By Michael Simpson
In the commercial real estate industry, both buyers and sellers are currently enjoying favorable market conditions. Whether it’s industrial space, office product or the retail sector, the basic fundamentals, such as a diversified economy, low vacancy and growing number of start-ups, all continue to point to consistent growth in the future.
As I discussed recently with NSDCAR members, I’m seeing sellers receiving multiple offers with bidding frenzies. I’m seeing buyers attracted to available properties with low cap rates and seizing historically low interest rates. Indeed, in its 2018 Investors Intentions Survey, CBRE Group listed San Diego as the nation’s 11th most favorable metropolitan market for commercial investors, which was a six-spot improvement from 2017.
If a slowdown is on the horizon, it will probably occur because of rising interest rates, slowing NOI (net operating income) growth, pressure on capitalization rates, fewer loan maturities and historical real estate cycles (we may be overdue for a small bump).
However, at the same time, I believe the future is bright because of continued economic growth nationwide, large amounts of investment capital looking for a home and recent favorable tax reform. Other positive signs include increasing number of building permits, initial claims for unemployment insurance are dropping, help-wanted advertising is up and consumer-confidence metrics are rising.
As I also emphasized recently at my NSDCAR class, I believe that opportunities abound for residential real estate professionals to expand into the commercial sector. You may have heard that residential agents cannot succeed in commercial real estate. I strongly disagree.
There’s nothing holding back a residential agent from also working in the commercial sector (I call it “resimercial”). At the very least, residential agents should have a working knowledge of the commercial sector so they can communicate with clients interested in investment property.
For example, do you know about the impact of rent on value (income approach) and calculating cap rates or gross rent multipliers? Can you easily discuss return on investment, vacancy costs and expense factors? If you don’t, then your investor client may go to someone else.
When I talk to potential investors, I ask a series of qualifying questions to determine their level of experience. Among the questions:
– What’s your risk tolerance? Do you want to buy and hold, or do you have an exit strategy?
— Do you have a certain split requirement?
— Are you looking for a property with upside potential, a value-play or do you prefer something plain vanilla?
— Do you want a turnkey property with high occupancy, long leases and low management costs, or are you looking for a fixer-upper to add more value and later increase the rents?
— Are you looking to invest horizontally or are you looking to invest vertically?
Feel free to contact me at firstname.lastname@example.org with your questions.
Michael Simpson is founder and senior instruction of the National Commercial Real Estate Association, a company offers commercial-investment real estate training solutions and consulting. He is a past director for the California Association of REALTORS® (C.A.R.) and THE Pacific West Association of REALTORS®. His certifications include National Commercial Real Estate Advisor (NCREA), Certified Real Estate Investment Consultant (C.I.C.) and Real Estate Investment Planning Specialist.