Washington DC Commercial Real Estate

Proper Investing

noreply@blogger.com (TG Associates Coldwell Banker Commercial) — Sat, 12 Sep 2009 17:09:00 +0000

Cash-on-Cash Return: Beyond Pro Formas & Cap Rates

The adversity most investors in commercial real estate are going through right now is leading to a new industry paradigm when it comes to analyzing investment properties. Not only are investors themselves looking for new, more practical ways to analyze these properties, underwriters are as well.

Cash flow is king!

To make successful deals in today’s market, capitalization rates and pro forma numbers take a back seat to cash-on-cash returns and accurate pricing. Financing is the biggest stumbling block in the market today. Capital is scarce, scared or patient. As a result, property owners who used to quote cap rates are now paying much more attention to cash flows. Cash flow is king! Equity and appreciation are secondary at best.

The questions for distressed property investors are whether the property has positive cash flows and the prospects of maintaining current tenancy levels. Prospective buyers and sellers are also paying more attention to the quality of the tenants than they were 18 months ago. Back then, vacancies were viewed as opportunities by the landlord to add value. Now they are a major liability.

Cap rates can only tell you so much about a property. For example, let’s say you have two retail properties with the same cap rate. One is a NNN, single-tenant space with a creditworthy lessee and a long-term lease in place. The other contains three tenants, one or more of which may be of questionable creditworthiness with shorter-term leases in place. All things being equal, it wouldn’t take a rocket scientist to figure out which of these is the better investment in today’s market. That’s why investors, like banks, are looking more and more at cash-on-cash return.

Cash-on cash is the ratio of annual before-tax cash flow to the total amount of cash invested, expressed
as a percentage.

Annual Before-Tax Cash Flow
Cash-On-Cash Return = -----------------------------------------
Total Cash Invested

For example, suppose an investor purchases a $1,200,000 apartment complex with a $300,000 down payment. Each month, the cash flow from rentals, less expenses, is $5,000. Over the course of a year, the before-tax income would be $5,000 x 12 = $60,000, so the cash-on-cash return would be 20% ($60,000 / $300,000 = .20).

However, it’s important to note that although cash-on-cash return is a better determinant of cash flow than cap rates are, it is still not perfect and should be used as just one tool in an arsenal for analyzing investment properties. Because this calculation is based solely on before tax cash flow relative to the amount of cash invested, it cannot take into account an investor’s tax situation, the particulars of which may influence the desirability of an investment.

Lenders Postpone the Pain (Troubled Loans)

noreply@blogger.com (TG Associates Coldwell Banker Commercial) — Fri, 11 Sep 2009 03:45:00 +0000

Two new phrases have entered the commercial real estate industry lexicon in recent months: "Pretend and extend" and "A rolling loan gathers no loss." Both witticisms describe an ongoing phenomenon in commercial real estate
finance: as the level of distress mounts, lenders have been loath to seize properties from troubled borrowers. Instead, in many cases banks are generously granting extensions or other modifications even in situations where it appears unlikely that borrowers will be able to pay back the loans.

From January through April of this year, the 20 largest banks in the country reported that modifications of existing loans outnumbered new commitments by approximately two to one. What's at work is that lenders are attempting to avoid recognizing write downs and losses on their commercial real estate loan books. Loans originated at the height of the market were done at near 100 percent loan-to-value ratios and underwritten with generous assumptions on increasing occupancies and rents. But in the past two years commercial real estate values have dropped considerably and fundamentals have weakened. Rents and occupancies are now dropping quickly, not rising. On top of everything, a major source of financing, the commercial mortgage-backed securities (CMBS) market, remains locked down.

Many banks hope that if they stave off foreclosure for a year or two, even if a distressed sale becomes inevitable, they will be able to recover more of their investment than they would if they sold right now. So lenders are playing a waiting game. Foreclosing on assets today means they would have to manage properties in a treacherous economic climate. The alternative would be to sell. But the investment sales scene is not encouraging. Distressed assets are trading at steep discounts to peak market prices.

If banks were to take back these assets now and try to sell them, they would fetch prices as much as 35 percent off pricing peaks. In May, the most recent month for which data are available, only $418 million in retail properties changed hands, representing a 12 percent decline in sales activity compared to April and a decline of 89 percent compared to May of 2007, the peak period for the investment sales market.

When a borrower does go into default and the bank takes over the property, the servicers are increasingly turning to receivers to take over the management of such properties and eventually attempt to sell them (a sale outside foreclosure also allows the lender to provide seller financing, rather than looking for an all-cash buyer) Meanwhile, banks and other traditional lenders want time to develop a long-term strategy for their real estate portfolios, as well as being reluctant to sell at the bottom of the market.

Lenders are not treating all borrowers equally, however. They are making distinctions based on the quality of borrowers and assets. In cases where properties boast healthy cash flows and owners with proven track records, lenders see little reason to foreclose. Why go through the tumult of a foreclosure and changing over day-to-day property management if the current management team is doing a good job? In these cases, the delinquencies are more the result of the poor financial climate than they are of mismanagement.

Market observers hope the current logjam will start to un-wind by the first quarter of 2010. If their predictions are on target, it will be another three to five years before all the bad commercial loans out there get resolved. But if lenders continue to postpone dealing with troubled assets, the resolution of this crisis might take as long as 10 years.

The good news is that in many cases, lenders are not simply extending the loans, they are trying to rework the terms in such a way that they don’t have to come back to the negotiating table six months or a year down the road. They are factoring in falling cash flows and the possibility of higher vacancies and lower rents. The bad news is that in a number of instances, banks may not be lowering those assumptions enough. Meanwhile, with banks unwilling to take
troubled assets to market, opportunistic investors continue to stay away from acquisitions and the process of price discovery in commercial real estate continues to be arduous.

DC Top Student Destination

noreply@blogger.com (TG Associates Coldwell Banker Commercial) — Wed, 09 Sep 2009 06:20:00 +0000

Washington DC has always been labeled as a highly educated city, now there's more proof to back it up. This is good news for property owners focusing on student housing, since demand will remain strong for housing near campuses in the district.

The opportunity and hope radiating from our nation's capitol has drawn droves of students to colleges in the DC area for their education and subsequent employment opportunities. The top reasons are obvious: 1) Low unemployment: 5.6% 2) Second Highest per-capita income in the US ($54,971)

All this news is good news to help aid the local economic recovery. As a talent magnet for the educated masses, DC will have the intellectual capital to grow its employment base.

D.C. Ranks Fourth in Report on College Destinations - washingtonpost.com

Tips for Landlords in a Tenant's Market

noreply@blogger.com (TG Associates Coldwell Banker Commercial) — Fri, 21 Aug 2009 22:22:00 +0000

The challenging economic climate marked by shaky financial institutions and increasing unemployment is resulting in rising vacancies and falling rents in today's commercial real estate market. The pendulum has swung in
favor of tenants and likely will remain there throughout 2009.

Landlords need to take a number of steps to protect their assets when dealing with existing and prospective tenants. First and foremost, landlords need to adjust their thinking in the short term to maintain a steady cash flow and position their assets to weather the recession.

More than ever, tenants are looking at gross occupancy costs, or net rent plus their share of the operating expenses. Tenants historically have focused on net rents, but the operating expense portion is coming under increased scrutiny as the recession deepens.

Lower Cost of Occupancy

There are several options that owners should consider to reduce operating costs, all of which can lower tenants' costs of occupancy.

Aggressively contest real estate taxes by arming yourself with information that could help your tax attorney and the assessor. A building may have lingering vacancies or unique challenges that the assessor hasn't considered.
Consider making your building more “green,” which may include Energy Star and LEED certification. Landlords should pay attention during the next few months to what's included in the government's stimulus package in the event the program offers incentives for property owners. However, there already are big incentives from utility companies in every geographic market.
Take advantage of group purchasing to lower operating expenses, including property insurance, utilities, janitorial services and trash removal. Landlords can receive significant discounts by leveraging the size of their portfolios managed by their service provider.
Don't sit on a request for proposal (RFP). Your responsiveness may set you apart, especially if you understand what's important to that tenant — from parking to amenities to lower utility costs. A quick turnaround shows a commitment to the customer.

Also, put on the “full-court press” when showing a building to a prospect. In addition to having the leasing agent at showings, consider including the property manager and the building engineer in case a prospective tenant has questions.

If the space needs significant construction, bring in a construction representative. You don't want to miss your opportunity during the 15 minutes you have with the prospect.

Tenant Representative as Allies

Tenant rep brokers are not the enemy, and can be an important friend. A tenant rep broker is hired by tenants to help define their space needs and negotiate lease terms with the landlord.

Today, more than 80% of all tenants are represented, and that percentage is even higher on large transactions.
Landlords must understand that most tenant rep brokers are not simply looking for a commission. They can help place the landlord's building in the best light to leverage the building's advantages. Treating a tenant rep as an extension of your leasing team can pay dividends.

Most landlords today are in an “asset preservation” mode rather than positioning the building for “value creation” in the next 12-18 months. Even if the objective is to position the asset to sell it in the years ahead, landlords can meet the market now by focusing on shorter-term leases. When the market recovers, landlords can return to a more aggressive strategy of building long-term value.

Minimize vacancies

In better times, a landlord could buy a less than fully occupied property on the assumption that he could lease it up quickly, but that's no longer realistic. Typically, landlords pay the cost of operating expenses on vacancies, which can quickly erode the building's cash flow. By generating enough rent to pay operating expenses the owner protects the downside and limited vacancy carry costs.

It's important to acknowledge requests for rent reductions, but also ask to see a tenant's current financial statement and a business plan showing how it plans to recover. If the tenant is a good long-term risk, consider exchanging rent relief for an extension of the lease term.

Despite challenges, investors can protect or even improve their building's value. With the right approach, investors can weather this storm and be well positioned when the skies clear again.

Ghost Space will affect DC Office Space Recovery

noreply@blogger.com (TG Associates Coldwell Banker Commercial) — Thu, 20 Aug 2009 23:11:00 +0000

BISNOW covers the trend we have been noticing in DC where there are more and more empty spaces within offices. Every other office I walk into looks like "Swiss Cheese," I guess all those pink slips and "buyouts" are to blame.

Read the full article:
http://www.bisnow.com/washington_dc_commercial_real_estate_news_story.php?p=5065

CMBS Crisis?.... Not Quite

noreply@blogger.com (TG Associates Coldwell Banker Commercial) — Thu, 20 Nov 2008 05:12:00 +0000

Not surprising to well-informed Commercial Real Estate Brokers, the CMBS market has weakened over the course of 2008. The popular CMBS market helped finance many commercial transactions for hotels, office buildings, and shopping centers. Now there is speculation that this market will collapse on the premise of the default of only two big commercial mortgages. Well, it will take more than two failed loans to bring down financing for commercial real estate.

As we all know, any commercial real estate investment is scrutinized by the brightest businessmen and the most intelligent investors. The fancy speadsheets, complex algorithms, and intricate projections all help mitigate the risk involved in multi-million dollar projects. If investors continue a disciplined and analytical approach to their acquisitions and dispositions of assets, the market shall weather this storm just fine.

Now, lets look at the delinquency rate, which is truly a bellweather for the industry. Delinquencies on commercial real estate debt rose to 0.78 percent in October, from 0.66 percent in September according to RBS Greenwich Capital data.

According to Mary MacNeill, managing director at Fitch "they’re still much lower than they were a few years ago.They would still be in line with the historical average, which is 0.78% to 0.79%.”

Now, even with a delinquency rate at 0.78 percent, we're still in line with the historical average; and average is far from a crisis. (Bear in mind that delinquencies are not defaults!) Those who are afraid can take the news and burn it to fuel their fears and make irrational decisions. Those of us that know the historical data, understand the real estate cycle can make informed investment decisions and still profit in this down-market.

Retailers to Close Stores

noreply@blogger.com (TG Associates Coldwell Banker Commercial) — Thu, 20 Nov 2008 04:02:00 +0000

Although We're optimists at heart, we can't deny the reality of the retail landscape changing in front of our eyes. Everyone is aware that Retail has been the most underperforming sector of Commercial Real Estate. This unofficial list of retailers (shown below) shuttering their stores was a shocking splash of cold water in the face.

Now, before people start yelling that the sky is falling, remember that Real Estate works in cycles. This is going to be a tough down cycle for the retail sector as consumers cut back on spending, slashing retailer revenues and impacting. Shopping Center Owners (as we saw in the previos blog posting) , and strip all owners will be taking serious hits and filing for bankruptcy. This contraction in the market will open up opportunities for innovative investors and enlightened entrepreneurs to make their move and acquire distressed properties.

In the meantime, cash in your gift cards and look for bargains at the following stores:

Retailers to Close Stores

Circuit City - Filed for bankruptcy, unsure as to how many stores will close
Ann Taylor- 117 stores nationwide
Lane Bryant, Fashion Bug ,and Catherine’s 150 stores nationwide
Eddie Bauer to close stores 27 stores and more after January
Cache will close all stores
Talbots closing down all stores
J. Jill closing all stores
GAP closing 85 stores
Footlocker closing 140 stores more to close after January
Wickes Furniture closing down
Levitz closing down remaining stores
Bombay closing remaining stores
Zales closing down 82 stores and 105 after January.
Whitehall closing all stores
Piercing Pagoda closing all stores
Disney closing 98 stores and will close more after January.
Home Depot closing 15 stores
Macys to close 9 stores after January
Linens and Things closing all stores
Movie Galley Closing all stores
Pacific Sunware closing stores
Pep Boys Closing 33 stores
Sprint/ Nextel closing 133 stores
JC Penney closing a number of stores after January
Ethan Allen closing down 12 stores.
Wilson Leather closing down all stores
Sharper Image closing down all stores
K B Toys closing 356 stores
Lowes to close down some stores
Dillard’s to close some stores

Local Shopping Centers for Sale?

noreply@blogger.com (TG Associates Coldwell Banker Commercial) — Wed, 12 Nov 2008 07:26:00 +0000

The Gargantuan REIT, General Growth Properties (GGP), one of the largest shopping mall owners (and owner of several large shopping centers in the Washington DC Metropolitan Area), is facing bankruptcy straight in its eyeballs. Will it blink?

GGP has failed to refinance or extend $1 billion in debt due this month, which could trigger default. Already, GGP warned of its precarious position in its quarterly filing to the SEC. Furthermore, GGP is facing an additional $3.07 billion in debt coming due in 2009.

GGP Says: “Our potential inability to address our 2008 and 2009 debt maturities in a satisfactory fashion raises substantial doubts as to our ability to continue as an ongoing concern,” General Growth Properties said in a Securities and Exchange Commission filing. “We may be required to take further steps to acquire the funds necessary to satisfy our short term cash needs, including seeking legal protection from our creditors.”

This current financial situation will be placing the future of its assets in jeopardy. GGP will be under extreme pressure to raise additional capital to pay off these imminent obligations.

What Will GGP Do? or WWGD?

1) Issue Stock or Bonds: Now, GGP can issue stock or bonds to raise money, but who would want to buy stock/bonds in a company thats in this dire position? The company has lost 99 percent of its market value this year; its stock was trading at 48 cents per share at the close of the market on Tuesday. Skittish investors will most definitely steer clear. And the liquidity crisis means most institutional investors and banks will continue to hoard money rather than take this investment risk.

2) Ask Uncle Sam: Bailouts abound these days, perhaps a Government bailout can be GGP's white knight. Solid support for their presidential neighbor may very well pay off.

3) Cut Corners & Costs: GGP is a major employer of 4,200 professionals nationwide, will it lay people off and start buying the single-ply toilet paper for its facilities? This option may generate savings and reduce overhead, but won't generate any revenue.

4) Raise Rents: Raising tenant's rents is out of the question as it would only drive out tenants and have the opposite effect. Moreover, the weak retail segment won't bear this increase in rent.

5) Divest its Assets: Taking the Good 'ol Fashioned approach to raising capital by selling off its assets may very well be the most sensible option in this economic environment. However, this won't be a walk in the park. Challenges in the retail sector will make this a complex and lengthy proposition. GGP should be willing to take reasonable offers on its properties, since this will allow them to pay off lenders and keep afloat. Trimming down its property portfolio and getting rid of the "dogs" may improve its overall long-term position. Sometimes one has to take one step back to take two steps forward.

6) Chapter 11: Bankruptcy.Game Over. Lenders Call the Shots. Shareholders Lose Big Time.

Surviving the Storm: A Recipe for Success

noreply@blogger.com (TG Associates Coldwell Banker Commercial) — Mon, 10 Nov 2008 21:17:00 +0000

Weathering the Storm: As the financial storm makes its way through the Washington DC region, we can expect our fair share of changes that can present perfect opportunities for savvy commercial real estate investors, particularly those with available liquidity. In recent years, the commercial real estate market was a seller's market, with institutional investors and gargantuan private equity firms gobbling up as many properties as possible. The previous conditions spurred this type of irrational exuberance (yes, this term also applies to larger commercial real estate investors) as the carrying costs were low, bank lending terms were lenient, non-recourse loans were plentiful, and CMBSs were the hot-topic. Now, in the middle of the storm, learn how to stay dry and not lose your shirt.

Investment firms like Merril Lynch and Lehman Brothers played this game and funded many commercial real estate operations across the region. Now, as the financial crisis has claimed its victims, commercial real estate funding has become quite scarce as banks hoard cash and build up their reserves to cover all the bad loans they made. Now, don't get me wrong, there is still money out there, it's just that the bar has been raised and the rules of the game have changed.

The Queen of Hearts Dilemma: Bank behavior these days remind me of the Queen of Hearts in Lewis Carroll's epic Alice in Wonderland. Alice described the queen as a "fat, pompous, bad tempered old tyrant," now I don't believe banks deserve this description, although many investors, developers and small businesses may disagree. The Queen of Hearts, when she challenged Alice to a game of croquet, would continuously change the rules of the game to ensure she was always winning despite Alice's noble efforts to play the game.

Changing the Game: Well, banks are changing the rules much in the same way the queen did for Alice. Banks have always done so to gain an edge over the competition. They changed the rules and lowered the lending standards... and got burned with defaulting loans and bad paper. Somewhere along the way banks forgot that their only competitive advantage in the industry is disciplined lending. Nothing more, nothing less. Al the Marketing in the world couldn't save IndyMac or Wachovia from their demise (the same applies to Merril Lynch and Lehman Brothers). Except now, banks have changed their internal rules and made it increasingly difficult for many investors to finance a particular project or acquisition, They've even been so bold as to pull the funding out of previously approved projects! All in all, over $1.3 Billion in commercial real estate projects has been cancelled this year.

What does this mean?

Work with the experts! Banks are scrutinizing loans more carefully; investors would be very well advised to work with a reputable Commercial Broker and Title Company, since these professionals can best help formulate the transaction and anticipate any problems that may scare off a lender. The do-it-yourself-deals won't have the momentum or appeal to make it past the tougher lending standards.

Cash is King! Having available liquidity prior to any commercial acquisition is important these days as most lenders are requesting 20-30% down. Furthermore, banks want to see income sources other than real estate that can guarantee the loan.

Opportunities Abound! As the financing pool has dried up, those liquid investors will be able to jump on the deals others couldn't afford due to bank lending requirements. Also, as banks have pulled the credit lines or significantly reduced credit lines to businesses and investors, many properties are for sale. Some aren't formally on the market, but the parent company is strapped for cash and the only way to raise funds is to do it the old-fashioned-way: liquidating assets!

Gain a Competitive Edge! Working with a commercial real estate broker, whether you are purchasing, selling, or investing, will help you obtain an edge in this difficult market.

Search for properties! Learn how the TG Commercial Property Group can help you succeed: http://www.tgcommercialproperty.com/