The pandemic is bringing on many challenges to every facet of our lives. The commercial real estate industry is quickly adapting to the circumstances of an on-going pandemic that will have lasting effects on the way people live, work and play. To navigate through these uncertain times, here are five recommendations for investors to keep in mind when buying a commercial building during a pandemic.
- Speak with lenders who know you vs. those who don’t.
Major commercial lenders are pulling back from the market due to the uncertainty. They are focused on servicing only their best clients and existing clients vs. taking on new ones. Some commercial lenders have stopped lending altogether. For investment properties, lenders are uncertain due to the renters initiatives which punish landlords and favor renters. There may be no way to collect on rents or evictions because of the moratoriums in place. Lenders are not interested in certain multi family properties for these reasons. For those reasons, it’s in your best interest to speak to lenders who know you and want to work with you. - Look for the hidden gems in the market.
Many sellers hire out of area brokers to market their properties and these properties are not listed properly or categorized correctly. They are not marketed broadly, widely and are not priced in line with local comps. Therefore these properties are the hidden gems and with a focused concentrated effort may be uncovered before the mass majority of the other buyers would find them. Our focused approach to the business allowed us to identify a building which could have had much higher competition. In a pandemic people are making moves to position themselves for recovery. Understanding these moves is essential in order to anticipate getting a quality building in a limited inventory marketplace. - Don’t believe everything you read.
Rents are presented in pro-forma vs. actual. Projections are based on yesterday’s economic picture vs. today’s uncertainties. Check the assumptions made when the property was listed and reevaluate the assumptions based upon today’s realities. Certain businesses will go away forever. Don’t focus just on one measure of performance or single key performance indicators such as cap rate. Look at the sustainability of the business underlying the investment and follow the money, find out of their sources of income are resilient in times of crisis. - Be loyal.
Find a broker who you are comfortable with and be loyal to them. Finding a quality building is a lengthy and complex process. Brokers will bring the best properties to their most loyal clients and uncover the hidden gems for those who they know are well qualified and able to purchase a building. Loyalty pays off even though it is a rare commodity in today’s market environment. If you are uncomfortable working with an individual, formally dismiss them from the agency relationship in writing and search for another broker who specializes in the product type you are seeking and then devote your focus and energies with them and it will return to you the best results in a changing market like the one we are in today. Even though it is a rare commodity in today’s market environment, your loyalty will pay off. - Avoid losing valuable time by doing your due diligence.
This last advice is especially critical for 1031 exchange buyers who are in the identification period. Do not get tied up with a seller who is trying to sell a leased investment without proper prequalification and lose valuable time. It is important to obtain the due diligence materials for the property as quickly as possible and as much information the seller is willing to share before making the offer and going under contract. A skilled broker will be able to determine if the opportunity is the right one for an investor’s objectives. A local seller with decision making authority would be preferred vs. a trust with many family members needing to decide about how to respond to offers which will take additional time and tie up a buyer while the 45 day time clock running. Ideally, controlling the sale of the relinquished property for timing purposes would be the most ideal. Finding out how leases are structured and also if tenants are paying due to local moratoriums is critical to success for investors and need to be verified ASAP. For owner users seeking to buy a building, finding sellers who are motivated due to the need to reduce debt and may have an upcoming financing event which is pending will help to get you the best pricing and terms. Doing due diligence is hard work. If you’re not able to commit to it, make sure you have a trusted broker who can do it for you.
Although the pandemic is causing everyone to feel like things are spiraling out of control, these recommendations are intended to help guide you towards the right decision on your commercial real estate investment. If you would like to work with a trusted partner who can help you navigate through these uncertain times, reach out to APEX. Our team is ready to help you analyze commercial properties and identify the best options to match your objectives. For more information, please contact our office at 310-377-3456.
