There’s no doubt that the commercial real estate market has seen better days. Along with the housing market, commercial real estate is going through a reset of values where even the top of the line Class A office buildings are selling at 2005-2006 levels – some 30%-40% off their highs. And with financing options continuing to be anemic and an economy that’s uncertain at best, those valuations are not expected to climb any time soon.
However, Richmond S. McCoy, president and CEO of UrbanAmerica Principals III (No. 3 on the BE Private Equity List with $1.1 billion in capital under management) says there are still money-making opportunities in this sector. UrbanAmerica invests in urban real estate and has a portfolio that consists of a resort hotel in Florida, several commercial office buildings, and a large industrial building in New Jersey. Here are some of the tips he offers:
Plan your exit first. “People always want to run in – ‘Oh, I can buy this deal for this.’ That’s meaningless,” McCoy states. “In every investment plan that we do, we do a tremendous amount of due diligence and review of it. I have at least two strategies of how I’m going to exit this deal to get my investors their money back and get them a market return. “
Be prepared to use a little debt. With banks continuing to hold their purse strings, credit for real estate deals is extremely hard to get. “You may have to go into it with all cash, or maybe a maximum of 20% or 40% [of debt] on the deal,” he says.
Don’t expect a quick return on your investment. You have to be prepared for a turnaround period of three to five years. At that time, McCoy says, there’s a better chance that the assets will stabilize.
Know the hot spots. McCoy says Midwest cities didn’t get hit with a tremendous uptake in valuations and, as a result, are steady. “Minneapolis is an interesting environment where you’ve had good values,” McCoy asserts. “They’re not really sexy places, but places where people could invest.” He also sees opportunities in areas in Texas and Washington, D.C.
Recognize the value in smaller properties. McCoy says now is a great time for buying some of the smaller assets of strip shopping centers within the $2 million-$5 million range. “You can also buy long-term net leases for properties that are leased to banks, drug stores, and service centers in these markets.”
Be aware of the environmental issues. Look at who else is investing in the area; what’s the crime level in the market, the political environment? Ensure that there are long-term economic drivers to keep the population and traffic in that market.