The Official Blog of the SBA 504 Experts

504 Loan Blog

The SBA 504 Experts Explain Why NOW is the Perfect Time to Buy Commercial Property…
  • more-shares
    • Save on Delicious

“Right now is a great time to buy commercial property.” I say and write that phrase a lot these days. If you’re a regular reader of the emails and blog posts I write to you, you’ve no doubt heard this from me. But I bet you don’t hear it or read about it many other places. You might even think me crazy for proclaiming this in the middle of these “interesting” economic times.

Well, I have an article I’d like you to read. It appeared in the May 2010 issue of Site Selection Magazine, and asks if it’s “Better to Buy?” I’ve posted the article in its entirety below for you to read and see what you think.

One thing to note is that the author gives examples of large corporations and large properties, but the same principles apply for owners of small and mid-sized businesses. Lots of smart business owners across the country have recognized that right now is THE time to buy, and that’s why we’ve been so busy this year.

We closed more than twice the number of loans in the first six months of 2010 than we did in 2009, and our dollar volume financed is up 416.46% over the same six-month period. The entrepreneurs we’ve worked with realized that it makes perfect sense to make the move from renting to owning . . . and they took action to make it happen.

But enough from me. Here’s the article:

(As featured in Site Selection Magazine and on www.siteselection.com.)

“Better to Buy?”
With discounted prices and coming lease
accounting changes, it might pay to purchase.

by Adam Bruns (adam.bruns@conway.com)

As even the word “investor” evokes a negative public perception in today’s economy, the positives attached to “owner-occupier” are building. After all, the investor in this case is an actual business with work to accomplish in that space.

Combine that favorable outlook with the forthcoming vanquishing of operating leases from the ledger, and with the very low prices currently on display, and it’s no wonder corporations are looking anew at outright ownership of their office and industrial space.

Recent examples include Electronic Arts’ purchase of its headquarters in Redwood City, Calif.; Tektronix moving to a newly purchased headquarters building in Plano, Texas; and Sotheby’s purchase of its headquarters in New York City. But the concept applies to the non-glitzy transactions too, and is on the uptick in markets from the Research Triangle to Southern California.

“We just signed another contract with a user on an industrial-type warehouse property in Anaheim,” says Joe Nahas, Jr., vice president of dispositions for BPG Properties, Ltd., who oversees all real estate sales activity for the firm. “It was a vacant building, and would not have been at all attractive in the investment market. A user came along, paid an attractive price, it worked for us to deleverage and pay down our debt, and for them, they amortize their costs, and it’s cheaper than to rent.”

That’s the conclusion being reached by firms from Scottrade to Walgreens to Wal-Mart, many of which can obtain financing via banking lines at a time when developers face a much steeper financing climb and landlords can’t afford to fund improvements, notes Nahas. BPG’s analysis for a possible sale of a vacant office building in Tampa tracked 16 similar transactions in size and quality to end users in 2009 and found an average price paid per square foot of $109.73, which Nahas says is about half the construction cost of a like-quality building. Using very conservative assumptions, he says the lease-vs-buy conclusion in the Tampa analysis “was that purchasing represented on average a $15-per-square-foot advantage over leasing. For public companies this is a direct impact to earnings per share.”

Time to Prioritize

Nahas says there are no firm statistics, but he has the sense that a significant majority of users want to buy new vacant buildings outside of the space they’re in right now, in part because of the opportunity to upgrade in quality in the current market. Landlords simply can’t compete with an amortized purchase. At the relatively new Anaheim facility, for example, the new occupier will be paying the full purchase price with the equivalent of three to four years of rent, and may get up to 20 years of use. Nahas says the value becomes most evident for firms looking to occupy between 100,000 and 250,000 sq. ft. (9,290 and 23,225 sq. m.).

Asked if the value of such moves is sufficient to be instigating headquarters or other relocation moves that otherwise might not be considered, Nahas says, “If it isn’t, it should be. CFOs and other strategic thinkers ought to be sitting back and asking why they’re not. If I were responsible for space decisions for my company, I’d be knocking on banks’ doors today, because most of the distress in real estate in the country today is held by banks, either in the form of a loan not performing, or properties already taken back. There are properties built but never leased, or the tenants went out and it’s virtually empty. That’s where the opportunities are.”

Among his lead examples is the 1-million-sq.-ft. (92,900-sq.-m.) former BASF headquarters in Mount Olive, N.J., less than an hour from Manhattan, that BASF occupied from 1994 to 2006. BPG and CBRE have been offering the property for $47 per sq. ft., which comes to less than one year’s rent in Manhattan. That compares to a replacement cost of well over $250 per sq. ft., says Nahas. Asked if he’s seeing foreign interest in such purchases, he says one prospect for that former BASF campus is a U.S. subsidiary of a foreign company.

Nahas notes that the longer vacant properties sit, the more of a problem they become.

“Time is the enemy,” says Nahas. “Without any cash flow, they can’t service the debt. Second, the problem becomes taxes, because lenders get nervous about owners not paying their taxes. They’re going to keep them heated and so forth, but over time, landlords/owners will say to themselves, ‘Do I want to spend money on that?’ The longer it goes on, buildings become more problematic. But if you’re a buyer, that’s an even greater opportunity.”

He says such conditions ought to also motivate another sector: municipalities themselves, which are feeling the budget pinch from lower tax payments. Many cities are retrenching, in terms of further limiting incentive programs that might appear to be a giveaway.

“If anything, they should he incenting users to buy buildings,” Nahas says.

Don’t forget to leave a comment below to let me know what you think!

Dedicated to Your Continued Success,

Chris

P.S. If you’ve been thinking about making the move from renting to owning your commercial property . . . or if you know someone who is (or should be) . . . call me right away at 1-866-622-4504 or email me at ChrisHurn@MercantileCC.com. It’s never too soon to get started with the right lending partner, and we can get you Pre-Approved within 24 hours. Call or email today!

P.P.S. If you haven’t found us on Facebook and “liked” us there, go to www.facebook.com/MercantileCC and do it today. You can also keep up with us on Twitter at www.twitter.com/504experts.

Tags: , , , , ,

7 Comments

  1. Mark Cumberland says:

    I have been saying it every week on my real estate show. The commercial market is opportunity time!
    Good News In Real Estate 97.5 ESPN Check it out

  2. John Rackler says:

    Chris-
    Thanks for the email. I agree that it’s a good time to purchase commercial property. My CPA finally finished my tax return today and I have a Fedex standard overnight on its way to Shawn. He called after I posted interest on your website. Thanks again!
    John

  3. Joe Welnack says:

    Thanks as always Chris for your astute comments and sharing this article with us. We have found bargains in Florida and Detroit Michigan. In the case of Detroit we actually acquired a property for 5.25 per square foot at auction and flipped it to a buyer a few months later. In metro Detroit and the city proper a lot of foreign investors are banking on a return to prosperity and the pickings are numerous. Anyone who wants to see some very depressed prices should visit Loop Net.com and review the listings, amazing.

    Here in Florida we are doing a deal where the property is grandfathered for a use no longer permitted by the municipality we are in. Being the end user we find a real opportunity in distressed bank foreclosure. Personally I believe that if buildings can be acquired for less than $40.00 a square foot they deserve a look.

    I firmly believe that for owner occupants a real goal should be to find a property where a part can be leased to another business to further enhance return.

    My sainted grandfather used to tell me stories about the Great Depression; he was a “saver” and became a very well to do investor as the economy improved. A banker I am well acquanted with states that the pressure from bank examiners is resulting in banks to selling properties at fire sale prices.

    I fully concur with this well thought out article.

  4. Don says:

    You know Chris you are very right about saying this it is a great time to buy commercial real estate.

    But there is one BIG problem. I have seen great deals come across my desk and ran the numbers on them and the DCR’s are over 1.25, but still can not find the financing for them because of my credit.

    I have even found deals where the seller will hold 20% and no one will fund this deal.

    Also i have found deals from banks cheap, but the vacancy is below 70% and bank says they don’t lend on anything like this it needs to have 85% or more to fund them. So when you find a great deal from a lender REO with low Occupancy because it is now Bank owned and not ran right what are you to do.

  5. Rom Parani says:

    You are absolutely correct with your statement.

  6. John Olivieri says:

    I agree with your article. Now is a great time to buy commercial real estate. Although the vacancy is up, we see more of the office space for lease in the southwest suburbs of Chicago coming back strong. For a while, we have seen rents drop and get pretty low – around $ 11.00/ SF now we see things picking up and rental space pricing is increasing. Thanks for the information and article.

  7. andy andreason says:

    Chris Do you refinance commercial. My son is buying me out and I would like to see if I can have a lower interest rate to pass off on him?

    property apprasial 850,000 Owe6 and change

    no money out just lower interest rate

    andy

Leave a Reply

Your email address will not be published. All fields required.

Back to all Entries