Commercial Real Estate

[Morgan]

Does anyone here invest in, or know about owning and operating commercial real estate? I'm interested in learning more about it and how things are handled in general or compared to residential real estate. I currently own and manage four properties with 27 apartments and in the future am interested in expanding into commercial, but I know there is much to learn prior to the first investment. Any tips, book recommendations, case-studies, companies to study, etc?

 

 

Thanks in advance!

[Evolveus]

William Poorvu is an author, Chair of Harvard Real Estate Department, and was an initial investor in Baupost.  I found him by doing a book search on Klarman, and noticed Poorvu in the 'thank you' section.  I did some digging and ended up getting his books.  He has two books "The Real Estate Game" and "Creating and Growing Real Estate Wealth" that are geared toward a wider audience.  I have read them both and took a little something away from each one. 

 

Since you already own and operate, you might want something a little more technical.  His book "Real Estate: a Case Study Approach" gets much more serious with numbers, analysis, and spreadsheets involved in comparing large apartment complexes, hotels, and industrial properties as investments.  I believe this was originally written as a textbook, but I found it to be pretty accessible if you really want to work with large RE project numbers.  It's cheap on Amazon right now used.

 

Hope that helps.

[Morgan]

Great! Thanks! I just ordered two book by Poorvu:

- Creating and Growing Real Estate Wealth

- Real Estate: A Case Study Approach

 

Hopefully those will come soon and I can dig into them.

 

I have done a good bit of reading about Frank Lowy and Sam Zell. Most of what I've read about them isn't too detailed and doesn't deal much at all with their younger, startup days, which is what I'm particularly interested in. It's difficult to find details regarding that kind of information as it was so long ago and not many people were paying attention to them just as they were starting.

 

Do you know of any sources of information like that?

[bttmline]

I'm in the business and yes a whole different world then residential, but if you understand finance and investing you will be fine. The biggest thing to keep in mind is that you really have to understand the local market and that just comes from experience and time. Commercial properties can sit vacant for years on one side of town and the other side be in high demand. Talk to local brokers, developers,owners, and understand all the players. I have a list of books for you to start with, but one of the better ones that I read and still think about is Professional Real Estate Development, Second Edition: The ULI Guide to Business. I'm happy to answer any questions.

 

[Morgan]

Great post bttmline. Would you mind posting that list of books? Or just a partial list? I looked at Professional Real Estate Development, 2nd Edition: The ULI Guide to Business but it is a little pricey on Amazon at the moment.

 

I'm hoping to read, learn and get to know the players in my market and buy a property in the next 12-18 months. Can you recommend any questions that I should ask to brokers, owners and developers?

[Junto]

Great post bttmline. Would you mind posting that list of books? Or just a partial list? I looked at Professional Real Estate Development, 2nd Edition: The ULI Guide to Business but it is a little pricey on Amazon at the moment.

 

I'm hoping to read, learn and get to know the players in my market and buy a property in the next 12-18 months. Can you recommend any questions that I should ask to brokers, owners and developers?

 

I think the better question is understanding what type of commercial property you ultimately want to purchase. Triple net lease, Class A/B/C space, turnaround plays, industrial, office, retail, or performing properties. A lot depends on your time resources and your abilities as to leasing, negotiating, financing support, and property management/maintenance. At 27 units, I am sure you have more or less the basics down but moving into commercial is certainly a slightly different skill set. I would also recommend researching the cycles of the different types and classes of real estate. This should be to your advantage as the economy recovers.

 

If you can slim down your market focus, you will be able to network more efficiently in your market area and get better leads on potential investment opportunities.

[Morgan]

I think the better question is understanding what type of commercial property you ultimately want to purchase. Triple net lease, Class A/B/C space, turnaround plays, industrial, office, retail, or performing properties.

 

I am interested in office space and most of the office buildings in my small town are pretty old (built between 1900-1930) but ornately constructed and would likely need to be renovated on the inside at least to some extant, so it is likely that the first property would be a turnaround play. I think because it is an old building it would be considered a Class B (maybe Class C) building even after renovations.

 

Junto, can you recommend a few good resources to research the cycles of the different types and classes of RE?

[fareastwarriors]

Didn't want to start a new Thread.

Can someone share some insights on why some commercial properties sit vacant for So long?

Here's the background. I live near a busy Main street in the suburbs of Oakland (San Francisco Bay Area).  When I moved there in 2014, houses were going for high 300 - low 400k. The people were mostly working class like factory workers and restaurant types. Now the houses are going for low 700k. There has been turnover and I see more office professionals move in but it's mostly higher pay blue collar types like self-employed construction.


There are 3 strip malls on the same street couple of blocks away from each other. These are not fancy or new, just rectangle boxes with parking out front. Two blocks away in the opposite direction, there is a Target anchored retail property that is basically fully occupied.

LARGE has maybe 20 spaces available for rent. It was half empty in 2014.
MEDIUM has 5 spaces available for rent. It had 1 tenant in 2014.
SMALL has 4 spaces available for rent. It had 1 tenant in 2014.

Now more than 6 years later:
LARGE is nearly full with only 2 spaces available.
MEDIUM now has 2 tenants (The new/2nd tenant is not even opened yet. It's going to be a pizza joint from a tiny local chain).
SMALL has 0 tenants.


LARGE, MEDIUM and SMALL still have (faded) FOR LEASE signs from different companies up. I don't think SMALL and MEDIUM buildings are going for redevelopment since there are no signs and I didn't receive any letters from city to comment on potential development.  Besides there plenty of surface parking lots available for redevelopment if investors were interested.

LARGE looks the oldest and don't have any national brands besides an Autozone and MetroPCS store... The Autozone predated me. Everything else is just mom-and-pop shops like restaurants, ice cream shop, and hair/nail salons.  These are not even Instagramy hipster places but just small places selling pho, pupusas, HK-style bbq meats, and etc.

The area is booming with higher income people moving in. LARGE's parking lot is always full now.  So what is the deal MEDIUM and SMALL? Why are their spaces still vacant all these years? 

I see this around town and also in other cities. Yes, I get some locations are just weaker or there is too much space available nearby.  Still, why are so many places vacant or seemingly underutilized even in the highly populated and/or growing areas? 

Sure some are institutionally owned and the REITS maybe have other stronger properties so they afford to wait for the high rent/right tenant. But what about those smaller ones? All those owners can afford not to rent for half decade, if not more? Am I missing something?

[Gregmal]

A lot of times that means theyre looking to run off the tenants and then reposition it or do something completely new. Seen stuff like this with shopping centers which then get converted to urgent care/medical centers or senior living/student housing type setups.  Just a guess though.

Also, many times its not the owner doing the leg work but a developer who will either be a partner in the venture or take control via a purchase option generally contingent on getting the approvals.

[fareastwarriors]

A lot of times that means theyre looking to run off the tenants and then reposition it or do something completely new. Seen stuff like this with shopping centers which then get converted to urgent care/medical centers or senior living/student housing type setups.  Just a guess though.

Also, many times its not the owner doing the leg work but a developer who will either be a partner in the venture or take control via a purchase option generally contingent on getting the approvals.

Are standard retail leases that long though? I thought they are 5 five years usually.

In my example, the SMALL building has been completely vacant since 2015. I know it's hell to get anything entitled in the Bay but still.  The MEDIUM building did finally take on a new Pizza tenant last year (finally). That building will have donuts and pizza (soon). :)  It seems like they want to rent space out.


Lastly, I would love to see some new development for senior/student or any just housing. We need it. Any new development (residential or retail) would be an upgrade compared to the dated strip malls, fast food places, and vast surface parking lots we have now.

[Gregmal]

Its just an educated guess so take it with a grain of salt. The retail leases vary. Anchors generally have 10+ with 5 year options. Smaller spaces can be anything from 12-60 months, sometimes even 10 years. I think the bigger thing is the behind the scenes stuff. You can start working on this stuff but ultimately a lot has to happen to get anything memorialized and only once things are memorialized will a transaction occur and only after that you would begin to see progress on a new development.

A shopping center and small MPC by me took almost a decade to get together just in terms of rezoning and entitlements and all those fun paperwork based approvals. Funny side story is that there was a bit of a tussle when one of the dudes who signed a 15 year lease on one of the outparcels was told the town wasnt issuing any more liquor licenses....whoops.

Lotta planning and palm greasing in some of these places. If I again had to guess Id say the small strip center is worth more dead than alive and the last thing the owner wants to do is restart the clock by signing a couple crummy leases.