Lawrence Yun, Chief Economist for the National Association of REALTORS® sees a stabilizing commercial real estate sector for 2011, affecting retail, office and multi-family.
Commercial real estate is a collection of people. So what is the financial downturn doing to that collection? A recent post at NAI Global summed one aspect up well by pointing out that the commercial RE brokers who were never really committed to this industry are moving on. This kind of shakeup leaves behind two groups:
1) Older brokers who built their careers on the ability to network, make the essential contacts and to be a indispensable part of the local economic picture.
2) Younger entrants who are learning everything they can about how to do commercial RE in a market characterized at the same time by both great upheaval and incredible opportunity.
Much has been written about the upheaval. But what is new about the modern marketplace that shows such potential?
For one thing, you! You’re using social media – you’re reading this blog post.
There will never be a substitute for concentrated research on properties or markets, so don’t think that I’m saying that blogs, Twitter, Facebook and LinkedIn will supplant the hard information that commercial brokers need to be successful.
But it is absolutely true that social media tools have already profoundly changed the part of the business that, when mastered, will sustain a professional through decades and through whatever economic upheavals come. I’m talking about the art of making contacts.
Take one example. When you have a buyer or renter and they’re hot on a distressed office property that you know the FDIC is handling, you’re in a real jam. There’s no easy way to get that conversation started; you might place dozens of calls to a bank’s REO department and get nothing but runaround or silence. One look at the bureaucracy of FDIC is enough to give you nightmares. Time slips away and that buyer’s love cools – all on your watch.
But as shown in the NAR Commercial Technology and Intelligence Briefing Podcast for October, social media can absolutely make all the difference to that scenario. You can listen to Robert Hamman, advisor with Sperry Van Ness tell the story of how Twitter helped him get through the above by giving him the right contacts to do a deal – and then some.
That’s just one example of what kind of world is being left by the Great Broker Shakeout. Lots of good news to be had – and plenty of ways to share it.
Managing director of Marcus & Millichap, Hessam Nadj appeared on CNBC to discuss the commercial real estate sector’s investment yields. They’re currently beating bonds and appeared to have escaped the brunt of the economic crisis, an effect Nadj attributed to lenders holding on to assets and minimizing the downturn’s damage by modifying loans instead of holding fire sales.
For those retail and office building stakeholders in secondary markets who might look at this diagnosis askance as they encounter record vacancy and rent declines, Nadj prescribed optimism, expecting the buying trend to “broaden beyond the top markets” in 2011. Since sales volume in premier markets is on track for a 60% increase this year over last, that would certainly come as a welcome development across the heartland.
At the 2010 REALTORS® Conference & Expo, NAR leadership approved a new policy statement on lease accounting. The statement responded to the Financial Accounting Standards Board (FASB) and International Accounting Standards Board’s (IASB) proposal that, if passed, would put nearly $1.3 trillion in leased assets back onto companies’ balance sheets, a move that would particularly hurt especially lessees and lessors of commercial real estate. Below is the actual Issues Summary:
What is the Fundamental Issue?
The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) proposed lease accounting changes may be detrimental to our nation’s economy by reducing the overall borrowing capacity of many commercial real estate lessees and lessors. The proposal would bring nearly $1.3 trillion in leased assets back onto companies’ balance sheets, with roughly 70 percent being real estate leases. Under the proposal, companies would be required to use a “right-of-use” accounting model where both lessees (renters) and lessors (property owners) recognize assets and liabilities arising from lease contracts. Currently, accounting rules allow many businesses to classify leases as operating expenses, which do not appear on their balance sheets. Both FASB and IASB believe these changes would improve transparency as well as provide investors with more consistent and concise financial reporting. However, if enacted, this proposal could negatively impact the financial stability of many businesses, which could prolong our nation’s economic recovery.
I’m a Realtor®. What does this mean to my business?
If ratified, this proposal would hurt businesses of all sizes, especially lessees and lessors of commercial real estate. With more bloated balance sheets, some companies may see their debt-to-equity ratios increase and find it more difficult to obtain credit, especially those with heavy debt loads or still recovering from the recession. The proposed accounting changes could also complicate compliance with debt covenants or agreements between the bank and borrower, which usually prohibit companies from borrowing more than they are worth. By capitalizing new and/or existing leases, some businesses could show more debt than allowed in their agreement with the lender, and therefore be in default of their loan. This could force some firms to put up more capital for existing loans or even have their credit lines revoked.
Additionally, the elimination of off-balance-sheet financing would be detrimental to commercial property owners. More frugal lessees will want less space and shorter-term leases without renewal options or contingent rents, which will decrease cash flow for property owners. Shorter-term rents will likely reduce the borrowing capacity of many commercial real estate lessors, who rely on leases and the value of the property as collateral in order to obtain financing. Ultimately, property owners would be forced to increase rent rates due to market uncertainty and reduce tenant improvements due to shorter recovery periods. Conversely, this change could encourage some firms to consider buying instead of leasing commercial real estate.
NAR is concerned that the new lease accounting proposal will be detrimental to our nation’s economy by reducing the overall borrowing capacity of many commercial real estate lessees and lessors. Also, NAR is opposed to lease accounting standard changes that would treat the income producing real estate business as a financing business on company balance sheets. Such a step would not accurately depict the unique characteristics of the investment real estate sector and in turn discounts the usefulness of the industry’s financial statements.
FASB and IASB will accept public comments on their lease accounting proposal until December 15, 2010. Both organizations expect to have their joint proposal finalized by mid-2011. The effective date of this proposal will likely be in 2012 or 2013, where virtually all new and outstanding leases would be subject to the new accounting standard. NAR is currently writing comments to submit to FASB/IASB and will continue to work with other stakeholders to develop and implement a strategy to address this issue.
As noted by Lani Rosales at Agent Genius blog, Google’s Street View feature now comes with interior photos of some commercial real estate properties in some major markets. Alternately referred to in materials
“kicking off by photographing interiors of the types of businesses that we know are searched for most regularly. The types of businesses we’re currently interested in are restaurants, hotels, retail shops, and other storefront businesses. We’re always open to new ideas, so please let us know if you have a great idea for a kind of business that our users would love to see. We’re currently not photographing legal, medical, or chain establishments.”
According to Google’s FAQ, business anywhere in the world can apply for a photo shoot, so the photo program doesn’t appear to be one similar to the one where drove a Google camera car down (seemingly) every paved road in the world, aiming to capture all locations under the sun. Surely many people wondered what Google thought it was doing. Now that Google Maps is in such wide use, no such wondering is going on now.
But it takes nearly no imagination to consider the ramifications of Google Places for commercial real estate. Virtual showing tools are growing in number and databases are bulging with RE business information. If it turned out that Google was the first to put it all together, would anybody be surprised?
Steve Zehngut has seen it all in web development. After founding his first web firm in 1995, Steve has been explaining internet technologies to business and real estate for long enough to know which trends will fade and which will be here tomorrow. At NAR Annual 2010, he’s set his sights on WordPress, the popular blogging and web publishing platform that enables non-technical professionals to build lasting, useful and profitable interactive platforms.
An essential benefit to WordPress is ability to add functions to it. These additions, called plugins, are designed to enhance the function of your blog, making it more attractive to your readers, or making it easier to control your blog. The number of plugins geared toward real estate blogs is in the thousands – plugins that enable display of listings, maps, locations, street views, database searches, news, videos – if it’s real estate-related information, you can publish it on your WordPress blog, and Steve knows the best ways:
Videos With VVQ: Adding videos to your blog can cause problems unless you use a tool that helps smooth things out. Several of these exist, but Steve recommends Viper’s Video Quicktags, aka VVQ. Install VVQ on your WordPress blog, then use the plugin menu to control the display of videos on a post, including size, type and play controls.
Listings: Powerful, attractive and useful displays of property listings are central to the success of any real estate blog. Bringing listing data from a data source into your blog is made much easier and successful (certainly for residential) by Diverse Solutions IDX plugin.
Feeds: Adding fresh content to your blog is a constant challenge. That’s why RSS syndication is so popular, by allowing you to republish content automatically using plugins. Steve recommends Feed-O-Matic.
Forms: Need to build forms for collecting input from prospects at your blog? Steve’s favorite for this task is Gravity Forms.
Get all the supporting material from this session online at NAR’s site wordpresscamp.blogs.realtor.org
The WordPress blogging platform is hugely popular in real estate (for instance, you’re reading a WP blog right now!) and professionals in commercial real estate are in a rush to learn the ins and outs of creating and styling WordPress blogs. This technical session at NAR’s 2010 Annual was led by Kelley Koehler of Housechick.com focussed on the styling part of the blog experience – also known as the dark and mysterious (not really) CSS, or Cascading Style Sheets.
CSS is that part of the WordPress blog that defines colors, text styles, fonts, and positions on the screen of various things. For example, here at CommercialSource.com’s blog, it’s in the CSS file (a simple text file called style.css) that we spell out such things as how much screen space our content takes up (measured in pixels). Make a change in a single line of text and we can change, say, the background color here at CommSource blog from white to some other color.
Session Q&A also touched on a common point of misunderstanding among the newly interested in WordPress. WordPress can be run and hosted for free at WordPress.com – but in order to have full control over every aspect of the site, hosting it in WordPress.com is not sufficient. Instead, the blog needs to be moved (migrated) to a hosting provider such as GoDaddy or 1&1 or Bluehost - for a small ongoing hosting fee. Don’t worry about that requirement whe getting started, though – it’s easy enough to start blogging for free at WordPress.com and to later move to a self-hosted solution when you need to without losing any of your content or work or investment.
The session handout for Kelley’s session can be downloaded here – and the entire session’s recording can be obtained from PlaybackNAR.
With pools of residential properties moving off of the balance sheets of distressed banks for pennies on the dollar, plus dire predictions of a new wave of commercial property foreclosures in 2011, how can the smart professional come out on top and deliver win-wins for everybody? Peter Mosca’s panel session at NAR Annual tackled that question with an array of specialists in the distressed property market including Michael Anderson from RealSource.net, Scott Carson of WeCloseNotes.com, Linda Yates of Foreclosure.com, and Steve Ferrara of Ferrara Financial Group.
New Norm? The question of whether a “new norm” in the real estate market was upon us was answered by Michael Anderson who recalled a similarly depressed market in the early 1990s following the S&L crisis and the RTC was able to rebound due to job growth and a tech boom soon following. He then noted that no similar factors seem to be in the cards this time around.
How To Handle Notes Scott Carson is a specialist in the notes market, doing short sales, closings and flips. “We target distressed banks and buy their assets”. The advice: never buy an asset you’re not ready to own – the days of the 90 day flip are over. At the same time, notes are more flexible than properties, meaning interested brokers should kow what they are doing, but take action.
Local Expertise Is In Demand According to Anderson, the need for real estate professionals hasn’t been higher in his 38 years in the business. Example: a recent asset pool he purchased had 1400 loans spread over 12 states. ”I have expertise in my own state. Wholesalers are ending up owning a lot of assets they have no idea about.” Local RE pros can step up to offer their knowledge and services to make deals work.
Where Are The Best Websites? The hunt for opportunities in depressed properties can be aided greatly by the web. Mike, Scott, Linda ad Steve all contributed to the following list:
Best sites to find distressed real estate assets:
bankrate.com - for finding FDIC-visited banks
fdic.gov – for the failed bank list, and lists of asset sales
debtx.com – one of the largest wholesale liquidators of paper
The entire session in recorded form can be had at playbacknar.com
It’s a question that called for answers from the land down under in the form of Fiona Blayney, efficiency coach to property managers the world over. When it comes to making more money per minute, Fiona’s expertise with the property management industry made for a well-attended Sunday morning session at NAR Annual (such attendance made all the more impressive after a long Saturday night of networking!) Below, some of the key takeaways from Fiona’s presentation:
Learn The Value Of A Minute – Figure out what one minute of work is worth for everybody in your business. Then, when you see someone performing a task, ask yourself Would I pay someone at that rate for that task? When you find mismatches, fix them
A Landlord Only Wants Three Things – 1) The best possible income for a property 2) Maintenance of the property 3) Nurturing - having a profitable relationship with a manager.
The Seven Elements of Property Management: Marketing, Leasing, Inspections, Financial Management, Maintenance, Tenancy Reviews, and Vacating. Fiona then shows how to add efficiencies in each area.
The Longer We’ve Had A Client, The Less Attentive We Are: While this is a truism in the business, there are ideal ways to handle the relationships by treating the existing clients in exactly the same way the new ones are.
Handle Tenants Efficiently And Well: Fiona counseled using a program she called the “7/30/90 Plan”. At 7 days following the move-in date, contact the tenant to check for problems with the property. At 30 days, after the first statement has been recieved, call up to go through the new and unfamiliar statement with the tenant, and at 90 days, take a walkthrough on the property.
Know What To Reuse And What Not To: When writing ads and listings, don’t reuse old photos or copy. Do ask the owner why they bought the property in the first place – then put the reasons they told you into the ad. They won’t remember they told you this, and they’ll love the ad even if they don’t know why.
Even though the rent is only one of a long list of costs of doing business, commercial property tenants who get into financial trouble seem to always put rent relief near the top of the list of things to address. How do commercial property managers or owners know how best to approach the problem of a retail or office tenant who is struggling financially?
This morning’s session at NAR Annual led by Richard Muehlebach examined the issue from the point of view of his 41 years of experience in commercial property management, bringing home the following expert findings:
To Help Or Not To Help: Rich spelled out that there is no right decision when it comes to the question of whether or not to even consider renegotiating a commercial lease. Some landlords are of the basic belief that the business problems of the tenant are exclusively their own, and that’s entirely defensible. Others consider a wider range of aspects of the business relationship and seek to head to the negotiating table with a solid understanding of what is possible and what is prudent. Aspects to consider include:
How To Spot Problem Tenants: In retail situations, Muhelbach counseled a property managers to cultivate a regular relationship with tenants including walking around the space to eyeball characteristics of the tenant’s operation; its sales, its inventory (is it low, is it old?), its staff and its advertising (have there been recent reductions?)
When The Request Comes, Make Some Of Your Own: When a tenant seeks rent relief, Muhlebach says to ask for the following:
- Get the request in writing, and provide a diligent, speedy response.
- Request a business plan (not an elaborate one – two pages or so should suffice) from the tenant that illustrates their own plan for getting their business back to profitability.
- Ask for financial statements of the business, and of the owner personally. Evaluate the tenant’s request for help, and if you find a high net worth individual who isn’t kicking in to his own operation, that helps quite a bit in the decision to renegotiate a lease. The point is to not make the decision in a vacuum .
- For retail tenants, benchmark the last two years sales against the national averages published bi-annually in The Urban Land Institute’s Dollars And Cents Of Shopping Centers, which Rich called a “bible” of the business.
These and many other excellent tips can be obtained in the session recording available at PlaybackNAR.