Alabama Commercial Real Estate

Commercial: Maybe Not So Bad

2008-07-01T15:00:00.003-05:00

A recent article from the Birmingham Business Journal sites that though residential construction continues to be in a downward trend, the commercial construction market shows a little hope.

1,950sf Retail Space Available

2008-06-26T13:57:00.003-05:00

Retail space available in Homewood. Click the picture below for more information.

New Publix Soon Hoover

2008-05-29T11:58:00.001-05:00

Exercise in Analysis of an "Upside" Investment

2008-05-29T11:57:00.001-05:00

The scenario is that an investor is looking at a 50,000 square foot retail center. It is located in an acceptable part of town, but for some reason has a significant amount of vacancy to the tune of 18,000 square feet (36%). If the potential purchaser has a decent amount of confidence for this particular market, how would he value this deal?

I'll be the first to tell you that there are numerous reasonable ways to evaluate a property and I have found that each purchaser has his or her own unique touch. However, for the sake of the blog, let me share with you this simple approach.

The idea is that there are two investments going on with a property that has a more than normal amount of vacancy. (1) There is the portion of the property that has tenants occupying that are paying rent, and (2) the portion of the property that is vacant. Both have different evaluations.

The first portion that has tenants "looks" like a normal center that is in good condition and positioned well in the market. In this case 38,000 square feet is currently leased generating a net operating income of $305,000 per year. The current stream of cash is pretty easy to value. We merely factor the market return for the subject property type, in this case 8.75% and the result is $3,485,715.

The second part is to value the vacant space. We know that the market rent for a similar building is $12 per square foot net to the owner and we have 18,000 square feet vacant. The normal vacancy for the market is 5% which is equal to 2,500 square feet. If operating at average performance to its competitors in the market, this property should expect an additional 15,500 square feet occupied (18,000 - 2,500). The 15,500 difference is worth $12 per square foot which is equal to $186,000. Now comes the "fuzzy" math. There is more risk in the vacant space, right? So, there should be an equally higher return, right? This is where we get a little subjective, but one might consider a 14% return reasonable on the "potential" income. If we factor that in just like we did with the occupied space above the space is worth $1,328,571.

The combined value is equal to $4,814,286.

Other things that the buyer might want to consider as a reasonable reduction in the price is carrying costs of the vacant space, value added renovations to improve the property to market conditions, leasing fees, tenant improvement, et.al.

What's your business quotient?

2008-05-13T20:36:00.003-05:00

Tenant's, do you know your threshold of revenues that can be used for rent? Most small businesses don't, but the larger multi-location corporations surely do.

A few months ago, I was shopping around a cell phone dealer who was looking for space. I called one of the larger retail developers in the area inquiring about small inline spaces in his development. When I asked for a rate, he replied with, "what business does your client operate?" I told him it was a cellular phone dealer, and he said, "they can usually pay upto $25 per square foot". Sure I thought. That seemed like the top of the market, but it was not an obscene rate so I showed it to the prospect and let them direct me to their intentions. Well, I found out that the rate didn't shake them since they were accustomed to paying the high rates at other spaces.

Well, here I am months later realizing how all this fits together. Yep, the prerequisite for real estate brokerage is not necessarily genius. As a matter of fact, genius, can prevent success in many ways!

So what was really going on? The market has subtle supply and demand models that are applicable even down to the unique type of a certian business. Applying a little mind-strength and analytics to some of our data tools, we can make some since of the market.

One of our data sources tells us the market's total revenue for the business type and the number of businesses that are in operation. With that, we can determine an average revenue per business by dividing the total revenue by the total number of establishments. If the market is large enough, the action of adding one more business wouldn't skew the averages too much and we don't have to do any further calculations or assumptions. If the market is small enough that one business would dramatically change the equillibrium, then other assumptions should be entered into analysis. Once we have determined the average revenue that a typical business can generate, we use another data source that shows us the proportion of revenue that the subject business type can expect to pay in rent.

Marry the two figures together and you've got the amount that a business can usually pay in rent.

This is a good tool for the tenants out there and even better one for the landlords!

Another factor particullarly interesting to landlords might be the difference, if any, found as the sample of demand is increased further away from the subject site. If the revenue mean should significantly increase as the sample group expands further away from the subject site, then the local area market should be declining. In this situation, the landlord might consider selling the property before the total market dissolves as the trend hints.

Sorry if the analysis seems a little excentric, but these days we've got to get creative when finding an advantage for our clients!!! I hope it helps you too!

Friday Surprise!

2008-05-09T15:26:00.003-05:00

I received a great market analysis put together by the really smart guys in the home office. I've created a link to the market summary. I hope you like me, can take some useful information from the report. I have read the document which takes a national perspective and already see some factors that don't quite match up with our local economy in Birmingham, Alabama, but overall the facts are very handy to have and continue to watch.

I guess there's no second best for good local knowledge! That's why I still have a job!

Bank Appears to Bail Out Their Own Interest

2008-04-25T16:05:00.004-05:00

In a recent article published by the Birmingham Business Journal, the lender for the Capri Condominum project claims to have settled their debt from the borrowers who have filed bankruptcy. After reviewing documents filed with the Alabama Secretary of State, it appears like the filing members of the new owners, Capri Real Estate, LLC, is in fact the lender itself and one other bank. I am not sure if the other bank has been involved all along or not.

Anyway, it's never good news to have to go through the settlement process, but maybe the bank's new equity position will allow them to complete the deal and "truly" close the matters at hand. While they likely don't wish to be developers and prefer the position of comfort as the lender, the unfinished building is a worst-case-scenario. Think of it this way, the building fails to produce ANYTHING if it doesn't reach the stage of an issued C.O.

All in all, this is probably a common practice among lenders who have the misfortune of facing bankruptcy threatened deals and actually the better of few available options.

Hey guys, I'm just digging a little deeper than what was reported in the BBJ article. I hope you, like me, can have a little more knowledge to use in your projects.

Here's Lookin' at You Kid!

2008-04-25T09:27:00.006-05:00

Wow! I am amazed the blog is getting around. I just looked up on a stats page and people from 16 of our 50 states are looking at the information I publish. Obviously, there is room for growth, but I am blown away about the support from all you guys and gals. Thank you, thank you, thank you!

The map below shows who's looking:

Hot Property Downtown

2008-04-24T12:37:00.002-05:00

We are offering about 2/3's of a city block between the 5th and 6th Avenues South. The location is well established and offers excellent access to all parts of Birmingham and its surrounding cities and well as other areas of the State of Alabama.

Most of the property is warehouse, but there is also some office and a showroom.

I have more information at the following web link:

LIGHTING AND LAMP INFORMATION

Return From an Alternate View

2008-04-13T21:14:00.002-05:00

Sure a 13% year-one return in a good, growing, location would be awesome. However, these days, that's not a readily available product. For a few years now, investors have been challenged to think a little more about positioning their investments. One strategy, I encourage is to look at a property's rental rate position.

Is the rental rate above the market? If so, it might be hard to demand equal or more rent in the near future. Is the rental rate below market? If so, you might have a good opportunity to raise rent in the near future for a lease renewal or new lease.

Okay guys and girls, this is not a trick question. Generally speaking, if expenses stay constant, for this example, and rents increase, what happens to the bottomline? Net income goes up, therefore, return increases as well.

The idea is not to merely look at rents, however, that is generally a reasonably easy factor. I want to encourage you (and myself), to find alternate views to uncover value in properties. Find your niche. Is it rental rates? Traffic counts? Population density? Starbucks with in a certian distance? You would probably be surprised how some high-level executives approve properties.

Should I Form an Investment LLC Group?

2008-04-02T21:13:00.003-05:00

I get this question a lot as I help "investors" in real estate. You see, I believe whether you are a user of real estate or a hands-length investor, if you are buying real estate, it is an investment -- therefore, you're an "investor". Some transactions could use more capital than what one party has or desires to use for the purchase. If more capital is needed, then the options are more leverage or more equity.

Sometimes even if the deal is leveraged to the max, one single investor just cannot come up with the required equity. Then his or her option is to raise more money through additional owner/members.

When dealing with other investors you might want to consider the following:

How much do I know about my partner?
Do they have experience in dealing with real estate?
Does he have the financial strength to back up his obligations?
Are our goals in alignment?
Who makes decisions? How are they made?
What if there is a conflict? How is it resolved?

That is not a conclusive list of questions, and frankly in most cases you and the partnership will draft a business operating agreement. The operating agreement spells out in some detail the processes that the partnership should follow as they own the investment.

Basically, it is important to not enter into a partnership relationship lightly. Partnerships have opportunities for conflict. However, if operated properly, partnerships offer a way to buy larger properties or diversify a portfolio.

Update: Green Building

2008-03-26T13:10:00.002-05:00

Update to a post earlier this month.

Alabama-based construction firm is developing "green" buildings. An article published by the Birmingham Business Journal states that BL Harbert International constructed $260 million in green buildings.

Negotiating 101

2008-03-20T10:25:00.003-05:00

One statement...

Knowledge is power.

I noticed while acting as broker for a landlord this week that one of the most important ways to get or keep a competitive edge is knowing the facts. Yep, like the show Dragnet, "just the facts m'am".

The broker and his client were planning a visit to space I have offered. In a preliminary conversation to our first meeting at the site, the broker notified me that they were also looking at a building up the street it was "three times" larger and was only $8,500 per month compared to the space we're offering at $7,000 (5,000 sq.ft.) per month. Hmm. Sounds like the other space is a good deal. I followed up on the lead and the fact is; the competitor space is only 500 sq.ft. larger than our offered space. So the math is as follows:

Our space offered: $7,000 x 12 months = $84,000 annual rent / 5,000 sq.ft = $16.80/sq.ft.

Competitor space: $8,500 x 12 months = $102,000 annual rent / 5,500 sq.ft = $18.55/sq.ft.

So, the next day our conversation went:

Other broker: "the space up the street is only $8,500 per month and it's much larger"

Me: "I called about the space yesterday after we talked and they are only 500 square feet larger, by my calculations we are almost $2.00 per square foot less expensive than them"

Other broker: "I didn't know that"

Me: "okay, I'm glad I could help. I hope your customer likes the space - we would love to have them."

Now, the objection was averted and my client has retained value in his property. Knowing the market and being able to synthysize the information is critical to providing value to a client. It is also very important to know the intangables in the market. For instance, we have had a lot of activity on the property. Therefore, the owner is confident that his firm position on rental rate is appropriate at this time. If it were the other way and we were not getting much activity our strategy would likely change.

As always, what does it mean for you. Simple this time... Either know your stuff very well or hire someone who does. When dealing in all forms of real estate and it's associated financial functions such as lending, et.al. knowledge is critical.

UPDATE: Just a quick disclaimer. I will begin moderating comments now. Comments are encouraged, but must live up to the informational nature of this blog.

Retail Cap Rates Headed Down?

2008-03-17T21:18:00.002-05:00

Over the past few weeks I have been having discussions with clients who own retail properties about the forecast for their properties. It seems that the supply and demand dynamics of retail space has taken a turn toward over supply. Due to the construction lag in expected supply the market now seems to have experienced a gap between tenant demand and vacant space. This it typical and temporary in each property type and in most any market. It's just a part of the real estate cycle that occurs as investors react to the demand from tenants.

What does that mean? Well, the supply and demand of tenants in relation to properties has a correlating effect on values of such properties. As mentioned in previous posts there are MANY factors that affect property value, and I merely attempt to highlight one at a time. Anyway, as vacancy rates increase, investor confidence tends to wane therefore leading investors to reduce holdings or at least hold off new construction projects. If you subscribe the supply and demand theme , two events can occur. (1) Retail spaces can be converted to alternative uses thus taking retail space off the market and reducing supply, or (2) the market can wait in anticipation that, in time, tenant demand will increase and fill vacant spaces to a comfortable level. While a prudent investor should consider all options, we tend to believe that over the long run the market will perform in a somewhat expected trend. Therefore, most will believe that there is no need to have a fire-sale of retail properties, however, you might want to consider other property types in the short term.

UPDATE: since I completed the rough draft of this post, an article written by Matt Hudgins hit on some of the points above.

Birmingham... A City with Opportunity

2008-03-12T15:56:00.000-05:00

It's easy to get down these days. With the economy being so tough and stock market volatile at best it's hard to tell if American is on the cusp of greatness or despair.

I was reading the monthly publication, Commercial Investment Real Estate, and there is was, a glimmer of hope buried in the mix of big deals and market trends. In a survey sourced from MarketWatch, Birmingham, Alabama, made the top ten list of MSA's based on large and small companies per capita, unemployment, population, and job growth. At number nine we joined the group of Minneapolis-St. Paul (1), Denver (2), Richmond, Va. (3), Boston (4), Charlotte, NC (5), Nashville, Tenn. (6), Washington D.C. (7), New York (8), and San Fran. (10).

Just FYI the worst fifty MSA's may surprise you. They are, New Orleans (50), Rochester, NY (49), Tucson (48), Buffalo (47), Sacramento (46), Los Angeles (45), Detroit (44), San Antonio (43), Virginia Beach-Norfolk, Va. (42), Las Vegas (41).

As for population I find it hard for us to beat out Atlanta, New York, Chicago and the like. There fore, it must be the other attributes surveyed that keep us competitive, number of businesses, unemployment and job growth.

I've always felt like Birmingham is a great place to do business -- especially starting a small business. As have conduct my work, I get to know many businesspeople. They seem to be able to navigate the market in a manner that is congruent to the American Dream of entrepreneurship. Also we can thank most of our area governments for supporting business growth.

This ought to keep Birmingham as a desirable market to buy, sell, and use real estate.

Is your building green?

2008-03-07T11:10:00.000-06:00

Whether you are a user or investor of real estate you might want to know if your building is qualified "green" or can be reasonable converted to "green". Green buildings are usually certified by LEED or STAR standards. What is the benefit? I understand that some lending institutions have programs to encourage environmentally sustainable development and have designated funds to help.

If you are interested in the idea of a green building, we are too. We can help you identify opportunities.

** supplemental article about the demand for green buildings.

I'm in commercial, my loans didn't do it!

2008-02-28T20:39:00.004-06:00

I know I'm late on this post, but I've heard enough about the sub-prime mess. Okay, I know just enough to be dangerous, and what I understand is that home lenders promoted loans that "financed" a person into buying a house. In layman terms; supporting value based on "can you make the payments" mentality. Those sub-prime borrowers typically would not have qualified for a loan or at least not as large. Of course, a few of those loans are in default or up for adjustment and the borrower can't satisfy its terms.

That's the problem and depending on the volume of default could or could not be a big deal.

Okay, that is the old news. What about today and what about commercial real estate?

Now it seems some attention has been placed on commercial loans and the commercial real estate market, and experts believe that the commercial capital markets might dry up a little over the next few months. Interesting and a likely scenario, but not because of commercial sub-prime loans. I was at a conference a few weeks ago, and one of the experts on a panel told us that, "not one commercial sub-prime loan was ever issued". Hmm... I guess the attention towards commercial is more of a fallout effect.

Well that's encouraging right? Maybe at least for the borrowers and lenders.

However, my personal observations show a trend of sharply increasing commercial real estate values beginning a few years back. One of the catalyst fostering such growth were low debt servicing costs. Check out a chart of LIBOR rates. While commercial loans tend to be more conservative in nature, some really great loan rates are now coming due and borrowers should expect higher debt servicing costs. Then that capital goes back to the marketplace and cannot achieve the same return unless prices decline. My point is commercial properties are going through is market related swing due to rising and falling financing costs and its connection to real estate values not loosely issued credit.

As usual, I have to finish with "what does that mean?" Well, there is a chance that we will see some commercial prices come down in some markets. Drastically? I doubt it. Keep in mind this post has focused on the financing side of an investment, and there are many other factors to consider. For example, overall the American economy seems stable, we have a significant population, and jobs are good so don't throw the baby out with the bath water. However, there may be some opportunities for a savvy investor to find a deal.

HealthSouth: an honest turnaround

2008-02-26T14:56:00.004-06:00

Congratulations, to HealthSouth for its excellent turnaround. In an article written by Jimmy DeButts from the Birmingham Business Journal, he explains that by re-structuring debt and net losses, the inpatient rehab company is showing a healthy improvement in operating revenues.

It's great to see such a large Birmingham company rebound from accounting fraud to success.

What could this mean for me? Here's your take away... One would think that the health care is a very strong industry sector to provide the foundation for a company to make such a recovery. Our population is aging and it looks like the health care industry will offer much opportunity for the real estate investor.

Ahh... One more thing, it's important that you also know that real estate was a part of the HealthSouth re-structuring. HealthSouth sold their campus to Daniel Corporation and it's reported that they will leaseback a significant portion of the office building. This transaction occurred a few months ago.

National Debt

2008-02-24T15:13:00.003-06:00

Ever thought about the national debt? As a user or investor of real estate, the strength of our economy is a big deal. Further, the U.S. national debt is a significant component of the overall economy.

Lately, we hear about the TRILLION DOLLAR national debt!!! A trillion sounds like a lot right? Maybe, but first let's calibrate to the perspective of our national economy. The U.S. economy is first in the world at 13.2 trillion dollars of gross domestic product in the year 2006 so we're talking about a big huge amount of currency moving around.

I found the chart below that shows the U.S. economy much like a business person would look at a business or a real estate investor might look at a cash flow property -- income less expenses.

Source:Whitehouse.gov

The result is a proportion of debt in relation to the economy. This formula takes out the change in the value of one dollar. Remember that one dollar fifty years ago spent a lot different than one dollar today. So that's why one would think that comparing the actual debt volume is inaccurate.

Of course there are many other issues dealing with our economy that are equally important that also deserve reasonable attention. As for the debt, I think it's fair to believe that we are reasonably in check.

Mountain Brook (Birmingham), Alabama

2008-02-24T14:05:00.002-06:00

CLICK HERE for re-development opportunity.

Wealthy Should Pay More Tax

2007-07-31T15:42:00.000-05:00

Well, the title of this post is a little tongue and cheek. First of all, I am not a wealthy person. I live in a modest home, drive modest/used cars, have a "dining out" budget and go on one vacation per year within driving distance. So, I don't have any bias here against the poor or rich for that matter.

I was prompted from a recent lecture to look at why democrats continue to waive the flag that the wealthy don't pay enough tax or get too many tax breaks. The general sentiment from the dems made me feel really sorry for the poor. One poorer person might make a few bucks then Uncle Sam swoops in to just take it away. No food or shelter tonight folks, pockets empty...

That scenario is simply not true. After searching the internet for such discussion, I discovered that Rush Limbough(spelling), made this argument years ago when the flat tax was a hot issue. However, since then, he has moved on to other topics. So what is the truth you ask? Well, I never thought the IRS was my friend, but in this case, they are very open with the stats of their business - collecting income for the running of our country. Thank you federal government! My discovery was astounding:

In 2004 (the most recent published data), the total tax share - that's who paid what portion of all federal reserve collections for the year 2004, is as follows:

The top 1% AGI Earners -- paid 36.89% of the fed reserves total collections

The top 5% AGI Earners -- paid 57.13% of the fed reserves total collections

The top 10% AGI Earners -- paid 68.19% of the fed reserves total collections

The top 25% AGI Earners -- paid 84.86% of the fed reserves total collections

The top 50% AGI Earners -- paid 96.70% of the fed reserves total collections

That means that 50% of the bottom AGI wage earners pay 3.30% into the pot to service our country. I won't address the idea that the bottom 50% of wage earner likely contributes to our country's expenses with special programs et.al. more than the top 50%, but I just don't see how this tax structure encourages success.

Heck, for the matter, for argument, let's look at it from another angle... From the statistics above, the top 5% of wage earners pay over 50% into the pot for government service that serves 100% of us. Hmm...

Taxing the successful just doesn't make since nor is it the American way. I am not for or against the poor or rich. Heck I am a middle class kind of guy here, but I am in favor for success incentives. Capitalism. The opportunity to succeed is what our country's success was built on, not mediocrity.

After reviewing the stats, I am amazed by the facts. Even in the midst, we still are the land of opportunity that I mention above. I just think about how much opportunity is lost due to myopic ideas on taxation instead of progressive. Woah, did I say "progressive". Isn't that the new buzzword for democrats? Aren't they now labeled "progressive" instead of "liberal"? Maybe we need to define the term progressive -- again tongue and cheek.

So, what am I going to do? For starters, I will pay my taxes next year. I mean, we do live in a free and safe country where I have the privilege to make a profit (though it's taxed out the butt), worship my God, and write about my concerns about our society, among many others. I will also pay more attention to what our future leaders stand for concerning the issue of tax.

Any thoughts out there?

Source: http://www.irs.gov/pub/irs-soi/04in05tr.xls (all the way to the bottom)

Where Have the CAP's Gone?

2007-06-20T21:56:00.000-05:00

Not talking about headcovers or the bicycle guys downtown. We're talking capitalization of investment properties. The desired return from investment real estate purchases are in the 8% range and less depending on the property type and tenant credit. Wow! So is that good news? Well it's great for seller's, but can create a timid market fluctuation for the short term.

The good news for a second tier city like Birmingham, is that rates are lower in many other urban areas all across the country. Therefore, many of the investors are not local. Great for realtors! We have significant value added service by marketing to investors from many diverse markets.