Increasing Commercial Property Values

Published on February 22, 2012 in Uncategorized. 4 Comments

Everyone likes to see real estate go up in value, but obviously, the Global Financial Crisis has decimated commercial property values along with the much more publicized residential market. Restoring commercial values is not something that we can rely on inflation to do by itself, and even with a recovering economy, the headwinds are such that tenant demand will come back only ploddingly. Commercial property provides the medium for the conduct of commerce, so it is both a reflection of and a necessary tool for economic growth. And yes, that applies even to internet commerce, as goods have to be manufactured and (usually) warehoused somewhere.

However, not many in the industry are patient enough to simply wait around for demand for space to reduce vacancy rates enough to forge broad-based rental rate increases. Nor should they be. And while we’re waiting, interest rates are certain to rise, which will put upward pressure on cap rates by the time we get there. Further, over longer periods of time capital requirements and obsolescence may be found lurking at the door, waiting for the unsuspecting property owner to get lazy and forget to fasten that lock just one time too many, so they can jump in and steal profitability.

With that backdrop, the only thing that makes sense to do is to take a much more proactive approach to adding value back to commercial real estate right now. It is an intensive process, insofar as the details to consider seem like an enormous pile of stuff. But taken bit-by-bit, attending to those details will yield the desired result: A property with a competitive advantage in the marketplace.
But we mustn’t misunderstand; gaining a competitive advantage for your property is not the end, it is the means to the end of higher property value. Differentiation of the commodity that is commercial space provides the magnet for demand, and we then must take proper advantage of those opportunities. After setting our properties in the proper position, where the rubber really hits the road is in some of the following areas:

• Leasing and renewal efforts;
• Tenant balance and rollover decisions;
• Income statement management;
• Capitalization and financing;
• Timing of disposition.

In short, adding value involves both proper positioning and aggressive asset management in order to get the ball across the goal line. These are the areas where Triumph has excelled over the years, and we look forward to doing our part to restore commercial property values across the market in the years to come.

The Way Forward in Commercial Real Estate

Published on August 19, 2010 in Uncategorized. 6 Comments

By: Paul Ruff – President, Triumph Real Estate Corporation

After two years of economic and market uncertainty, the view of the way forward in the world of commercial investment real estate is starting to become clearer.  That is, at least in terms of how we may best place investment capital in order to create the potential for above-average risk-adjusted returns, if not necessarily the global economic picture.  Throughout 2008 and 2009, it was clear that there would be no advantageous investment opportunities to pursue, and so we used that time top conduct extensive R&D; the one thing we knew for sure was that the business would be very different over the next 10 years than it has been for the past 10.   Now that the fog is lifting a bit, some strategies are beginning to emerge that allow us to define where the compass may be pointing.

Although there is still significant risk to the market, both in terms of global economic volatility as well as the potential for harmful forms of federal government intervention in the economy, tax code and capital markets, we believe several of the most critical factors in the resolution of the crisis have been or are currently being resolved by the public/private markets.  Thus far in 2010, capital market players, using flexibility provided by tweaks to regulations and policy by the FDIC and the FED, and in the face of abundant equity looking to acquire assets, have been able to maneuver through the minefield of upside-down loans well enough to prevent the once-anticipated tsunami of troubled properties from flooding the market.  From that, it appears clear that absent a global economic meltdown, we are not looking at a repeat of the RTC days.  But we are seeing assets become available at a cost-basis that is reflective of the risks of the day.  It may be touch and go for a while until we see what the government response will be to the markets and in their efforts to spur job growth, and clearly, a path must be established to mitigate the long-term risk from the federal budget deficits and national debt, but a great deal of liquidity has returned to the market and begun to loosen things up.   That being said, the commercial mortgage maturity issue is not going away anytime soon.

In short, according to Elizabeth Warren, Chairperson of the TARP Congressional Oversight Panel, by the end of 2010 nearly half of all outstanding commercial real estate mortgages will be under-water, meaning the collateral assets will be worth less than the outstanding debt against them.  Further, she adds that “we now have 2,988 banks, mostly mid-sized, that have dangerous concentrations of CRE lending.”  Finally, the bottom line is that $1.4 Trillion in commercial real estate mortgages will become due between 2010 and 2014, and the lenders who currently hold that debt are not equipped to handle that kind of spike in default volume, so the market will likely soon approach a “tipping point.”  The key is that while restructuring (work-outs with existing borrowers) is dominating bank policy for now due to REMIC rate changes and the FDIC guidance issued on October 30, 2009, according to Robert O’Brien of Deloitte in New York City, the infrastructure of the industry is limited and may ultimately be overwhelmed.

The fear in Washington DC is that, if the system is indeed overwhelmed, waves of defaults could cripple banks again and re-freeze lending to small businesses that could otherwise create jobs, precipitating a double-dip to the recession.  And according to new projections from Foresight Analytics, the volume of nonperforming commercial, construction and land loans is expected to reach $165 billion in 2010, up from $135.7 billion in 2009.

To be sure, there are nuances to the lending and banking industries relative to the regulations now in place or may be coming soon.  But as always, successful real estate investing comes down to supply and demand; of capital, of assets, and of tenants to occupy them.   Triumph believes the forgoing facts may indeed define a clear path in the world of commercial real estate investing, and we have developed a solid business plan to capitalize on these current market realities.  Please log in to our next posting for more on that…