Watch out for a "hair-cut". Price reductions in the middle of a sale...

Sellers…Ready for a haircut? The increasing phenomenon of “re-trading”

In an environment where investment property sales have plummeted in the Sacramento region approximately 75% or more over the past year, any Seller who has a property in escrow must be prepared for the growing phenomenon of “re-trading” a “hair-cut” or a “price reduction” that is taking place and is prevalent with almost every transaction these days.

The phenomenon of re-trading is also categorized as a “haircut”” or “price reduction.” It typically occurs when the property is in escrow, during some point of the Buyer’s due diligence process. Perhaps some sort of unanticipated or unexpected property defect is discovered whose repair/update requires significant additional dollars , or the amount and type of financing that the buyer expected to achieve is not possible or requires additional buyer equity. In this tightening credit market, these issues are no longer a remote possibility, but instead a daily market reality.

The end result is that the Buyer asks the Seller for a “price reduction”, after having spent a certain amount of time having the property tied up in escrow. No buyer or broker for that fact likes it, but in this market, it is more inevitable than ever. Our advice to most clients is “don’t take it personal” it doesn’t necessarily mean that the Buyer “isn’t ethical and dealing fairly” – most often it is a reflection of the tough times that we are in…

How does a Seller minimize the probability of a haircut when selling a property?

The more certainly a Seller can provide a Buyer up front in regards to the condition of the property, the better. Oftentimes, this may mean the Seller may pay for key inspections such as a roof inspection or a Phase 1 environmental report prior to bringing the property to market to understand the property condition and disclose any issues to Buyers up front before they have put the property in Escrow. It may mean some up front costs, but it goes a long way in defining the scope of any potential problems to potential Buyers prior to putting the property in escrow. Having accurate records regarding income and expenses, square footages, rent rolls and etc is also very essential.

Also, we as brokers know that counseling a Seller on choosing the correct buyer is really an art. Despite all of the Seller’s best efforts in doing so, there are occasions, now much more frequent, that require a buyer to say, “Oops, sorry, for XYZ reason, I can only pay this reduced amount.” As brokers, we counsel our seller clients to accept deals based on a combination of 3 primary factors. First, it is what PRICE the buyer is willing to pay. Second, it is the TERMS of the deal (how long the due diligence takes, any contingencies in place), and third, it is the Buyer’s ABILITY TO CLOSE. It is oftentimes not the Buyer who is willing to pay the highest price who will come through at the end of the day. Reputation on previous transactions is key variable.

Sellers have to understand that in a rapidly declining market, which seems in the short term to be getting worse, gone are the days where a Buyer who wants to change the terms of an agreed-to deal is substituted for another Buyer. Many negotiations are extending into and during the escrow period, with Sellers and their brokers working to keep the existing Buyer engaged and committed rather than disappearing. In this market, time or delays, kill all deals or certainly increase the probability of a haircut. Brokers and sellers as well as lenders, inspectors, attorneys and escrow agents have to work with a heightened sense of urgency. A prompt closing with a pre-qualified buyer and completed due diligence package on the property is the best defense to a “hair-cut”.

If you are ever faced with the issue of retrading as a Seller, take the time to think through all of your options and strategies. It is a normal reaction to become mad by the request to change the financial terms. But, sometimes, your best option is to continue to keep riding the horse you’ve chosen, taking a “little trim” if you are lucky, and helping the Buyer get over the finish line. Ultimately, this response may result in you achieving your objectives or the majority of your objectives of disposing of your asset more quickly rather than starting from scratch with someone new in a falling market.

If you would like to discuss this blog post with us or if we can help you with a commercial or investment real estate transactions, please call or email us at Jim Gray (916) 617-4255 jgray@naibt.com or Nahz Anvary (916) 617-4257 nanvary@naibt.com. “Build on the power of our network” visit our website at http://www.naibtcommercial.com/

Sacramento Employment Continues to Deteriorate

Sacramento Employment Numbers Show Further Deterioration—Sit tight, no recovery in sight
A recent report by Sacramento Regional Research Institute points out that there are 12,600 fewer jobs in the six county Sacramento Area at the end of July 2008 than there were a year earlier. This means that there are 1.3% fewer jobs than there were last year. Actually, the report indicates that we have lost 14,000 private sector jobs and actually added 1,400 public sector jobs. This is the slowest employment growth in almost two decades. The declines were steeper as a percentage in Sacramento than in the Bay Area or California as a whole.

The largest losses were in the following sectors: Construction (-6,100), Leisure and Hospitality (-3,000), Financial Activities (-2,800), Trade Transportation and Utilities (-2,700), Manufacturing (-2,100), Information (-400). Those sectors of the regional economy that added jobs included; Education and Health Services (+2,000), Government (+1,400), Professional and Business Services (+800), and Other Services (+300.)

Employment is a significant driver of commercial real estate. This underlying economic condition leads to reduced demand for office, warehouse, and retail spaces. In addition, these real job losses affect the overall economy, reduce earnings and spending, and contribute to a regional slowdown.

Things are pretty tough already in the regional economy but we are very concerned about the next stage of this slowdown. A recent Sacramento Bee article reports that the California legislature is still deadlocked on agreeing on a new budget—with a deficit of $16+ Billion dollars – it appears that the State is going to continue to reduce expenditures for the poor and needy-- and is likely to siphon off almost $3 billion dollars from County and City governments. That article of August 30, 2008 is entitled “It may all come down to a whole lot of borrowing – again” and you can find it at http://www.sacbee.com/111/story/1197429.html

Government employment at the state and local levels will have to slow or probably reverse. This will be felt in the California Capitol Region with greater impact than elsewhere in the State. What sector will step up and lead the recovery? A recovery will come…but when? Our guess is things will get worse before they get better.

Our advice for landlords of commercial real estate properties is that this is a time for making sure your current tenants are happy with the level of service and property management you are providing to them and to evaluate whether you can get an extension and renewal for your current tenants, and it is a time to get aggressive as it relates to “asking rents” and prices and concessions to attract new tenants.. We think being conservative and focusing on operating efficiencies and satisfied tenants is the thing to do now. It is time to sit tight and ride this through until the tide turns.

If you would like to discuss this blog post with us or if we can help you with a commercial or investment real estate transactions, please call or email us at Jim Gray (916) 617-4255 jgray@naibt.com or Nahz Anvary (916) 617-4257 nanvary@naibt.com. “Build on the power of our network” visit our website at http://www.naibtcommercial.com/

Investment Sales Slow in USA and in Sacramento

Investment sales slow dramatically…

My current line when people ask me “how is the commercial real estate business?” is “It’s fine but I get to sell properties 4 or 5 times before they actually close”. This is because buyers are pickier, sellers are confronted with a changing market and lenders are tougher when it comes to underwriting real estate loans. The indicators are clear and we feel it as active brokers in the business--Investment sales have slowed down considerably. The National Association of Realtors reports that “Investment in commercial real estate during the first 4 months of 2008 was $48.2 billion, down 69.5% from the $157.8 billion for the same period in 2007. More at http://www.realtor.org/press_room/news_releases/2008/commercial_index_contracts

And here in the Sacramento Region, the Sacramento Business Journal reported “Real Estate investment tumbles; sales happening, but at a slower pace.” The Business Journal reports that investment sales are off 2.1 billion or 58% drop for the past 12 months. More at http://sacramento.bizjournals.com/sacramento/stories/2008/08/04/story5.html

Clearly volume is down, but deals are still getting done. For the first 6 months of 2008 14 office investment properties have been sold and that contrasts to 56 transactions for the same period in 2007.

The slowdown is attributed to the overall decline in the economy, to a tighter credit market with stricter underwriting in which lenders are requiring higher down payments plus higher interest rates and personal guarantees from buyers. A number of lenders have left the market all together. Also a number of prospective buyers are waiting and assessing what is happening to operating expenses, rental rate growth/decline, and to potentially higher cap rates.

We agree that this market is slowing, but we believe it is not going to be like the savings and loan collapse of the late 80’s. There has not been that much over-building , and most properties are still generating positive income and cash flows for the current owners. Sure, there will be some investors who will get into trouble and will need to dispose of properties that were bought at the top—that haven’t hit their proformas and likely have short term debt or adjustable rate debt who will have a higher sense of urgency. Sellers who want or need to sell will need to be realistic about their price and their deals will attract buyers with more cash seeking higher yields – 7% to 8.5% cap rates on actual Net Operating Income – and underwriting and conditions of financing will make transactions harder to get funded and to actually close.

If you would like to discuss this blog post with us or if we can help you with a commercial or investment real estate transaction please call or email us at Jim Gray (916) 617-4255 jgray@naibt.com or Nahz Anvary (916) 617-4257 nanvary@naibt.com.

There are investments and there are sort of investments...

Can you help me find an investment property? Digging into the details, asking questions and having a good chuckle …

Just the other day my colleague Nahz got an email from a prospect of ours who is looking for an “investment property”. We love those kinds of inquiries. This prospect is a sophisticated and smart individual who lives in our small college town of Davis, California. His profession is in the financial service area and he has a diversified portfolio and has acquired property through our brokerage firm before. We were pleased to have the opportunity to try to be of assistance and potentially make a commission.

So that lead Nahz and I to have a discussion, get busy scanning the market, making a few calls, getting the help from our research and marketing colleagues and having a few laughs about; “What is an investment property?” We are investment brokers and realize that when people seek an investment they are seeking a return on their capital. Also investors want to make sure that they get a return of their capital. We have been trained in calculating yield and returns and we know how to discuss cash flows and the reversion value or the future gain from a sale or disposition. We can build spreadsheets and do discounting and compounding and build 10 year projections to evaluate an investment with our clients. Our discussion turned quickly to what kind of investment. There are the four core investment property types; Retail, Industrial, Office, and Multi-family. Or would the client be interested in a non- core investment like ground lease, hospitality, special use, etc ?

Was this client looking for safe and secure income, institutional quality property and the resulting lower yield and higher price that goes with it? Was he interested in a value added deal? Do you think he wants a mom and pop kind of property with the management responsibility that goes with it? Single tenant or multi-tenant? How much leverage and how much cash? Was his investment being driven by tax shelter /tax deferral like a 1031 exchange requirement?
So we ran through our mental check lists and thought about all commercial properties that we knew were on the market, including our listings. Then we did a search of the commercial databases Loopnet, CoStar, the local MLS and we developed a list and a summary including a picture and a map of each property “listed as an investment property” in these databases.
Now here is where we think it gets funny. As we analyzed the 18 properties and summarized the data into categories we realized that- what is often listed as “an investment property” could in many instances be labeled and described as something quite different as well. In our letter of transmittal to our prospect we said.

Dear Client
Please find attached materials summarizing what is on the market. Two properties are commercial buildings with Net Operating Income. One is a multi-tenant office building at a 7.15% asking cap rate. One is a single tenant specialty/convenience store at a 5% asking cap rate. (Also that retail strip that we previously mentioned that had been on the market at a 6% cap, is not actually on the market anymore. “It has been removed from the market because of disputes amongst the partners and some tenant issues”… but if you want to make an offer we’d love to present it, their broker said.)
There are 3 Multi-family properties on the market, one is a four-plex at nearly $200,000 per door, another is a 13 unit apartment at about $135,000 per unit but no income or expense information is available and please don’t disturb the tenants. The third apartment complex is a nearly 40 year old 200 unit complex at $115,000 per door and a 5.5% cap rate.
Also there are 6 properties on the market – that are land deals—for development – in the People’s Republic of Davis. Those will give you an opportunity to spend money and a lot of time at hearings and meetings. There were two business properties seeking owner users. There were two Farm and Ranch Acreages. And finally there were two properties that we decided to label “Unique Davis Deals”. A campus like setting with living units, a school, an administrative office, a gym, a kitchen, and no income, and no asking price…make offer. And finally there is a remodeled 1917 bungalow with a conditional use permit for a wellness center that has a wheelchair ramp in a residential area but near the commercial center…
Please let us know if any of these are what you had in mind when you said you are looking for an investment property? Please call with questions or concerns.
Best Regards,
Jim and Nahz

Now don’t get us wrong every one of these properties has its positive attributes and we hope to be able to sell or lease each and every one of them and to serve the client in meeting their objective. However, I am not sure we would describe many of them as “investment properties”. In closing when describing considering and reviewing an “investment property” remember that there are some investments that have steady and predictable income and returns and there are other real estate opportunities that have attributes for use, development, and speculation. And every investment has potential for risk and rewards and occasionally a chance for some chuckles.

If you would like to discuss this Blog Post with us or if we can answer questions or try to help you search for an investment property or a good chuckle or if we can be of service please contact us. Jim Gray (916) 617-4255 jgray@naibt.com or Nahz Anvary (916) 617-4257 nanvary@naibt.com

California Green Building Code Enacted...!

Attention developers!! Green—no longer just an ideal but now a reality. California Green Building Code enacted…

We like to think of ourselves as progressive, helping our clients better understand the ins and outs of what it takes to develop buildings for the upcoming century. It is clear that we need to get up to speed with the new building code for California. We will add that to our studies already underway for LEEDS AP. Thank goodness we are believers in lifelong learning.

This past Thursday, the California Building Standards Commission adopted the first statewide “green” building code in the nation, moving all of these “green talk” from just an ideal to a forthcoming reality. The code will be phased in between 2009 to 2011 and encompasses Commercial buildings, health care facilities, and homes. Some impacts include lowering water use, improving air quality, and increasing energy efficiency. Some advice to developers of commercial buildings and homes--use this as the impetus to get familiar with what it takes to re-conceptualize your plans and projects to incorporate these standard and other ideals rather than being forced to change by a new law.

For the reference, go to the California Department of Housing and Community Development’s press release at http://www.hcd.ca.gov/news/release/07182008PressRelease.pdf

Or to the Sac Bee article at http://www.sacbee.com/103/story/1091557.html

To learn more about green, to to the US Green building council web site at: http://www.usgbc.org/

Also view our previous blog article on intelligent buildings at: http://scorebrokers.blogspot.com/2008/06/intelligent-buildings-from-executives.html


If we can help you with strategies to help you prepare for this upcoming change in the building code and the related elements of vision, innovation, collaboration, sustainability, and consideration of utilizing technology and targeted marketing please give us a call. For questions about this post or to discuss please contact Jim Gray or Nahz Anvary at (916) 617-4255 or (916) 617-4257

Slowing Market... What we must do to work smarter for our clients

So the market is slowing? What are we doing to work smarter on behalf of our clients? This is the crux of the soul searching that we commercial real estate brokers must be doing right now. Below are a few of the underlying questions that we must answer and which clients are already asking those of us who are listing agents for Landlords and Sellers. These are questions that must be asked and answered if you are going to provide good service in a soft market.

1. How do we review and present information to the Landlord or the Seller that communicates realistically what the market price or the market rent should be? Is it priced fairly and competitively?
2. What are we doing to feature the positive attributes of our client’s property? What differentiates the property and what is the value proposition for a future tenant?
3. What are we doing to maximize exposure?
4. How do we increase the number of prospects for a property?
5. How do we alert the other Brokers that this is a good deal and that we the owner and the listing broker are doing to be “broker and client friendly”?

I have been in this business nearly 30 years. Right now it is tough for sure and the market has changed dramatically, quickly and will probably get worse before it improves. But you don’t serve the client and help them achieve their goals by blaming the market and sticking to the techniques that worked when it was a “Seller or Landlord’s Market” and the average broker could get by as an “order taker”. It is time to work smarter and to make sure that properties show well and are priced at the market.

Here are a few steps to take so we as brokers work smarter on behalf of our clients.
1. Do a Broker’s Price Opinion. Base your analysis on recent sales or leases, including an analysis of incentives and concessions and how long a property was on the market. As importantly, list and describe competitive properties currently on the market. How many properties compete directly with the subject? What are they priced? What are the terms? Are there any incentives and concessions to the tenant or his broker? How much TI allowance was or will be provided?
2. Review the property in detail. What needs to happen for it to show well? Does it need to be cleaned up? Are there items of functional obsolescence? Will paint and carpet help? Do you need to order and evaluate 3rd party inspections for hazardous materials, termites, mold, Zoning, Code Violations, Conditions of Title and etc? Are there TIs that need to be planned and constructed? (Can you compare these matters with the other competitive offerings?) Prepare an estimate of the TI allowance and schedule to complete needed work if a tenant were found.
3. How descriptive and easily available is property information? Do property brochures and offerings have accurate financial expenses, floor plans, photos, aerials, maps and etc? How many web sites contain information about the property? Is the property advertised? Where does a prospect look to find information about the offering? Is information available in multiple media channels including the local newspaper, Craig’s List, Ecommerce sites such as LoopNet and Costar? Can someone Google their need –say 5,000 square foot office to lease in Sacramento-- and find your client’s building? Have you prepared a targeted marketing plan to address these matters and to “brainstorm and make a list to call” of who are the “low hanging fruit”, the likely prospects to reach out to?
4. Prospecting is about getting exposure to the kinds of business users and investors who would be most interested in the site. Are there alternative users—if it is a medical building with a vacancy have you also contacted labs, specialists, group practices, dentists, chiropractors, optometrists, and other allied health professionals? Have you reached out to the likely users and let them know that there is a good deal in the market? Can you provide free rent or moving expenses or lease buy-outs at existing properties to get a prospect interested?
5. Our business is not rocket science. If you can convince other brokers that the property offering is a good one and that they will be paid competitively and promptly if they bring a tenant or buyer to see the property you will get more showings and tours. What are you doing to communicate to the other Brokers that this is a good deal?

These are not guarantees in a slow market, but they will increase the likelihood of success. It is time to work smarter on behalf of our clients. There are no commissions to be made waiting for the phone to ring. Get busy, set realistic expectations with landlords and owners, price properties competitively, experiment with emerging media and marketing technologies, and learn to make good deals to attract buyers or tenants. Be nimble, be creative and work smarter.
If you would like to discuss this post or if you would like to discuss a Broker’s Price Opinion or a Targeted Marketing Plan , please call or email us Jim Gray at (916) 617-4255 jgray@naibt.com or Nahz Anvary at (916) 617-4257 nanvary@naibt.com

Lots of Options --Office Buildings For Sale Sacramento

Office Buildings For Sale in the Sacramento Valley—What Does That Really Mean?
Sifting through Lots of Opportunites...

So you are looking for an office building to buy in the Sacramento area? Or you are thinking about investing in a commercial/office property in the Sacramento area? Well you have plenty to choose from – but you need to refine your search if you want to locate what you really want and you want it to meet your business and investment needs. Office properties are known as one of the four core product types of commercial real estate. Office properties vary greatly in their configuration, style, utility, and economic performance. The “office market” is comprised of many distinct property types. These include modern skyscrapers, medical office, office condos, classes A, B& C, single tenant and multi-tenant, offices for the owner user and offices that are well managed investment properties. There is institutional quality and there are mom and pop offices. Sometimes offices are mixed use with residential or with retail, and there are offices in warehouses and within flex buildings. There are various submarkets and plenty of features that differentiate. Being able to understand these variables and their unique attributes requires a professional focus and asking the right questions.

It is the first of the month and Commercial Brokerage Firms are sending out their “availability lists”. When this occurs, it means that the research staff and the administrative staff are working closely with the Brokers to make sure that an inventory of available property is updated and distributed. When this task is performed by the various offices it also means that the information to the commercial databases such as LoopNet or Costar are also updated. But consistent and uniform information it is not! We thought it would be interesting to review the office market and share some of the findings from our analysis of this imperfect market information.

Here is an effort to describe the current inventory of “office properties” that are “actively on the market”. There are 580 office properties currently offered for sale in the Sacramento Valley. They range in price from $135,000 to $26,500,000. Only 12.5% of the office properties have a quoted cap rate—the other 87.5% are being offered to owner users --or the investment attributes haven’t been provided for their office offering.

To help get our arms around the market we did a few searches in LoopNet to check in on market conditions. The searches included the counties of Sacramento, Placer, El Dorado, Yolo, and Solano. We then looked at the information in these offerings and have the following observations to share:

The first search was for “office properties” less than $1 million dollars. There are 209 separate properties on the market. They range from Victorian houses modified for commercial use to small office condo units. Only 11 of those properties reported a cap rate- ranging from 4% to 9.10%. 198 of the offerings are trying to attract the owner user. Sizes ranged from 384 to 9,600 square feet. Prices varied from $135,000 to $999,999 and from $104 all the way up to $962 per square foot.

The second search was amongst office properties from $1 million to $10,000,000. There are 355 office buildings on the market in that price range. In this category there are properties from $1 million to $9,815,000 on the market. Sizes in this price range from 2,435 to 59,616 square feet and prices per square foot range from $94 to $425 per square foot. Of these offerings, only 55 properties quote a cap rate –ranging from 4.12% to 9.08%. Three hundred of these offerings have no stated income and expenses and are not being offered as an investment.

The third search was for office properties being offered for sale at $10,000,000 or more. In this price category, there were 16 properties on the market. From $10,454,000 to $26,500,000 with more than half of these offerings being “un-priced” and only 6 of these have a quoted cap rate –from 6% to 7.6%. Sizes in these high price offerings range from 34,848 to 153,879 square feet.

There is a lot of inventory; more than 500 buildings being offered to users or being offered without stabilized income --but not a lot of office investment inventory on the market. However, it is worth noting that there are now more than 30 office buildings being offered for sale with cap rates higher than 7%.

If we can assist you with your search for an office for your business or an office as an investment please contact us to see if we can be of service and bring professionalism and value as you sift through and consider available options. If you have questions or comments about this post or if we can assist you with your commercial and investment real estate needs please call Jim Gray at (916) 617-4255 or Nahz Anvary at (916) 617-4257.