value-added services such as project management for buyers who intend to make renovations to a property. Larger firms often have service lines to manage properties, offer guidance regarding construction/project management, incentive procurement, environmental issues and more. They help buyers and tenants consider total occupancy costs, which includes utility consumption, maintenance/upkeep and taxes incentives that could reduce the tax burden. 

Brokers also help buyers and tenants evaluate locations that meet their specific needs beyond the brick and mortar, such as access to employees, utilities, freeways and areas that are zoned for their specific intentions. These important aspects can be overlooked without a knowledgeable broker to guide the process. 

At what point in the search process is it prudent to get an agent involved? 

Online listings are a great way to get a sense of what’s in the market and a ‘snapshot’ of range of value. However, it makes sound business sense to reach out to a broker/consultant early in the process who understands the specific types of property and is armed with real-time market knowledge. 

Prospective tenants and buyers without knowledgeable representation are at a disadvantage at the deal table. Bringing a professional on early in the process levels the playing field. The end result is an informative decision based on all the critical components of a transaction. 

Most people only buy or lease property a few times during their professional lives. It’s to a tenant’s or buyer’s advantage to have the right team on their side of the table to maximize value. Real estate agents are specialists working in the market every day. They have the experience to help clients achieve their objectives.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate.