Why we are buying in this uncertain market

In the past 5 months we’ve bought the following four properties:

• PT’s/Mexico Lindo
•Baptist  119 MOB
•Former Goody’s Galleria
•2,000 SF Downtown Homewood

What do they have in common?  They would have been impossible to purchase four years ago when the market was on fire. And had we been able to purchase them, we would have paid much more than what they ultimately cost today.

Commercial real estate can be a long cycle, 7-18yrs!

So the first thing you have to know is where you are in that cycle. There is a verse in the Old Testament, I Chronicles 12:32, “… the men of Issachar, who understood the times and knew what Israel should do…” These guys not only understood what was good for Israel, but they understood the times they lived in and how that effected what was ‘good’ for their country.

Context is the starting point.  Given that, are you better off buying assets today or three years ago? The answer is obvious, yet fear reigns with buyers, bankers and the media.

Warren Buffett says “Cash combined with courage in a crisis is priceless” and that is how we see ourselves, ready, willing, and able to buy very good real estate at very good prices.

If you hear of a good deal, please send it our way. If you are a broker and you bring us an “off-market” or pocket listing, you keep all of the fee.

One Data Point

Much has been made in the media about the coming collapse of Commercial Real Estate via problems with CMBS loans. Protective Life reported an excellent quarter today and I though it was interesting to see how their $1.1 Billion CMBS portfolio was performing.  To date, no real spike in problems.  Maybe they haven’t hit yet? Maybe PL is a good lender who hasn’t made many bad loans?  Maybe its overblown?  Time will tell….

Inflation and its effect on Real Estate

A couple months ago I posed the following question during an office meeting:  “what effects will a higher than normal inflation environment have on Real Estate Investments in general and on our portfolio specifically?”  We came up with a few answers that fell into 2 categories: postive and negative.   On the positive side, by owning existing buildings, you are at an advantage vs. to-be-built buildings as they will cost more to build given the effect of inflation on construction materials.  On the negative side, if you are holding properties with long-term, flat leases, the dollars that you put in your pocket after paying the mortgage will be worth less each year though no less in absolute dollars. 

And as if Mark Heschmeyer was in the room with us that day, he wrote this_article.

DW

How Far Will Housing Prices Fall?

Fortunately, those of us who live in Alabama have been spared the vicious and large declines in home prices. While there is still a ton of inventory and some slippage in values here, it pales in comparison to the mess in California, Nevada, Arizona and Florida. Yet we feel effects through the greater economy and the general mood of consumers.

How much longer do we have until prices nationally hit bottom? One very detailed report prepared by Wachovia Economics Group tries to come up with an answer. The Cliff Note’s answer is they project values will hit bottom toward the end or 2009 or early 2010 and home values will have lost 25% from their peaks in 2006.

Our Latest Acquisition

We’re pleased to announce our latest acquisition, a 7,200 SF retail strip center at the front door to the Wal-mart Supercenter in Troy, Alabama.

Typically we’ll look at 75-100 deals before we find one that fits our criteria and that we purchase. We thought it might be helpful to explain to brokers (or whoever is reading our blog) what we’re looking for in a deal and how we found that in this property.

The Troy strip has 4 tenants, Rent-A-Center (RAC), Advance America, Alltel and a billboard ground lease (all national or at least regional credit tenants). The center is only 3.5 years old and was built as a build-to-suit for RAC. Four years ago the southern part of Troy was just starting to grow and therefore rents were low. The original lease had RAC at $11.50 PSF and Advance America at $12.00. After the center was built, the developer signed Alltel at around $16.00 PSF.

After undertaking a market survey of existing centers, we found that the market rate in the area is now $16 to $18 PSF and that there were very few vacancies. We were therefore buying a center with below market rents in an excellent location and the price we paid for the building was less than we could build it for today.  Unfortunately we paid a premium for the in-place rents, but don’t mind doing this as our upside occurs at lease expirations. We prefer this scenario over buying a center with above or at market rents where you get to catch a bullet if your tenants blow out. Finally, we’ll only buy in a small town like Troy if there are clear signs that it is growing and is forecasted to continue to do so.

In Summary, we like:
* Below Market Rents
* Excellent Locations
* Below Replacement Costs
* Growing Markets

Get your Francs ready

I came across this interesting article in the WSJ about how the Swiss Government is ready to lift their prohibition on foreign ownership of real estate in Switzerland. The article deals with possible impact on property prices and chances for more development. It highlights a truism that the government can quickly change the value of real estate by changing the rules of the game. -DW

Wealthy Americans see a real estate buying opportunity

This article was posted on Marketwatch.com yesterday and I though it was both insightful and similar to how we view buying opportunities within the current commercial real estate market.  -DW