06/19/2009
To Be Truly Successful in this Market, Educate Yourself
It is no secret that the real estate market is extremely volatile right now. Property values are increasingly hard to pin down, borrowers are less and less able to make payments, and we are facing an abundance of other challenges on a daily basis. In this type of situation, it is more important than ever for brokers to learn how best to sell a deal and to take advice from the lenders they work with to ensure they have a successful transaction.
As a small, private money commercial lender, we have dealt with thousands of brokers over the years. We have seen all kinds of deals—from the craziest, most absurd schemes, to the most solid private money deals that any lender would love to fund. In this market, it is more important than ever that brokers understand what they are doing and communicate in a way that enhances their credibility rather than undermines it.
Many brokers do not know much about commercial real estate lending but profess a desire to learn about it and to do more commercial deals. We often see these people trying to convince us of the value of a piece of property, the manner of calculating cash flow — or any number of other underwriting criteria — when they really know little or nothing about them. A broker is far more effective — and ultimately successful — with lenders when he or she takes the time to learn some of the basics of commercial real estate and finance: DCR, NOI, Cap Rates, NNN, price per square foot, rent per square foot, owner user vs. income property, etc. If there is something he or she does not know, then that broker needs to acknowledge it and be willing to learn from the lender.
With the downfall of residential markets, many brokers are trying to survive by getting into areas with which they have historically been unfamiliar. In this type of circumstance, it is best to follow the guidance of the lenders and underwriters. A broker should find out what their guidelines are and understand the key factors that will enable a deal to close successfully. A broker can then find deals that fit the parameters set forth by the lender and abandon those that do not. One of our top Correspondents has been highly successful due to his ability to walk away from deals that do not meet our standards. The number of deals we see that have no prayer of getting funded–anywhere, at any price, by any lender– is astonishing, and yet salespeople will work for weeks or months on them in hope of a payday that is destined not to come.
To truly be successful in the world of commercial lending, it is fundamental for all brokers learn what does and does not meet the criteria the lenders they are working with have set forth. It is essential to ruthlessly cut out the deals that have no chance of closing and concentrate on the ones that are as close as possible to the guidelines. Doing so greatly increases the potential to make more money, have more fun, and keep borrowers happy!
12/22/2008
Subleasing Gives Tenants Bargaining Power
By now it’s no secret that the slowing economy has created a host of challenges that, in one way or another, have affected everyone. But now, it’s starting to affect commercial property owners in another way—subleasing.
As companies have downsized, so has the amount of space they need to operate. Yet, these companies are locked into rental agreements with the property owners, so what are they to do? Many have simply let their leases expire and then sought out smaller quarters, while others have opted to sublease their unused space—often for a much cheaper price. This has resulted in a spike in the amount of vacant office space available throughout the country.
What effect does this have, then, on office markets and commercial real estate as a whole? For one, it means there’s a lot more competition out there to get space rented out. Property owners are forced to compete with the tenants who are subleasing their space—which can mean offering built-out space as opposed to putting the responsibility of building out a space on the tenant. After all, the sublease properties often come with furniture and even phone and internet systems for a fraction of the cost.
Landlords don’t really need to worry about existing tenants, as they are bound to continue to pay rent until the end of their lease. The real concern involves what happens to those spaces after the lease runs out. The prospective tenant really has the advantage and bargaining power in a market where subleases are so abundant. To keep spaces filled, landlords will need to make more concessions than in recent years and offer exceptional customer service to really make it worth the tenant’s while, and dime.
Keeping these properties occupied is especially important to the property owner, as the revenues generated from the rentals often goes right into paying the mortgage on the property. If spaces become vacant, not only might there not be enough income to cover the mortgage payment, but it will be difficult to refinance the property later. If a lender sees that the property is not self-sufficient, they may be reluctant to make a deal—especially if the property owner has credit issues or any other financial challenges on his or her record.
Given this trend of accumulating office inventory, property owners really need to change their perspective on leasing. Whereas a few years ago, the landlord had the upper hand and could focus on making a profit and be selective with his or her tenants, the tables now have definitely turned. It is now up to the landlord to give a little more to attract tenants and keep their spaces occupied. It’s less about making a huge profit and more about making wise decisions to stay afloat during this stressful economic period.