Buy low, sell high. We all know the
rules of investing by now, though
following them in an economic
downturn requires a bit of courage and a
lot of foresight. For business owners and
investors considering commercial real
estate purchases, the market is ripe with
inventory at fair prices.
“Now is the time to buy,” says Craig
Johnson, president and CEO of Franklin
Bank, Southfield, Mich. “Essentially, what
you buy today for 70 cents would have
cost a dollar yesterday.”
Indeed, it’s a buyer’s market for those
who have conserved cash and are prepared to commit to traditional terms and
conditions. And business owners who are
in the position to bid on properties now
could realize returns once the economy
rebounds.
Smart Business spoke to Johnson
about what to expect in today’s commercial real estate market.
What opportunities exist today in the commercial real estate market?
With the current economic cycle, there
are plenty of owner-operator businesses
that may be experiencing financial difficulty and may need to sell. Investors who
are having trouble leasing their properties may want to exit the market. Also,
the number of commercial properties
banks own is much greater now because
of loan defaults and other circumstances.
Whether you are a business owner looking for office space or an investor speculating properties to own and lease out,
there are certainly a lot of choices out
there. The key is to shop carefully, do
your due diligence and determine
whether a property is truly a good deal.
Any warnings for investors?
If you are an investor, be sure to stress-test the investment: be sure your pro formas make sense given the current economic cycle. In particular, get a strong feel
for the property’s income potential.
Understand its position in the marketplace relative to competing buildings.
Consider the old adage, location, location,
location. Does the property you’re considering have a stigma? Some properties do
not lease — sometimes for good reason;
other times for no reason at all. You do not
want to invest in a property like this, even
if it’s a bargain-basement deal.
What about for business owners?
While the same rules of doing due diligence and recognizing the importance of
a property’s location are true, there is less
emphasis on a property’s potential to produce revenue. That is, unless you plan to
own the building, occupy a portion of it
and lease office space to tenants. Today’s
market may be friendlier for business
owners than for investors because most
owner-operators are not buying with the
intention to ‘flip’ the property and sell it
for profit, or make a living off of rent revenues. While the availability of properties
is appealing for both types of buyers,
business owners may be more willing to
take a risk on a ‘deal’ because their goal is
to buy office space, not to attract and
retain tenants.
How will building vacancy and current rental
rates play into the deal?
If you buy a building that is vacant, ideally you should have a tenant lined up to
lease the space. If not, you must understand the typical occupancy timeline for
the property. Keep in mind that filling the
building may be more difficult in this market, unless you are willing to pay for
improvements to entice tenants. However, if you find a property with a good
rental history or are willing to build out
space for tenants, you can get a tremendous deal on a property that will pay back
now in terms of rental revenue and appreciate in value over time.
What should business owners/investors
expect regarding financing?
You will put more money down and, currently, pay slightly higher interest rates for
commercial real estate loans. Investors
may put an average 30 percent down,
whereas in the past the typical requirement was about 20 percent down. Owner-operators may put 20 to 25 percent down
but can take advantage of Small Business
Association (SBA) loans, which can help
them conserve cash and still fulfill banks’
down payment requirements. Don’t discount any loan opportunities, and strongly consider SBA lending. Also keep in
mind that banks are seeking relationships,
not single transactions. Banks want to
pick up checking and savings account
business and to leverage their cash management and payroll services. If you treat
real estate financing as one piece of a total
partnership, banks may be more willing to
recognize the value in backing you in real
estate investments.
The key in this market is to polish your
strategy and understand your risk before
buying commercial real estate. Make the
deal transparent. Then enlist your banker
before you need capital. Make financing
part of the process, not the last step in
your real estate transaction.
CRAIG JOHNSON is president and CEO of Franklin Bank, Southfield, Mich. Reach him at [email protected] or
(248) 358-6459.
