Dike Drummond MD CPC's Blog

As we roll into the third quarter of 2010 and the talk of "double dip" recession is getting more and more air play - we are seeing several multifamily markets around the country start to heat up.

Tops of our radar is San Antonio.

In select neighborhoods, listed apartment projects are getting 20+ offers and Cap Rates are falling while rents are rising.

 

We are all waiting for spring ... when all things are born anew!

AND before you can get green shoots like these in the commercial real estate markets ... the first step is the market fundamentals have to stabilize. At some point rent and occupancy simply must stop falling and enter the category of "No Change" as the analysts in our industry survey the national markets. Only then can the turnaround ... and those little shoots ... begin to emerge.

Here's a sign we may be seeing some stabilization sooner than most pundits had predicted.

Even though the Commercial Property markets are experiencing the lowest transaction volumes in a lifetime ... there are a number of very active niche market segments ... areas where developers are seeing a different group of once in a lifetime numbers ... this time it is unheard of low prices on land acquisitions.

Here's were you can profit handsomely providing cash to developers in need ... while the traditional commercial lending sources are busy licking their wounds. And not just any developer...

Our partner here has a long track record of Commercial Development in the Chicagoland and TX markets with over 100 completed projects to date ... and $100M in projects in the pipeline. Many of these are in partnership with the likes of JPMorganChase, AVS Pharmacy, AutoZone and Walgreens (they have completed 18 Walgreens already!) ... where they supply the finished building pads to these rapidly expanding companies and come away with a very profitable long-term land lease.

Now a Rubber Chicken is pretty useless ... except as a practical Joke. Let's take a look at the most useless number in Commercial Real Estate. 

The Gross Rent Multiplier - the Rubber Chicken of Commercial Property Value Indicators.

The Gross Red Multiplier (GRM) is a number you will see on every Broker's pro forma.  And it is touted as a measurement of the "Property's Value".  If anyone out there really sets a property's value based on GRM ... I have to wonder what they are smokin'.  I'm not really sure what a Gross Rent Multiplier measures, but it certainly is NOT the Value of the Property.  

GRM is calculated by dividing the Property's sales price or value by the Gross Potential Income. 

 Example:
A $1M property with a $100K annual Gross Potential Income. This property has a GRM of 10.    Price (Value) / Gross Potential Income  =  GRM
$1M / $100K = 10    

Here is another sign of the times with regards to the concept of the "Strategic Default". If you are underwater on your mortgage it would appear the lawyers are lining up to "help".

I just ran into this website with it's "Pay or Go" calculator. http://payorgo.com/

You plug in your numbers on what you owe and what you pay and it will tell you whether you should keep Paying or Go ... walk away and trigger your "Strategic Default"

In this economy, where many individuals and businesses bought at the peak and are now under water on their loans, is it now Socially Acceptable to walk away from those loans? Are we to the point where a "strategic default" - as this has come to be known - is simply idle water cooler banter amongst investors.

Today Bloomberg announced that Morgan Stanley is doing just that for the second time in 2009. And the Wall Street Journal has had a series of articles on single family home owners and the epidemic of strategic defaults in home loans

More on Morgan Stanley ...

Due Diligence is the disciplined process you use to lower the risk of investing in Commercial Property. This risk typically comes in four "flavors" when you are investing in Commercial Real Estate.

• Market Risk: Will the fundamental conditions of this market allow me to meet my return on investment (ROI) goals?
• Financial/Performance Risk: Does the projected financial performance of this property meet my ROI goals
• Tenant Risk: Will these Tenants allow me to meet my ROI goals?
• Physical Risk: Will the physical structure of this property support my ROI goals?

The third area of risk... Tenant Risk... deserves special attention when you are buying Retail, Office and Industrial Properties. These property types carry an additional layer of risk you don't see in Multifamily because your Tenants aren't just living in your building... they are doing business within your Property.

Their ability to pay your rent is predicated upon the health of their business and not just on their ability to draw a paycheck.

Never Ever Ever ... take a property under contract without a quality local Property Manager on your team.

Our latest "hype-free" Commercial Power Hour Teleclass shows you why your Property Manager is the workhorse of your Due Diligence Team in all phases of the process - Market | Financial | Tenant | Physical. You will dramatically increase the risk in your investment without them on board.

Download your copy for FREE here

http://tinyurl.com/yea7lve

In Commercial Real Estate Price negotiations, a natural response is to try and "meet in the middle", once an opening price has been established. If I say 10 and you say 20, both sides expect a middle position response, in this case 15, as a "reasonable compromise" to begin to lower the price.

Let me show you a technique I call "Move the Middle" that will naturally cause your negotiating counterpart to split the difference in your favor and move them in your direction ...  toward the number you need.

It begins with a traditional "meet half-way" or "meet in the middle" basis for bargaining. I add a little twist I call "Move the Middle", that benefits you in any negotiation. This is a simple negotiation technique that provides consistent profitable results for you in any transaction. It has enormous value and it is a tactic you can use again and again when bargaining.

Your relationship with your Property Manager is key to the success of your Commercial Property Investments. This relationship starts with your Contract AND we have found a lot of Property Managers Contracts are heavily weighted in favor of the Property Manager.
These dangerous contracts are often presented as if they are "standard"... Not True. You get what you negotiate. The last thing you want is to be locked into a contract with a poorly performing Property Manager... and no easy way out... OUCH.

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