One does not have to read many newspapers, magazines, or websites to recognize the US economy is going through a severe economic downturn.  Unemployment is rising, values are dropping, banks and corporations are imploding and there is little agreement on when this economic cycle will end.  People are scared.

The troubles of the country have also affected the commercial real estate market.  National office vacancies are approaching 18%, office construction is down 30%, sales of retail properties are down 70%, commercial real estate prices are down 39% since 2007.  In Texas alone, commercial transaction volume is down 83%.

And to make things even more interesting, the wave of residential foreclosures which have been sweeping the land over the last two years is nothing in comparison to the commercial mortgages currently maturing. A respected commercial bank estimates that 65% or more of the commercial mortgages coming due in the next 5 years will not qualify for refinancing.  The numbers range from the mid to high hundreds of millions in potential bad loan values. If you thought the residential collapse was bad, throw in an estimated $600M plus of failing commercial loans and you will see a real problem.  Government agencies, bankers, lenders, and other commercial professionals are rightfully concerned.

I have always been of the opinion that the prudent commercial property investor can make money in any market (even this one).  The analytical fundamentals do not change, the property does not change, the value changes and the financials will fluctuate, but a thorough, financial investigation of the target asset with a clear investment plan should, if done properly, not unduly risk your investment regardless of the market.  So, the one thing you must remember as you surf to a new page after reading this article is this, DO NOT BE AFRAID. Yes, I know it is all doom and gloom on the news but now is not the time to ignore the market and wait for better conditions. Now is the time to be vigilant, be analytical, be creative, and be aggressive.    

In my opinion there are several reasons why commercial investors do not get into the market, particularly a down market, 1) lack of equity/capital, 2) lack of available credit, and 3) lack of market/asset knowledge.  Although daunting from the outside there are numerous ways to overcome these obstacles so that one may smile in the face of opportunity when it shows itself in a down economic cycle.

The greatest concern for novice investors is lack of equity/capital; “I would if I had a little money.””If could get some capital together I would buy a new warehouse.”  You do and you can. There is value everywhere, and cash is not the only acceptable form of equity; you might have stocks, a business interest, or other property. If cash is required you might ask friends or relatives, seek a partner, or you could seek out seller assistance.  Novice investors have been trained to think that commercial real estate deals only get done if you have 6 figures to bring to the table as a down payment.  Not true.   Does it make it easier? Sure, but lacking capital is not a complete barrier to entering into commercial property.

Leverage has often been heralded as the key to successful commercial property investing.  Many commercial property assets cost more than most people will ever earn and it is unrealistic for individuals to pay all cash for a large office building; for most of us we need credit and one or even several lenders depending on the project.  If banks are not extending credit, as in the current market, then the commercial investor has a new problem to overcome.  

Although they will disagree, commercial banks are not the only sources of credit for commercial property loans.  Yes, developing a working relationship with a commercial bank is beneficial to you for your business and your commercial property investments but if they do not want to lend you money or if you just want to negotiate their rates down further, you must remember you have many options.  Savings and loans, credit unions, insurance companies, private lenders, friends and family, investment clubs, and seller financing are all available credit resources just to name a few. In down markets, some of these alternative credit sources may be the key to closing transactions.  

The last reason I often encounter that individuals or businesses refrain from getting into a market is lack of market or asset knowledge.  It is imperative that commercial property investors have good current market intelligence and as the field narrows, good asset intelligence.  Commercial real estate is a cold numbers game so knowledge about market rates, current transactions, sector benchmarks, and the like are vital.  Once the general issues are out of the way then we need to dig into the financials of the target, expenses, operating costs, replacement costs, land values. We are about the numbers and we need to check and verify to insure that they are in line with our investment parameters. Where does all this information come from?  A lot of the information required to properly evaluate a commercial property is available from public sources, the seller themselves, and various public and private databases. The best source is your commercial real estate professional.  Commercial bankers, mortgage brokers, commercial appraisers, and commercial brokers employ some of the best methods to collect this information and all try to keep on top of their sources as a matter of due course.  And if you just want to talk a bit about the market, give one of us a call, we are always willing to talk shop for a free lunch, especially in a down market.     

Finally, Texas has been affected by the downturn in the economy to a far lesser degree then other regions of the country.  Our local Houston economy is buoyed by the port, energy, and the medical industries which are all heavy users of commercial real estate. We have been spared the vacant condo projects of Florida and the empty office towers of California. Values have fallen but not as far.  If you are not in Texas, get here; not only will your commercial investment dollars be more secure, it is a pretty nice place to live.

Be aware, be informed, be creative, but do not be afraid in down markets. Now is the time when the prudent commercial property investor increases his bottom line and real property assets at a greatly reduced cost.