Tough or Bear Markets --Some Advice to Consider and Opportunites to Consider

In tough or bear markets—important advice and opportunities to watch for.…

We are sales people and consider ourselves “honest brokers.” One of the challenges that we must confront is to coach and counsel parties to be realistic, and in tough time like these, that often means sharing bad news, and yet we still need to be positive and even optimistic. We don’t want our clients to say; “ Damn , here come Jim and Nahz with more bad news…” We enjoy our clients and we want to be welcomed by prospects and not be “shunned as downers or contributing to our depression”.

First, in this particular post we would like to do a little philosophizing and acknowledge up front that it is really tough in the commercial real estate industry right now. Conditions in northern California for many properties and for many sectors of the economy have taken a hit. Some people are taking real losses-- financially, in their relationships and even to their own sense of self worth.

Our goal is to share with clients and prospects market information as we gather, sift, compare, analyze, understand and hazard a guess and formulate a recommendation. Our goal is to appreciate the prospect’s or the client’s perspective and objectives – but sometimes the client’s goals and the market realities are not in sync. Unfortunately, there are properties that are worth less than someone paid for them, or leasing projections weren’t achieved and the cash flow and yield aren’t being obtained, or vacancy has risen and rents have actually declined, and increasingly operating expenses are rising faster than income. And unfortunately, businesses fail, tenants quit paying rent, and loans come due and can’t be refinanced at the old favorable rates and terms. It just isn’t fair --but sometimes you invest and you lose income and even occasionally equity or principal.

If you are well capitalized and a seasoned professional and the current underperforming asset isn’t going to increasingly deteriorate, the usual reaction is to “hold on – take it off the market”. You merely wait for the market to turn around and recover and don’t lose any sleep because it is merely a part of your diversified portfolio and you can subsidize the underperformance and it doesn’t adversely affect your life of lifestyle.

In this market we are seeing more and more people who are in denial and who aren’t fully equipped to hold on and to wait for the recovery…“But I can’t.!” “How will I tell my investors, my partners, my family my banker and etc ?” We have heard them all and we understand and it is tough and painful. We have sympathy and empathy and sometimes the best advice and the best help we can give is to present the facts and the strategies and help people get realistic, help them become decisive and cut their losses before their problems get worse with deteriorating relationships, bad credit, foreclosure and the like. If you get proactive and you get the problem behind you, manage your way through it the best you can, we have seen many people express relief and thanks. We share the advice and perspective that this too will pass. Hopefully there have been important and beneficial lessons learned, and with this behind you tomorrow will be a better day. With this behind you it won’t be dragging you down any further and that you can go on with other activities that bring you pleasure and make you money. You aren’t a failure. This investment might have been a lousy one. We firmly believe, from firsthand knowledge and experience, that we are all able to recover from the downturn or from an adversity or loss and if we learn from it and go on with optimism seeking opportunities that it will make us better and stronger. Life is about resilience and finding the silver lining and being able to make a new start a bit wiser.

Here are a few waves of opportunity in these tough seas and currents:

There are some opportunities that are emerging out there. Here are a few product types that are worth watching:

1. A number of small owner user office buildings and condominiums are available either from the developer, from a struggling company, or even from lenders as REO, that are beginning to be sold at below replacement costs. These properties often qualify for special SBA financing for business users with as little as 10% down. Make sure you do the math and the costs of ownership are equal to or less than you could rent a similar property for.

2. As a result of the number of housing foreclosures combined with high gas prices – it seems certain that apartment complexes and land for high density apartments in the urban centers and near transit will see considerable demand and likely increased rents and values. As fewer can own, due to the tightened lending standards, more must rent. This is likely to be a huge advantage for high density rental housing as we slowly de-suburbanize and re-urbanize in response to increasingly tight fuel supplies. Human habitation will gradually become more concentrated, benefiting purveyors of urban rentals.

3. We believe that intelligent buildings—LEEDs or Green Buildings —incorporating such features as security, technology, communication, and digital signage, will command above market rents as they develop a brand, and offer users better spaces with better services. In addition there will likely be incentives to do this and the investors long term operating expenses will likely be lower. Many of these opportunities just might be in acquisitions and renovations of existing buildings in core areas.


4. Cap rates are starting to rise and once sellers acknowledge that rates of return from net operating income are likely to be in the 7% to 8.5% range for good low or no leverage investments, more opportunities will be created for buyers.

If you would like to discuss this post or if we can be of assistance with a real estate service please feel free to call Nahz Anvary at (916) 617-4257 or Jim Gray at (916) 617-4255.