Pushing Dirt

I spend hours a day talking with buyers and sellers of commercial property. Here is some of what I take away from this ongoing dialog:

• If you look at the graph on this post, we’re clearly in the “despair” phase. This is evidenced by qualitative evidence, ie the tone of investors and brokers I talk with, and also by quantitative evidence: Many buyers think an appropriate capitalization rate today in the Washington Baltimore area is 10% or higher no matter what the product. I don’t believe those buyers are going to be successful buying product around here anytime soon and they are missing out. Those cap rates may be found in Richmond VA or Cincinnati Ohio or some other secondary market, but not in a top 10 market market with an ever-growing federal government that will soften the edges of the downturn.
• That said, many brokers representing sellers are 6 months behind the market, and are telling their clients that pricing in the 8% cap range is still achievable. It’s just not.
• For a savvy buyer willing to be a bit more aggressive than the herd, it is clear that bargains abound. There are owners in a must-sell situation. Those sellers will have to sell at prices that are 20% to 30% lower than peak levels. Buyers that can forget about current yield and focus on buying in the middle of the range, in the high 8%s, low to mid 9s and at an attractive “price per pound” are going to be rewarded with some amazing yields in the long run.
• The best buys are for those who are willing to take on significant vacancy risk. I am marketing several empty buildings right now in the Washington DC area and I can tell you it is very much a buyer’s market. I’m also seeing more buildings go vacant, and tracking vacant buildings that are moving toward foreclosure. If you control a tenant that you can drop into one of these empty buildings, your yield potential is going to be off the charts. The opportunities also abound for users of space to buy buildings and push their effective rent (mortgage payment) below current market rents.
• Multifamily is the one sector where product continues to trade as financing is more readily available in that sector. I say that if this product is continuing to trade, stay away. Look in sectors where there is more distress: retail and hotel being the ugliest right now, with office and warehouse right behind.
• Watch for the Federal government to grow dramatically and increase demand for office space. Obama plans a massive fiscal stimulus in the very short term, and democratic spending won’t be the sort of checkbook stimulus we saw under Bush: it will be accompanied by a big increase in the bureaucracy and and associated demand for more space in the DC area. This will happen rather quickly.

I wish I convince more buyers that I believe we’re at or near a bottom already, but most are on the sidelines. Some are on the sidelines because they don’t have the necessary cash but there are others waiting for the sky to fall. Once we’ve passed the bottom — whether it is today or a mere 9 to 12 months from now — and the media and bulk of investors recognize this, it will be too late to make truly opportunistic purchases.