commercial real estate

See my story in the Baltimore Business Journal today. Or at least part of it.

With all the hype of flipping houses for profit, think about the tax consequences.

You suffer ordinary income tax treatment on your gain if you sell less than 12 months after acquisition.

Hold for a year and a day and save yourself potentially 25-35% of your profit!

In these leaner times, might make more sense to collect a year of rental income before you pull the trigger.

They never appreciate in value. Never never never. Research research research. buyer beware.

Joe Burke, a great mortgage broker in Maryland wrote the following about the commercial mortgage market. A great read. Let me know if I can put you in touch with Joe.

“What a market we have had over the past six months! It seems things change every day. Yesterday we saw the 10 year Treasury rate plunge about 15 basis points to 3.29% in the morning only to lose steam quickly ending the day at 3.60%, a 31 basis point increase in 4 hours time. I have been in this business for a long time weathering a lot of ups and downs in the market but I cannot recall experiencing the volatility we are currently seeing. It makes it tough on both lenders and borrowers trying to figure out where we will be tomorrow and when should you think about locking rates. The volatility creates many issues for lenders who don’t want to lock rate when the Treasury is approaching historic lows unless they are sure that it is a long term trend. The lenders try and hedge their bets and typically either widen their spreads as the Treasury rates go down this quickly or institute a floor rate that they will not go below regardless of where the Treasury goes. The philosophy behind this strategy is easier to understand when viewed in the context of what happened in the Treasury market yesterday. In the space of 4 hours they could have lost 31 basis points on their ultimate rate.

Pricing pressure for insurance companies come primarily from what alternative investments are available at spreads that are equal to or better than what is available in the commercial real estate mortgage market. Currently in the CMBS market in the Super Senior traunch [which has a 30%+/- subordination level] spreads of 200-235 basis points are available. Typically rated as high as AAA by the rating agencies one can see the relative value investing in these AAA CMBS bonds. The question all real estate developers would ask is “are they really AAA?” Time will tell but it does explain why CMBS all in spreads for new business can range from 275-350.”

1. Find a tenant that needs space. Find a building to buy. Contract to buy the building, write the lease. Finance based on the credit of the tenant and the cash flow.

2. Buy Veterans Administration homes which can be bought by investors with 5% to 10% down.

3. Get a real estate license. Find a niche with little competition (car washes? Mobile home parks? small multi-family buildings? little strip centers) and excel.

4. Think big. Find a bigger opportunity. Joint venture partners will contribute 95% of the equity required if the deal is a good one and give you much of the upside. It takes as much work to do a big deal as a small one. You do have to bring some expertise to the table to pull this off.

5. Be contrarian. Now that everyone is down on real estate, start thinking about buying it.

6. Look for sale leasebacks: an owner and occupant of a building who wants out but will continue to occupy the building and rent from you.

I spoke with a REIT executive who confirmed my impression that the days of bidding wars for commercial real estate, even in the hot Washington DC market, are over for now. Where once brokers set bid deadlines and were assured of a dozen offers, brokers are now “quietly marketing” properties to a handful of buyers. The fear? No one wants to strike out, end up with no offers for their building, and be embarrassed.

The parallel is the residential side where once brokers could have an open house on Sunday, set a bid deadline of 7 pm on Monday, and count on a bidding war.

Costar runs highlights today of retail market reports from Grubb and Ellis, Torto Wheaton, ICSC, Marcus and Millichap, plus their own data.

As usual, looking for a story, the report paints a bleak headline ( “…bleak picture for 2008″).

The facts paint a different picture:

-”The U.S. retail vacancy rate stood at 6.6% at the close of fourth quarter 2007, varying only slightly throughout the year.”

-”During 2007, 111.8 million square feet of retail space net absorption was recorded, a significant improvement over 2006 net absorption of 58.6 million square feet.”

-”The average quoted asking rental rate in the U.S. has increased at a fairly steady pace over the last two years, creeping up 13.8% from $15.47-per-square-foot in first quarter 2006 to the current rate of $17.61-per-square-foot.”

-Grubb & Ellis predicts buyers will “return to the investment market in greater numbers” in 2008.

I’ll believe the gloom and doom when I see it.

If you’re a commercial real estate professional, try this commercial real estate custom search from google. searches 9 sites, including: businessweek.com, forbes.com, wsj.com, realestatejournal.com, propertyline.com

Google Base is in beta. On full launch, and with some minor tweaking, it could be the commercial real estate category killer. Really a three way killer: it has all the functionality of craigslist, ebay, and classified ads in one site.

There’s next to no property in there, but give it some time…it’s only in beta.

You can create your own Google base home page and Google will also make sure whatever you put in there is search able on Google. You can mass-upload your listings. You can sell stuff. You can tag everything. wow.

I touted First Potomac Realty Trust yesterday (NYSE:FPO). If you bought bought FPO yesterday you made about 7% in one day and locked in a yield just shy of 9%. What a roller coaster today!