Getting started with Commercial real estate investing

[Abhishek Sahni]

Hi,

I am looking for advice on getting started with Commercial Real Estate Investing. I am inclined towards investing in Retails spaces.

I am new to this space and would love to get pointers on how to get started, how to find RE agents, any gotchas or considerations for new investors. Please share reading material , getting started guides or books that might help.

I am currently based out of the San Francisco Bay area and I am looking to invest within a 2-3 hour driving range.

Regards

[Chris Mason]

A super basic step one would be to set up a "newly listed within the last week" custom search on Crexi, Loopnet, whatever. You're going to be scouring the "stale" listings anyways, but what you should be focused on are things that have not already been passed on by everyone else. To the extent that a price reduction may make a "stale" listing appealing, worry not, you will get those notification emails on auto pilot anyways.

Start doing the compare and contrast, maybe make a spreadsheet to evaluate opportunities, play a game of "spot the patterns." One thing to look at in detail is the advertised cap rate and advertised NOI. A lot of times they will prominently display an appealing cap rate, and then you look at the offer memorandum and it's clear that they are advertising a "projected" cap rate based on "projected" rents. What you generally care about, however, is the actual & current revenue.

Once you start to focus in on a property that looks like it might be a good fit, the next conversation is with a commercial mortgage broker (I would be one example, among many) to go over what the financing of that property might look like. Everything is property specific in commercial, so you need at least one example property identified to have the conversation. 

If you see a retail shopping center with one or more vacancies, hop on google/yelp/etc to find out what business used to be there (old yelp reviews, for example). In cases of environmental contamination, that can limit what could be there in the future, for example a former car repair shop (that you found the stale yelp reviews for) is likely sufficiently contaminated that it can only ever be something like that, you won't be able to put a daycare center or restaurant in there. 

When commercial lenders are evaluating a first-time CRE investor, they like when the sponsor is within driving distance of their first investment, so pat-on-the-back for staying local on deal one, it makes it a more prudent transaction for all involved.

[Evan Polaski]

@Abhishek Sahni, at the surface level, real estate investing is real estate investing.  When you dive into it, there are a lot of nuances.

First, there are subsections of retail: single tenant NNN, small unanchored neighborhood, grocery anchored, shadow anchored, power centers, regional malls, lifestyle centers, etc.

Then you get into tenant mix and market specifics. 

On the buying side, there are not really "re agents" per se in most commercial deals. There are listing agents, but buyers are almost always self represented with legal counsel helping negotiate LOI and PSA.

Loopnet and Crexi are the most common platforms for listings, but many brokers don't list properties there.  So, you will be going to CBRE, Marcus and Millichap, Cushman, Colliers, and likely some local brokerage websites to find various listings.  Most brokerages will have a retail investment sales team and likely a retail leasing team.  You will want to talk to both.  Sales, clearly for actual investment opportunities.  Leasing to understand market rents, pros and cons of specific assets, any insider knowledge on tenant interest, etc.

Then you get into the day to day operations.  Leasing, property management, tenant billing, lease administration, finance, capex budgeting, etc.  

Your leasing broker will be able to help with this, but things like which side of the street you are in can make a big difference.  Coffee shops like the "to work" side.  Grocers like the "coming home side".  Ingress/egress is considered, other tenant mix to draw foot traffic, exclusive use clauses, pylon signage, visibility, parking ratios, etc all matter. 

The biggest thing though is retail is not entirely price sensitive. Most retail tenants will happily pay more in rent if they can get more sales.  

I worked for a retail operator for many years.  The partners spent their careers in retail real estate and made a ton of money.  And like all real estate, the more stable the asset, the lower your yields will be.  The more risk you are willing to take, the higher the potential return, but also the more chance it will all crash down.

[Loren Howe]

Quote from @Evan Polaski:

@Abhishek Sahni, at the surface level, real estate investing is real estate investing.  When you dive into it, there are a lot of nuances.

First, there are subsections of retail: single tenant NNN, small unanchored neighborhood, grocery anchored, shadow anchored, power centers, regional malls, lifestyle centers, etc.

Then you get into tenant mix and market specifics. 

On the buying side, there are not really "re agents" per se in most commercial deals. There are listing agents, but buyers are almost always self represented with legal counsel helping negotiate LOI and PSA.

Loopnet and Crexi are the most common platforms for listings, but many brokers don't list properties there.  So, you will be going to CBRE, Marcus and Millichap, Cushman, Colliers, and likely some local brokerage websites to find various listings.  Most brokerages will have a retail investment sales team and likely a retail leasing team.  You will want to talk to both.  Sales, clearly for actual investment opportunities.  Leasing to understand market rents, pros and cons of specific assets, any insider knowledge on tenant interest, etc.

Then you get into the day to day operations.  Leasing, property management, tenant billing, lease administration, finance, capex budgeting, etc.  

Your leasing broker will be able to help with this, but things like which side of the street you are in can make a big difference.  Coffee shops like the "to work" side.  Grocers like the "coming home side".  Ingress/egress is considered, other tenant mix to draw foot traffic, exclusive use clauses, pylon signage, visibility, parking ratios, etc all matter. 

The biggest thing though is retail is not entirely price sensitive. Most retail tenants will happily pay more in rent if they can get more sales.  

I worked for a retail operator for many years.  The partners spent their careers in retail real estate and made a ton of money.  And like all real estate, the more stable the asset, the lower your yields will be.  The more risk you are willing to take, the higher the potential return, but also the more chance it will all crash down.

I’m curious when you say there are rarely buyer’s agents in commercial real estate, but buyers represent themselves.  How does the buyer insure the seller’s agent doesn’t pocket a double commission as they normally manage to do when you try this in residential real estate?

[Evan Polaski]

@Loren Howe, just like residential, the commission is agreed upon between the seller and listing broker. So, as a buyer, it really doesn't matter who is getting the commission.  

And when you are a seller and you, again, have a prearranged commission agreement negotiated in the listing agreement.  Whether it is flat fee or percentage, the seller is going in know what they will be paying to sell the asset and factoring that into their asking price. 

But the bigger take is, whether the agreed upon commission is $1,000 or 6% or $250,000 for a $50,000,000 listing, as the seller that amount is arranged ahead of time, and therefore, from my perspective, has no bearing on which "pocket" it goes into.

[Chris Mason]

Quote from @Loren Howe:

Quote from @Evan Polaski:

@Abhishek Sahni, at the surface level, real estate investing is real estate investing.  When you dive into it, there are a lot of nuances.

First, there are subsections of retail: single tenant NNN, small unanchored neighborhood, grocery anchored, shadow anchored, power centers, regional malls, lifestyle centers, etc.

Then you get into tenant mix and market specifics. 

On the buying side, there are not really "re agents" per se in most commercial deals. There are listing agents, but buyers are almost always self represented with legal counsel helping negotiate LOI and PSA.

Loopnet and Crexi are the most common platforms for listings, but many brokers don't list properties there.  So, you will be going to CBRE, Marcus and Millichap, Cushman, Colliers, and likely some local brokerage websites to find various listings.  Most brokerages will have a retail investment sales team and likely a retail leasing team.  You will want to talk to both.  Sales, clearly for actual investment opportunities.  Leasing to understand market rents, pros and cons of specific assets, any insider knowledge on tenant interest, etc.

Then you get into the day to day operations.  Leasing, property management, tenant billing, lease administration, finance, capex budgeting, etc.  

Your leasing broker will be able to help with this, but things like which side of the street you are in can make a big difference.  Coffee shops like the "to work" side.  Grocers like the "coming home side".  Ingress/egress is considered, other tenant mix to draw foot traffic, exclusive use clauses, pylon signage, visibility, parking ratios, etc all matter. 

The biggest thing though is retail is not entirely price sensitive. Most retail tenants will happily pay more in rent if they can get more sales.  

I worked for a retail operator for many years.  The partners spent their careers in retail real estate and made a ton of money.  And like all real estate, the more stable the asset, the lower your yields will be.  The more risk you are willing to take, the higher the potential return, but also the more chance it will all crash down.

I’m curious when you say there are rarely buyer’s agents in commercial real estate, but buyers represent themselves.  How does the buyer insure the seller’s agent doesn’t pocket a double commission as they normally manage to do when you try this in residential real estate?

 They do double end it, heh. 

Just like residential, if you don't want the real estate agents getting paid out on "your" deal, then it needs to be YOUR deal. As in, you sourced the seller directly, without the involvement of any real estate agents. 

[Abhishek Sahni]

Quote from @Chris Mason:

A super basic step one would be to set up a "newly listed within the last week" custom search on Crexi, Loopnet, whatever. You're going to be scouring the "stale" listings anyways, but what you should be focused on are things that have not already been passed on by everyone else. To the extent that a price reduction may make a "stale" listing appealing, worry not, you will get those notification emails on auto pilot anyways.

Start doing the compare and contrast, maybe make a spreadsheet to evaluate opportunities, play a game of "spot the patterns." One thing to look at in detail is the advertised cap rate and advertised NOI. A lot of times they will prominently display an appealing cap rate, and then you look at the offer memorandum and it's clear that they are advertising a "projected" cap rate based on "projected" rents. What you generally care about, however, is the actual & current revenue.

Once you start to focus in on a property that looks like it might be a good fit, the next conversation is with a commercial mortgage broker (I would be one example, among many) to go over what the financing of that property might look like. Everything is property specific in commercial, so you need at least one example property identified to have the conversation. 

If you see a retail shopping center with one or more vacancies, hop on google/yelp/etc to find out what business used to be there (old yelp reviews, for example). In cases of environmental contamination, that can limit what could be there in the future, for example a former car repair shop (that you found the stale yelp reviews for) is likely sufficiently contaminated that it can only ever be something like that, you won't be able to put a daycare center or restaurant in there. 

When commercial lenders are evaluating a first-time CRE investor, they like when the sponsor is within driving distance of their first investment, so pat-on-the-back for staying local on deal one, it makes it a more prudent transaction for all involved.

Thank you @Chris Mason, this is super helpful.

A question around financing. Is commercial real estate financing similar to residential real estate investing? Are there any guidelines on how much I should put down

[Abhishek Sahni]

Quote from @Evan Polaski:

@Abhishek Sahni, at the surface level, real estate investing is real estate investing.  When you dive into it, there are a lot of nuances.

First, there are subsections of retail: single tenant NNN, small unanchored neighborhood, grocery anchored, shadow anchored, power centers, regional malls, lifestyle centers, etc.

Then you get into tenant mix and market specifics. 

On the buying side, there are not really "re agents" per se in most commercial deals. There are listing agents, but buyers are almost always self represented with legal counsel helping negotiate LOI and PSA.

Loopnet and Crexi are the most common platforms for listings, but many brokers don't list properties there.  So, you will be going to CBRE, Marcus and Millichap, Cushman, Colliers, and likely some local brokerage websites to find various listings.  Most brokerages will have a retail investment sales team and likely a retail leasing team.  You will want to talk to both.  Sales, clearly for actual investment opportunities.  Leasing to understand market rents, pros and cons of specific assets, any insider knowledge on tenant interest, etc.

Then you get into the day to day operations.  Leasing, property management, tenant billing, lease administration, finance, capex budgeting, etc.  

Your leasing broker will be able to help with this, but things like which side of the street you are in can make a big difference.  Coffee shops like the "to work" side.  Grocers like the "coming home side".  Ingress/egress is considered, other tenant mix to draw foot traffic, exclusive use clauses, pylon signage, visibility, parking ratios, etc all matter. 

The biggest thing though is retail is not entirely price sensitive. Most retail tenants will happily pay more in rent if they can get more sales.  

I worked for a retail operator for many years.  The partners spent their careers in retail real estate and made a ton of money.  And like all real estate, the more stable the asset, the lower your yields will be.  The more risk you are willing to take, the higher the potential return, but also the more chance it will all crash down.

 @Evan Polaski thank you for sharing these insights, super helpful.

[Evan Polaski]

@Abhishek Sahni, regarding commercial financing, it is certainly different than residential. Typically, you will see loan products that are marketed up to 75%, MAYBE 80% LTV. But more often then not, you are going to limited by your DSCR. In retail, while I have minimal direct experience lately, I was talking with some lenders about a month or two ago, as I was looking at buying a strip center myself. They noted, while they can technically go to 75%, in recent deals, they are closer to 65% due to DSCR covenants.

And maybe this is expected, but I would anticipate having a personal guarantee, fully-recourse loan for retail.  

[Jake Andronico]

@Abhishek Sahni

Welcome to BP! I grew up just north of San Francisco and moved to Reno, NV to live and invest. 

I know some great commercial agents up here that I'd be happy to recommend, but I'm curious, what draws you to the Retail/Commercial space? 

[Graham Rider]

Quote from @Evan Polaski:

@Abhishek Sahni, regarding commercial financing, it is certainly different than residential. Typically, you will see loan products that are marketed up to 75%, MAYBE 80% LTV. But more often then not, you are going to limited by your DSCR. In retail, while I have minimal direct experience lately, I was talking with some lenders about a month or two ago, as I was looking at buying a strip center myself. They noted, while they can technically go to 75%, in recent deals, they are closer to 65% due to DSCR covenants.

And maybe this is expected, but I would anticipate having a personal guarantee, fully-recourse loan for retail.  

Agree with you. And yeah the personal guarantee seems to be a given. The only exception 'might' be REITs, but I could be wrong.

[Graham Rider]

Quote from @Abhishek Sahni:

Hi,

I am looking for advice on getting started with Commercial Real Estate Investing. I am inclined towards investing in Retails spaces.

I am new to this space and would love to get pointers on how to get started, how to find RE agents, any gotchas or considerations for new investors. Please share reading material , getting started guides or books that might help.

I am currently based out of the San Francisco Bay area and I am looking to invest within a 2-3 hour driving range.

Regards

Your main goal is to understand the market (demographics, traffic volumes et cetra) and understand what makes a good deal (look at what has actually sold and at what price combined with building out a pro formas to understand it). 

 Call the realtors who are selling the assets you want to buy and build those relationships to understand what they are seeing and get on their radar. Then follow up every couple of months. 

Practice building out a valuation model if you haven't. Then do it again. One resource among many is Joshua Kahr. He has a great YouTube channel with a lot of resources for how to do that. 

[Evan Polaski]

@Graham Rider, ultimately there needs to be a balance sheet behind the loan.  So, yes, there are REITs and even private LPs that do not have personal guarantees on their loans, but when you are starting out: on a commercial loan you will very likely have a personal guarantee on the loan for all performance of the loan.  Starting out of college, I worked for what was then a privately held retail owner/operator.  

It took the company about 15 yrs of being around and building their portfolio before the two principals of the company were able to remove themselves from all personal guarantees and get to purely non-recourse debt with bad boy carveouts.

When looking at MF loans, you can often find non-recourse debt on acquisition financing as low as about $1mm loan balance, even with no real experience (granted, you will need an experienced management company lined up and personal financial statements showing a net worth equal to loan balance, but you are not putting your personal financials at risk like many commercial loans).