Residential Downturns Effect on Commercial

NEW -> Contingent Buyer Assistance Program
C

capocorso_IHB

New member
<p>I was wondering what you experts thought would be the effect of this downturn on the commercial sector?</p>

<p>I am hoping to move my business to either OC or Pasadena in the next year or so and am trying to figure out what commercial prices are going to do in relation to residential.</p>

<p>Here is the type of building I am looking for and it's current price in HB.</p>

<p><a href="http://www.loopnet.com/xNet/MainSite/Listing/Profile/Profile.aspx?LID=15213882&RecentlyViewed=true&ItemIndex=2&PgCxtDir=Down">http://www.loopnet.com/xNet/MainSite/Listing/Profile/Profile.aspx?LID=15213882&RecentlyViewed=true&ItemIndex=2&PgCxtDir=Down</a></p>

<p>If this were a home I think I would have an idea of what this downturn will do to the price, but I am not sure the effect it will have on commercial. Any guesses?</p>

<p>BTW I have been lurking on this blog for a long time now and love the insight that the members bring.</p>
 
<p>Nice marketing strategy on that one. The 7.8 cap rate certainly got my attention until I saw that it's vacant and based on what it the broker believes it could rent for. Primarily, I look for retail commercial but the ultra low cap rates on centers both in OC and LA have kept me on the sidelines. I've looked at couple of centers in the already overbuilt but more affordable IE, but the numbers were nowhere near close to working. I don't know much about the owner/user side which I guess what your looking for but would welecome thoughts on investing in retail commercial as well. </p>
 
<p>tenmagnet,</p>

<p>Are you thinking commercial prices will come down as residential pricing erodes? Or do the two have no connection?</p>

<p>This building is actually bigger than I am looking for, but was a bit suprised at the price. It is very comparable to prices here in Vegas which is suprising. </p>
 
<p>capocorso,</p>

<p>Are you planning to buy the building and use it yourself or planning on renting it out? </p>

<p>To answer your question, I think commercial prices will decline, at least in the market segment I'm interested in. However, whether that decline will be a direct result from the residential market being hit, I don't know. I wish that I followed the Vegas market so I could weigh in on how it stacks up. You have a better handle on that than I do. </p>
 
<p><a title="Permanent Link: O.C. office vacancies soar" rel="bookmark" href="http://lansner.freedomblogging.com/2007/10/03/oc-office-vacancies-soar/">O.C. office vacancies soar</a></p>

<p>http://lansner.freedomblogging.com/2007/10/03/oc-office-vacancies-soar/</p>
 
I'm looking for owner occupied. I cannot explain the market here in Vegas. They keep building strip mall after strip mall and charging unheard of prices for them. I would pay it, but business is nowhere near the levels to support the prices they are charging.
 
<p>capo</p>

<p>i am in the commercial re industry... work with all types including retail, industrial, office, and multifamily.</p>

<p>most experts believe there will need to be significant repricing in most commercial markets, primarily due to the status of the credit markets and cost of capital these days. most investors are unwilling to be aggresive during this uncertain and volatile phase in the re markets. </p>

<p>i would say that residential prices do not have a direct effect on the commercial sector... however, with the whole cmbs and credit markets fiasco, which is directly tied to single family residential prices and velocity and home mortgages, it would be a safe bet that commercial re in certain geographical areas will take a dip as well... most deals just can't get financed in this credit environment... generally the entire finance industry is revamping and changing the way they structure, evaluate and underwrite deals... higher spreads, lower LTCs/LTVs, higher exit caps, etc... basically most deals will be sitting around for a while... some believe pricing adjustments will be in the order of +100 bps increase in cap rates... i guess this is not directly related to you as you are looking for owner user space... however this will affect overall price/sf throughout different locales.</p>

<p>generally speaking however... and this is pure speculation and generalization... if you're looking for a decent retail space throughout OC... you will definitely have to look at prices well over $400/sf... and for A locations in A markets... over $500/sf. just goes to show re is going back to fundamentals... location.</p>

<p> </p>

<p> </p>

<p> </p>
 
<p>Unfortunately, I'm not familiar with owner occupied property. Your assesment of strip malls in Vegas being outrageously priced sounds all to familiar. It echoes the same theme I've seen here locally. I guess both markets aren't that different after all. Brokers here, like the listing in HB, liberally use proforma#s to dress a property up. </p>

<p> </p>
 
<p>Nude, </p>

<p>The cap rate is a rate of return used in CRE. Usually, the higher the number the better. In my opinion, a 7.8 cap is unusuall high for retail in the OC area. Of course the broker came up with the 7.8 based on proforma#s.The other day I looked at a center on 17th. Street in Costa Mesa. The cap rate was 5.2, which seems to be in line with the where the OC market is right now. The listing price was way, way out of my range, north of 3mil. </p>
 
the capitalization rate is NOI (cash flow) / cost of capital (price paid on property). they have several interpretations. the relative cap rates between properties and regions can be used to represent quality. for example, midtown manhattan has the high cap rates in the country at around 3.6%. san francisco 4.1%, los angeles 4.3%, and suburban philly for example is around 6.8%. class A properties will have lower cap rates than a class C bldg in the same market. so in this regard, it can be thought of as the return an investor is willing to take to own a property. obviously they are willing to accept lower returns for more desirable assets.





<em> changes</em> in the cap rates signal changes in the value of the underlying assets. lowering cap rates signal rising asset values and rising cap rates mean values are going down.





cap rates are extremely impt for comp purposes because when commercial properties are sold, the cap rates based on the sales price are often used to re-value similar properties.
 
<p><em>"I guess both markets aren't that different after all"</em></p>

<p>Except for one is a God foresaken desert that looks like Mars and the other is one of the most beautiful places on earth. </p>

<p>Thanks for all your comments everyone. Hopefully we can start looking for a fair priced home to live in and a good restaurant location here in a year or so.</p>

<p> </p>

<p> </p>
 
dont know too much about the HB area but in the main commercial centers of OC/LA, i think there's going to be a lot of hurt. office vacancy is creeping up and near term growth does not look good. its not necessarily related to residential but certainly many of the same factors (credit crunch) affect the commercial sector. here's what i think will/has hurt local CRE in the near future.





1. residential fallout affect on commercial office (effect on rent growth)


just look at all the empty bldgs. for ex, the bldg i work in used to be half occupied by one company. since then they have consolidated into a few floors and are subleasing the rest of their space. the irony is my company happens to be at the end of our lease and negotiating with the landlord is a battle of fuzzy math. they claim theres no way rents are down, especially considering the bldg is fully leased. fully leased, but 30% of the floors currently empty! so vacancy numbers wont reflect all empty space that is still leased out but not occupied until those leases end. actual OCCUPIED office space is much higher than the quoted 9% OC vacancy rate.





2. end to m&a activity (effect on property values)


private equity firms and foreign buyers fell in love with commercial real estate the past several yrs and bid up the prices on anything they could get their hands on. you had apt bldgs being purchased and converted into condos -- that opportunity is gone. booming residential mkt and easy credit was huge for consumer spending and then the hot thing was buying retail/strip center properties -- signs are that opportunity is slowing. and the big fish -- commercial office bldgs -- were being flipped like irvine townhomes. now that the borrowing costs for PE firms has increased significantly, deal-flow is completely dried up. foreign buyers dont want to be hit with the double-whammy of buying declining assets with the us dollar going down.
 
"<em>you will definitely have to look at prices well over $400/sf... and for A locations in A markets... over $500/sf. just goes to show re is going back to fundamentals... location</em>. "

<p> Thanks for your thoughts. Looks like you feel this property I linked could go down to about 2.25 million (400/sft). </p>
 
<p>acpme,</p>

<p>Wow, where did that come from, great post my friend. Well done, putting a bow on it and hitting all the different segments. There's a treasure trove of information in your post and I appreciate your analysis, which I believe to be dead on. Sorry if I sounded surprised initially, we're usually talking cougars on the wildlife, I mean IHB singles thread.</p>
 
<p>Here are some other things to consider: </p>

<p>The first being the listing agent for that property should be shot for using asking rents and not actual rents for comps. He must be a residential agent turned commercial because I don't think I've ever seen a professional commercial agent use asking rents for all the comps. Maybe one or two. I think the real cap rate is more like 3.3% but I wouldn't know because I don't have any actual rent comps.</p>

<p>Ah the restaurant business. I've seen so many in strip malls like that that change names and type of food every year. A space that big costs a chunk of money to run if it was decently busy. Just going over the numbers in my head the gross revenue would need to be around a $100k a month just to stay open. Possibly higher if you need the staff or want to pay someone who actually went to culinary school. I don't know HB that well to know if they have a Benihanas but they could make the revenue work and pay that rent. </p>

<p>The third thing to consider is how well the restaurant business is doing. I went to popular Mexican restaurant in Orange last night and even for weeknight it seemed slow. The parking lot is typically full most nights and there was plenty that night. Of course my attention was elsewhere so maybe I just missed how busy it was. Full service restaurant jobs have been increasing YOY since 2000 and in 2007 they are down slightly. That really isn't a good sign at all.</p>

<p>IMO if I were to looking into commercial I would look into medical buildings. It is the industry that continues to grow and with the baby-boomers getting up there in age we are going to need more. Hopefully after the credit markets settle down I will have the cash to start being serious about this. Plus it's not like the baby-boomers are going anywhere because no one will buy their homes at the prices they think they are worth.</p>
 
<p>Thanks for the answers on terminology. </p>

<p>capocorso, I moved directly from Huntington Beach to Las Vegas in 1993. Recession had hit and Las Vegas was booming as companies and people sought to escape the high costs of SoCal for Nevada's low- to no-tax business climate. I'm chipping in my two cents here based on personal knowledge, so take it with a grain of salt. That's a crappy restaurant location, and it always has been. It's tucked in between professional buildings and limited in it's signage to what you currently see on the building. The land slopes down at such a sharp angle at that corner that you are litterally hidden from street view at the intersection. The only remedy for the visibility problem is a 30' sign on the street, but you'll never get a variance from HB city planners. Furthermore, it only has 40 parking spots within sight of the front doors, which will all be filled with the cars of the offices within that lot, so you can forget about a heavy lunch or happy hour trade and after dark people shy away from parking their cars out of site of the building. It's got competition directly north from two well established chain restaurants that have an entire strip mall of parking spots to work with. The residential housing that surrounds the area was subject to massive bubble inflation due to it's proximity to the beach and typical lot size, and is therefor the residents are not going to be able to support the kind of prices you would need to charge in order to cover the nut every month. Add in another slew of restaurants both to the west and east, and you'd be really hurting after 6 months.</p>

<p>I could go on, but I think I made my point and I think you get it.</p>
 
<p>Great stuff all of you. I am really looking for something smaller, this listing just caught my eye because it is was already a restaurant so I can compare it to spaces I have been looking at elswhere.</p>

<p>Thanks for the info on the location. I have never lived in OC, lived in north LA before moving here to Vegas. I have had a number of customers tell me that OC would be better than Pasadena or N. LA for the type of restaurant I have, so I am just starting to look. I totally agree that there will be an abundance of restaurant space available in LA, OC and especially Vegas over the next 1-3 years.</p>

<p>Let me know if you see anything good out there!</p>

<p>Thanks again</p>
 
Since both office and apartments is my bread and butter I have been looking very quizzically at valuations in the past 3 years. I've seen 5% caps of retail and 6% caps on office. Neither of these capitalization rates is remotely sensible considering the high tenant improvements of both. Especially if you are financing at 6.4% you are getting negative yield on each dollar of leverage. Assuming massive rent growth in the OC in retail is in my opinion a fairy tale so these numbers are just plain not supported by reality. In apartments proforma valuations are very common for "hitting" a cap rate for the purchasing parties press releases. In apartments 165 bp of cap rate difference is probably close to a minimum increase. "A" apartments were trading at an 8% cap in 2000 and are at about a 4.75% cap now. They should trade at a cap rate north of borrowing cost and 4.75+1.65 = 6.4%.
 
You must log in or register to reply here.
Back
Top