Pushing Dirt

When you build a building for your business, make your best effort to design the building so that it lends itself to multi-tenanted use. So for instance if you have a distribution/warehouse use, build a rectangular shaped building with loading across the entire length of the building (either in the front or rear), ample truck courts and parking. For an office building, work with an architect to incorporate design features that a typical multi-tenanted building features: ample attractive lobby area, flexible floorplates with bathrooms and stairwell on a central core, etc.

You may think that the building will be your home until it crumbles to dust, but more likely you’re going to outgrow it, sell your business, or otherwise move. Nothing worse than trying to backfill say a 2 story call center with 100,000 square foot floor plates or a boxy manufacturing facility with minimal loading.

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I haven’t seen many residential agents make the transition successfully to commercial real estate. I believe it can be done, but you need to consider the following guidelines:

1. You need to make a clean break of it. Successful commercial agents don’t do any residential work. None. Never say never, but none of the top agents in my market try to do both.

2. Take your picture off your business card, even if you are cute

3. Determine an area in which to specialize. First, sales or leasing? Next, what product type? Retail, office, industrial, etc?

4. Take some professional training. SIOR, CCIM, and ULI all offer great basic training for commercial agents.

5. Train under a senior agent. We used to call this job a runnership (run for coffee, run for dry cleaning, but mostly just run to show property again and again and again). You won’t make much money for that year of running, but if you’re working under a capable agent, you’ll learn everything you need to know.

6. Remember to think big. It takes the same time and energy to execute a 10,000 sf or 100,000 sf lease as a 1,000 sf lease. In the first year work on whatever you can get, but once you ramp up, focus on finding transactions or listing assignments that will bring in a least $100,000 in gross commissions.

7. Dial for dollars. Cold calling works wonders in commercial real estate, and business to business calling I believe is much easier and more pleasant than calling on homeowners at their houses.

8. Remember that unfortunately the commercial real estate business is still dominated by men. It’s a shame, but if you’re a woman, you may find some advantage in negotiating with men because of it if you’re not intimidated. CREW (Commercial Real Estate Women) is a great organization providing networking opportunities for women in the business.

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When business is down and you need to downsize, you might consider a sublease. Also consider approaching your landlord about a lease buyout or rent reduction of some other sort. The leasing market is miserable and your space may not lease at any price. Your landlord, on the other hand, would rather have some income than no income at all and may be amenable to giving you some relief. Work both ends to identify the best opportunity for savings. A broker can help.

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REITs are now allowed to pay out dividends in stock and not cash. Simon is one of several that have taken advantage of the new rule, and will pay out 90 percent of their dividend in stock.

I like this idea, even though it’s been greeted with a great deal of hand wringing in the media by analysts in the media who are concerned about this diluting existing shareholders.

This new rule allows REITS to preserve cash, and this is an important time for any investor to preserve cash. And if I need the cash, I can immediately sell the shares. I’d rather get my dividend as cash than see my dividend cut.

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In this soft leasing market, free rent is a win for both landlord and tenant.

A dollar today is worth more than a dollar tomorrow. Likewise a dollar saved by a tenant is worth more than a dollar saved later. So as a tenant, I’d rather have free rent upfront than a lower rent later.

Free rent for the landlord means a higher rent later, everything else being equal. A higher rent later means a higher net operating income. A higher net operating income will result in a higher sale price on exit, all else being equal.

So both landlords and tenant should recognize the merit of using free rent.

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1. mail 1000 postcards out this week. use an online postcard design service like expresscopy.com for the postcard design and mailing, and generate  a mailing list from dnb.com

2. place an ad in craigslist

3. place an ad in your local paper

4. develop a broker/agent email list and send out an electronic announcement

5. put a big banner on the building

6. raise your commission offered and publicize that

7. offer cash for qualified tours

8. Offer a 2 year lease on a car if you’ve got a lot of space to lease

9. use adwords advertising tied to keywords related to what you have to offer (e.g., “los angeles office space” or “maryland warehouse.”

10. fire your broker and hire a new one

11. go to elance.com and hire a telemarketer to make calls on your behalf. make sure you’re in compliance with local laws when you do this. calls can be made off of a list from dnb.com

12. go door to door with flyers in hand in the the neighborhood.

13. dial for dollars

14. send out a press release to the local business journals announcing your space is available and highlight what makes it unique. Many are so eager to fill space they will run the ad.

15. Offer “free rent.”

16. list the availability and buy advertising in costar.com

17. is your property in loopnet.com?

18. How about a guy twirling a sign board on the busy street nearest your property?

19. dancing sock man? (see the picture on this post)

20. Try propertyline.com advertising

You saw I was running low on steam when I got toward the end of the list. What am I missing? What creative approaches have you used to get vacant space filled?

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Straying to the residential world today…it’s so much more fun over there. Try punching “1600 Pennsylvania Avenue” into Zillow.com’s property value estimator.

You’ll find the market value of this 16 bedroom 35 bath home totaling 55,000 square feet on 18 acres.

Apparently the housing market has taken a bit of a hit on the nation’s first house. Zillow figures the White House’s value fell from $389 million in the peak of the market to a measly $295 million today. Zillow figures on a $1.4 million mortgage payment.

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Yes.

In The Huffington Post, Jim Randel wrote  (in a story with the same title as this post) that he does not see wide scale defaults in the world of commercial mortgages. He also wrote that commercial borrowers have much more equity in their properties than do homeowners on general.

Unfortunately he’s wrong. Many (if not most) investors that bought stable commercial investment property in 2007 are “under water.” Property values have fallen that much, at least in the short term.

He was also wrong about commercial real estate being a market devoid of emotion where real estate values are a pure exercise in evaluating cash flow and solving for a target return. There is a tremendous amount of fear and uncertainty among commercial real estate investors, and this emotion is keeping buyers on the sidelines despite some exciting opportunities to buy at spectacularly low prices.

I’m also not sure I buy his assertion that it’s an easier decision for a homeowner to make to hand over the keys to his or her property to the lender, that they have less to lose than a commercial investor.  A home is the biggest investment most individuals will ever make, and most (though I acknowledge certainly not all) put down a significant amount of hard-earned cash to buy those homes they are now losing.

He was right about some things, though. Mounting tenant failures will grow the amount of sublease space on the market dramatically in 2009, putting major downward pressure on rental rates.  He’s also right that as commercial debt has been tight lately, it’s pushed property values down.

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It’s coming to commercial real estate! Residential agents have been living in the world of short sales for some time. Now I’m involved in negotiating a few of them. In a short sale, the proposed purchase price falls short of the loan balance. That puts me in the middle of a negotiation among buyer, seller, and lender, trying to arrange a meeting of the minds all around.

I’m seeing slowly-increasing-willingness on the part of lenders to start discounting notes to get them off of their books. This will accelerate through 2009. This will also make for more opportunity plays for investors that want to buy these notes at a sizable discount with an eye toward hopefully foreclosing on the property or being paid off at par for a nice profit.

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Title insurance is a necessary evil, but many don’t realize how evil. You probably don’t realize that a full 70% of the title insurance premium you pay is kicked back to the settlement attorney handling the settlement.

In a commercial real estate settlement, this can be a very large figure. In a $5 million sale I handled recently, the buyer paid almost $14,000 in premiums.

While it doesn’t seem like a lot in the context of the sixe of the transaction, There’s no reason that you can’t negotiate with your settlement attorney, particularly in these tough times, to make sure you’re getting a fair break. The attorney deserves to make a living, but keep him or her honest, and let them know that you know about how profitable a transaction this can be for them and that you’d like to share in that.

Better yet, start a title company!

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