Today, economists point to financial data that shows more than $500 billion in commercial real estate debt is coming due over the next three years. Nearly a third of this debt is scheduled to mature in 2009. At the same time, there is a lack of liquidity along with a substantial reduction in values, which will make it challenging for commercial property owners to refinance this debt. Commercial real estate values are likely to decline during this market instability.
Conservative real estate investors see this as an opportune time to acquire distressed properties. Here are five key strategies for investors to take advantage of the upcoming opportunities to acquire valuable commercial properties at low prices.
1. Opportunity funds -- invest with experienced advisers.
Invest with a well-qualified adviser or sponsor. Opportunity funds are typically formed by real estate advisers to purchase commercial properties. In today's marketplace, most lenders will finance 50 percent to 60 percent of the appraised value, requiring investors to fund the remaining balance with equity from private sources. Based on experience, capital will flow to sponsors or organizations that can demonstrate a consistent track record of successful acquisitions of commercial properties.
2. Due diligence -- hire a real estate adviser to analyze property.
In this turbulent market, a real estate investment adviser plays a vital role in assessing a property's potential. Before purchasing a distressed asset, an investor or investment group will perform due diligence to evaluate occupancy/vacancy rates of surrounding properties, construction quality, potential maintenance issues and potential for property rehabilitation or repositioning.
For example, in the fast-growing Southern California Inland Empire, Janez acquired an undervalued, 138,000-square-foot, multi-tenant business park and budgeted funds to transform the aging five-building research and industrial complex into a contemporary office campus. Janez updated the 1980s era business park by making architectural improvements to the entryway, landscaping and common areas. In addition, Janez rebranded the complex, installing prominent new monument signage with the newly christened name, "Summit Business Centre." The strategic capital improvements paid off. Tenant occupancy and rental income increased and Janez sold the property, producing significant investment returns for its group of opportunity fund investors.
3. Property management -- retain the services of a professional manager.
Typically, professional property management companies will charge between 3 percent to 5 percent of annual rental income to manage a commercial office property. The investment will usually pay for itself by producing a more attractive property, better positioned to attract and retain new tenants in a competitive rental market. An experienced property manager should be able to provide you with an annual maintenance budget and a "blueprint" that will lay out a pathway to increasing building occupancy.
In addition, professional management can usually make your investment dollars or capital improvement budget go further, relying on pre-negotiated rates with their long-time stable of vendors. A manager's expertise can be especially valuable in recommending strategic capital improvements that will provide the greatest return on your investment and enhance curb appeal.
Last year, Janez acquired the 159,000-square-foot Genesee Executive Plaza in the La Jolla Golden Triangle/University Towne Center area. In acquiring the two-building office campus, Janez budgeted for capital renovations and energy conservation measures, including refurbishing lobby interiors and elevators, updating landscaping, renovating a breezeway bridge span and repainting/repairing the parking garage. Heating, air conditioning and lighting improvements are also planned to reduce operating expenses and increase conservation measures. These strategic improvements may enhance the property's attractiveness to the growing number of UTC-area medical professionals.
4. Timing vs. location.
In contrast to the saying "location, location, location," timing has become equally important for real estate investors -- because frequently, a profit can be realized at acquisition. The key to timing is not to be too early and ride the market down.
Today, numerous economic indicators chart the state of the economy and real estate markets. A few of these indicators include consumer confidence index, stock market performance, purchasing manager supply index and jobless claims. Once the data shows signs of improvement, higher values will follow. Although timing may be more important than location in this environment, a first-class location will always perform better over the long term.
5. Be patient -- wait for the right opportunity with upside potential.
During the economic downturn in the 1990s, Janez organized its investors to move quickly when well-located properties became available. Janez was able to act quickly and acquire Governor Plaza, a 37,000-square-foot building located near University Towne Center in 1992. Although the well-designed brick building has aged gracefully, Janez recently made architectural improvements to the entryway, plaza walkways and interior courtyard to update the property's appeal. Today, Governor Plaza enjoys 96 percent occupancy.
Kocmur is president of Janez Properties, a San Diego-based real estate firm that develops, acquires and manages more than $400 million in commercial properties.