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A worthy re-post…Llenrock’s “Lessons in Commercial Real Estate” October 11, 2010

Posted by Erik Swanson in Articles, Blogs, Sale, Uncategorized.
Tags: , , , , , , , , ,

Although transaction velocity remains stagnant, we’re seeing glimmers of hope that there’s life returning to the CRE market. The necessary “players” all indicate they want to play…Lenders are getting healthier and seemingly positioning themselves to move troubled assets off their books. We’re hearing  from banks that they want to begin making loans on investments, (some say they will even look at lending on a retail center!)  And there are investors eager to deploy capital. Yet, buyers and sellers generally can’t seem to reach agreement on an appropriate risk premium to attach to commercial property investments (sans a few core assets and single tenant properties). There’s an ongoing and rather massive case of analysis paralysis in effect. As we plod through it, a lot of us are left scratching our heads wondering what it will take to get things moving again.  I like the Llenrock Group’s idea on how to kick-start the market:

Commercial real estate is not a commodity. Yet from 2004-2007, it was treated like one. Like a popular stock whose underlying financials do not support an increase in demand, but whose price rises anyway, commercial real estate prices shot up dramatically during this period. Unlike gold, whose value is artificially predicated on whatever the market determines it is worth at a given point in time, commercial real estate has intrinsic value because it produces income through cash flow. The speculative and competition driven aspects of the asset class’ popularity is measured through cap rates. But whether you value a property at a 10 cap or a 6 cap, the NOI remains the same.

 This is what makes real estate such a nuanced asset class. You can buy because of location. You can buy because of strong cash flow. But in order to preserve the value of the asset, you must take an active role in the property’s management. Tenants do not appear out of thin air and pay your your asking rent. Leaky roofs do not fix themselves. Rent increases do not negotiate themselves, nor do tenant improvement packages.

While you CAN control a lot of what happens to your property through hands on management, there is a lot you cannot control. If you are an office landlord you cannot control the unemployment rate. If you are a retail owner you cannot dictate store sales. And while values are shaped by such forces through occupancy, you can still overcome them but being shrewd in retaining tenants or attracting new ones through free rent, lower rental rates, and higher tenant improvement allowances.

Full post here at Llenrock .com



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