Raleigh, NC – Is a Career in the Commercial Real Estate Market a Bust?
I recently read a column on CarolinaNewsWire.com by two brokers from Trademark Properties called “Once Lucrative Commercial Real Estate Market faces 50% Job Cuts Nationally.”
The synopsis of the article basically said that according to “some industry experts” 50 percent of the 130,000+/- Commercial Real Estate brokers nationwide will be out of the business by 2011 by “sheer job attrition.”
But is it really job attrition? When the market was hot in the mid 2000’s closing deals seemed as easy as shooting fish in a barrel. Rents flew, Cap Rates ran high, and Commercial Real Estate Brokers instinctively flocked like the salmon of Capistrano. Where they truly Commercial Real Estate career seekers? No. Did they sell a few properties? Yeah. At the time there wasn’t any other way for them. It looked like a good opportunity and they took it.
The process was simple, if you list it, they will come. A broker new their ship had come in when they got their name on their own sign and their own shovel. But the field of dreams came to an end in 2008 and brokers became adrift in sea of increasing inventory.
Brokers are commissioned based, independent contractors, who are working much, much, harder and earning less money. The lean times are disheartening and the brokers who once flocked the market are slowly retreating to more stable income jobs.
Think of the commercial brokerage career as a lifeboat on the ocean. Until early last year, a broker’s lifeboat was tethered to a yacht called “The Good Times”, being tugged along on the water without much drama.
If you needed food, water, or anything else (like income), you just went to “The Good Times” and grabbed what you needed.
Unfortunately, “The Good Times,” similar the Titanic, hit an iceberg and started to take on water and sink early in 2008. Now all those ambitious Commercial Real Estate career seekers are trying to un-tether their life boat before it follows “The Good Times” into the deep blue sea.
Sometimes it’s a buyer’s market, sometimes it’s a seller’s market, but it is always a broker’s market. Looking ahead, this is a great market for Commercial Real Estate Brokers. Less competition, more cash waiting on the sidelines, and leaner, stronger, tenants.
While 2008 seemed relentlessly slow and 2009 has seen the worst of the recession, 2010 is poised to be one of the greatest commercial real estate markets since the late 90’s.
Last night I was speaking with a close friend who had just raised $150 Million in private funding to buy distressed commercial properties across the United States. In a recent smaller fund, they have made a 30% return monthly by investing in residential real estate. Mean while the big boys, like Simon Property Group, have risen billions of dollars in the past two quarters for “strategic commercial real estate acquisitions.”
When will those funds hit the market? Most likely starting in March of 2010.
Brokers make their money from commissions. While the market has been lacking high dollar deals in recent quarters, the volume of smaller transactions has risen tremendously as jobless executives start up consulting practices or purchase franchise rights to retail businesses.
With a surge of start up businesses and decreasing rents, savvy Commercial Real Estate Brokers are still making a good buck. When the private money comes back to play in 2010, the Commercial Real Estate Market will likely begin to boom again.
The overall commercial real estate market has been a major casualty of the recession with values falling as much as 30+% from their peak, and sales down 83% from a year ago (113 Billiion to 9 Billion Nationwide), causing a decrease in broker income and forcing many commercial real estate firms out of business.
GVA Advantis recently closed their Durham office along with 16 others in the Southeast.
But, the gap between US commercial property buyers and property sellers is narrowing, indicating the shattered market is closer to beginning a path to recovery.
The last two quarters have seen a slight improvement in transactions. Credible buyers are appearing and bidding on assets. Previous Property Investors who were showing up to bid weren’t credible and were often unable to close their financing. Current Investors fall into the institutional category and are well capitalized to close large Commercial Real Estate transactions.
But prices are not improving and values have fallen over 30% from their peak prices reached in 2007.
Other sellers also are getting closer but have not yet embraced the new price reality and sales are being discussed but not done at a level that can clearly indicate market prices. Investors understand that’s where the market is headed and yet transaction additivity remains extraordinarily low.
Commercial real estate sales worldwide in the second quarter were down some 67% from a year earlier, with US volume suffering more, down 83%.
The correction in the commercial real estate market, is going to be painful for a lot of people, particularly those who bought their commercial properties using considerable amounts of debt financing.
Commercial Real Estate remains edgy from current market operating conditions: limited capital, extremely tighter underwriting, shrinking net operating incomes, shrinking space demand and declining property values.
It is apparent that the “Great Gatsby Era” of Commercial Real Estate has come to an end following downward spiral of unraveling residential real estate portfolios which spread rapidly into commercial portfolios by the end of 2008 and beginning of 2009.
For commercial real estate companies today, that means leaner and more efficient operations and more focus on tenant retention rather than tenant attraction.
Rankin Commercial Properties was formed as a Full Service Commercial Real Estate Firm in order to help “lean down” on operating costs for commercial property owners in North Carolina. The company offers in house cleaning and janitorial, landscaping, maintenance, construction, and facilities services in combination with the traditional property management and brokerage services. In doing so, Rankin Commercial Properties can shore up expenses, spread the overhead costs, and help commercial property landlords save considerable amounts of money.
The “Great Gatsby Era” wasn’t just a pecuniary boom for Commercial Real Estate Tycoons; it had also become an economic “cakewalk” for service providers. Commercial Brokers had the luxury of slamming signs in the ground and collecting phones calls, general contractors added 50-60% profit margins while hiking salaries, and other property service providers enjoyed the constant climb of service fees from nonchalant property managers.
Rankin Commercial Properties (RCP) was originated in Late 2007 with the vision of constructing a fully integrated commercial real estate company to offer commercial property owners quality, affordable services accompanied with proactive management and aggressive brokerage services. RCP materialized a year later with the closing of 4109 Wake Forest Road, its first rehab project.
Today, Rankin Commercial Properties has over 500,000 SF of available property listings.
Despite some signs of overall economic stability, commercial real estate is still reeling from the effects of the credit crunch while trying to avoid the recession’s knockout punches. At the same time, they know the cycle will eventually turn will eventually come to an end.
We probably have already experienced the worst, but our economy is still falling, at a slower pace. Several leading indicators suggest that we will likely bottom out before the end of this year.
Nonetheless, property investors should keep in mind that the economy declining at a slower rate is a lot different from actually beginning to expand. The recovery process could be less robust and take longer than expected.
We believe that there will be more distressed assets coming to the market over the next 12 to 18 months, Property Investors with cash can cherry pick the best assets in the most desirable markets.
Preferred equity, mezz debt, super senior CMBS and ‘loan-to-own’ are also attractive investments during this period.
However, the end isn’t next month, continuations of reductions in job losses through the next two or three quarters, will offer some hope but won’t put a lot of money back in consumer’s hands, and a return to growth is another story, because inflation and rising interest rates resulting from the stimulus is a real threat, and that will hold down spending and hiring.
What does all of this mean going forward?
First, lenders want more equity in the deals (whether it’s a new loan or a refi). Second, prices have already dropped in most markets to the point where a lot of commercial properties are under water or close to it, which will continue that downward pressure on prices because lenders will be taking back more commercial properties and selling them at a discount to get them off their books and property owners will be selling them at a discount to avoid going back to investors to raise additional capital for a refinance.
Commercial properties aren’t losing tenants as fast as people think, at least not in Raleigh, North Carolina. Commercial Real Estate Brokers simply aren’t able to do deals because they haven’t been properly trained to prospect for tenants. Proper marketing techniques, cold calling, and sincere drive will keep properties leased.
The disconnect between what commercial property sellers want and what commercial property buyers are willing to pay is clearly pointed out by looking at sales volumes around the country-anemic compared to any “normal” year.
Because of the pricing disconnect between buyers and sellers of commercial real estate, many in the industry are mining the books of lenders looking for nonperforming loans, foreclosed properties and pending loan maturities as a place to extract current opportunities.
We still have commercial property owners trying to sell properties at 7-8% CAP rates. It’s not happening. Then they try to reduce their costs to raise the CAP rate by firing their service providers and doing it themselves. The problem there is that the property then goes south because tenants see the lost property services and could care less about the landlords struggles.
With falling NOIs and corresponding lower property asset values, commercial real estate owners will be hard pressed to refinance and retain property ownership of their leveraged assets over the next 12 to 24 months. As banks begin or continue to foreclose on commercial buildings, many of these institutions will be forced to make hard decisions about their move-forward strategy for these assets. As the economy begins to recover, well capitalized commercial real estate buyers will have many assets to choose from, both distressed and non-distressed, since, as we’ve heard so many times recently, if you have money, you won’t find a better time to be a buyer.
Based on conversations and business meetings, banks are getting into the commercial real estate business. If a workout cannot be accomplished on a default, banks will foreclose.
REO (real estate owned) opportunities are rising. It will be similar to the RTC days. People chasing notes are the first wave of property investors stepping in. Purchasing notes have advantages but some serious disadvantages. What needs to happen is the foreclosures to happen expediently with the understanding that lenders are going to off load the commercial properties just as fast.
No commercial real estate investor is going to accept the prices that banks are trying to dispose of their assets because equity is expensive and the rules of the game are still changing. Immediate opportunities will continue to be those where property investors are buying the notes at less than par (if the banks get rid of them at that price) with the expectation that these troubled loans are really REO opportunities.
CMBS/Commercial lenders and their servicing agents are going to be drinking from a fire hose shortly as we are seeing an increasingly large waive of troubled assets enter foreclosure. For the next 18 to 24 months, we are in for a rough ride downward as commercial real estate lenders continue to foreclose these troubled assets and more importantly sell them off at very low price-per-square-foot prices.
Commercial Property Owners need to position themselves as best they can to compete with the REO product in terms of rental rates and concessions; which if they are underwater is going to be tough to do.
The commercial real estate industry as a whole will shift from transaction oriented to property management oriented. Returns from commercial real estate are made up of income from cash flows (NOI) and appreciation; traditionally 70% from cash flows and 30% from appreciation. The past five years or so have seen the majority of returns stem from appreciation due to cap rate compression not NOI growth. Now that cap rates are headed back up and probably will not return to historic lows in the next five years, returns have shifted back to cash flows as the main source. Real estate companies that have a core property management focus will be well poised to assist property owners as they seek ways to increase their NOI by filling vacancies, increasing rents and reducing operating costs.
Traditional transaction brokerage companies will survive, but on much less volume. Further, companies that can show a strong track record of property management, leasing and disposition work will be well suited to partner with commercial lenders who are forced to hire “work-out” firms to help delinquent sponsors that lack these basic skills.
The real estate industry is not in transition from one cycle to the next, it is undergoing a major transformation that requires new strategies, new business models, new business practices and new systems. There are many positive long-term trends and opportunities, however, getting there requires vision, leadership, capital and a knowledge- and customer-centric focus. Some of the areas of opportunity include, but are not limited to: energy; waste management; healthcare; data storage; government; R&D; trade; pharmaceuticals; corporate campuses; defense and security; high tech; green industries; FIRE; back office services; and infrastructure.
Commercial Real Estate Companies will have to become leaner and more efficient. It’s a well known fact that many large commercial brokerages have not only let go their lower performing sales people, but more importantly a lot of the staff that supported those people. The opportunities coming out of the recession will in part be related to the accumulated market knowledge and more and stronger relationships that the survivors gained in the downtime, which only full-time immersion in the business can provide. Bad times can be a great opportunity to sharpen skills, take courses, clear your desk and your mind, refine marketing tools and techniques, and allow time to plan new strategies and tactics, some longer range planning than we are usually able to do during the busy times.
Rankin Commercial Properties is a leaner, more efficient, boutique firm in Raleigh North Carolina. For more information on Rankin Commercial Properties visit www.rankincommercialproperties.com .
Rankin Commercial Properties (RCP) is a fully integrated Commercial Real Estate Company, “built-to-suit” customers and clients, with exceptional commercial real estate products and services. The mission of Rankin Commercial Properties is:
“To establish Rankin Commercial Properties as North Carolina’s Premier Commercial Real Estate Firm through systematic team work, proficiency, integrity, and a sincere desire to achieve success and improve the overall vitality of the communities and environments in which we do business.”
At Rankin Commercial Properties, we realize that in tough markets, all bets are off. What used to work when riding along “The Good Times” doesn’t necessarily work anymore.
We tell our commercial brokers to think of their career as their life boat. How will that life boat not sink with “The Good Times?”
· Identify your destination and chart a course from where you are to where you’re going
· Detect storm clouds in the far distance and forecast the on-route weather
· Plot course changes to avoid the storm
· Continuously adjust the power settings and headings to steer your boat.
Becoming nimble hinges on a Broker’s ability to:
- Quickly consider several inputs from the environment (markets, buyers, sellers, available financing, government action, etc.), and
- Make several simultaneous changes to the way you run your business
- Forecast and monitor the results of these changes on your entire business (sales pipeline, margins, income ratios, etc.) and repeat steps 1-2 with the necessary adjustments.
That is what having efficient systems gives Rankin Commercial Properties. And efficient systems are what make our brokers nimble.
Proficiency is literally Rankin Commercial Properties knack to create, maintain balance, and improve in all areas of our Broker’s careers.
It’s not just about our brokers business skills.
To be truly proficient, brokers must continuously focus on all these areas:
· Personal relationships (friends, family, spouse, children, etc.)
· Professional relationships (co-workers, employees, partners, etc.)
· Health and vitality (including spiritual)
· Personal finances
· Personal growth and development (including life skills like time management)
· Business skills (including networking, sales skills, leadership, etc.)
As the credit crunch squeezes the sleeper-hold on the commercial real estate market, thousands of brokers are struggling to stay in business… and thousands have already called it quits.
But what if you’re somewhere in between doing well and calling it quits? What if you have a couple of months of reserves and the prospects of closing a deal are not good before you run out of cash?
Should you take a side job to support yourself while commercial real estate makes a comeback?
After all, what do you have to lose? The answer is everything!
There is one immutable law when it comes to success in anything, including commercial real estate brokerage: you will only make it if you’re 100% committed to the outcome.
You’re not cut out for commercial real estate brokerage — or any other work that rewards people for their results – if your not willing to put in 100% effort.
Commercial real estate brokerage is not for the faint of heart… it’s not for quitters… it’s not for sheep. Anyone who has made it in this industry can tell you that successful brokers do not even consider failure as an option.
Successful commercial real estate brokers burn their ships when they get to the enemy’s shore. It’s success or nothing!
Desire is the first step to success. Commercial Real Estate Brokers must commit all their resources towards achieving their goals to be successful. At Rankin Commercial Properties, our brokers are constantly driven to increase their desire to do more.
A lack of integrity is usually the shortfall for most Commercial Real Estate Brokers. Integrity is a brokers ability to pull everything together and make it happen regardless of the circumstances.
All the talent, technical know-how, commercial broker training, and whatever else you can think of is not going to make you successful if you: Can’t connect with people and build trust. Are out of touch with reality. Never finish. Never embrace the negative. Are not oriented towards perpetual improvements. Can’t look beyond the obvious.
Unfortunately Commercial Real Estate Firms do not build integrity, desire, or character into their Brokerage Training Platforms. Rankin Commercial Properties does.
For more information on becoming a Successful Commercial Real Estate Broker, visit Michael Moshiri’s the Succesure.com. Michael Moshiri’s Commercial Real Estate Training platform is one of the most successful platforms in the industry, a sure thing to be Succesure.
In terms of positioning for recovery, the big issue today is people making hard decisions to cut muscle (the fat has long since been cut), and not knowing when/where that muscle will be necessary in the future. The emergence of commercial real estate boutiques from all of those who have gone out to start their own firms will be interesting. Some will be very creative/successful doing interesting things.
The industry is also optimistic in office leasing. There is always a need, and the number of businesses far outweigh retail operators and landlords. During the next two to three years, commercial real estate companies that are faring well, comparatively, are going to be able to take advantage of the drastic cuts in office rents, and increases in landlord incentives. Over the next 12 months, landlords are going to realize that anything resembling the $200/PSF era of the 2006/2007 leasing bubble will not be able to compete in the new economy. The supply and demand rules are in complete effect, and with supply at its current levels landlords are going to have to adjust. If they aren’t able to adjust (because of their break-even point) they are probably going to be in distress. Which then brings us back to bank foreclosures, and the need for everyone to face reality.
There will certainly be pain to endure on the part of landlords, as many markets have seen rental rates start to soften and concessions have increased significantly. As loans mature and landlords look to restructure or renew their debt, many will face difficulties with higher vacancy rates and stagnant (if not decreased) base rental rates on their rent rolls. It seems that those companies with financial strength and long term perspectives would be wise to negotiate (or renegotiate) long term leases right now for those corporate locations that are deemed to be stable in the coming years. The company with long range strategic planning and the ability to make decisions will create tremendous value in the coming years as a result of transactions with excellent economics right now. With that being said, for branches or offices with uncertain futures, it makes sense to negotiate short-term renewals while ensuring for maximum protection and flexibility in the lease document.
Contact:
Charles Rankin, President
Rankin Commercial Properties
800-737-9632
http://www.rankincommercialproperties.com
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The next phase of North Hills is almost a perfect model for mixed use development. In fact it is so perfect, even Harris Teeter agreed to bite the bullet and dive into the parking deck (another odd move for an anchor tenant). But let’s face it, if Harris Teeter where in line, the mixed use aspect would never work.
