All Forum Posts by: Chris Mason

"Inflation expectations" is a purely rational and logical way to look at it, but let's consider that bond market buyers/sellers aren't 100% comprised of Vulcans, and that there are highly emotional and irrational individuals among them, as well. We actually CAN'T explain what we are seeing if we are operating on the "purely rational actor" hypothesis (as you implicitly observe), we MUST include highly irrational and emotional individuals to explain what we are seeing.

- Investor uncertainty. If I, as a bond investor, am uncertain about what the future will bring, I might just sit on the sidelines and not invest. In order to entice me to invest in spite of my hesitation, a better ROI must be offered to me. There's nothing that prompts inaction like uncertainty (in fact, hinting at demanding a stable 11 cap, one might argue, is a form of effective inaction, since we know how hard that is to find).

- Substitute goods. If I'm mentally and emotionally all-in on the incoming administration and think the economy is going to be amazing, best economy with the biggest hands ever, etc etc, then I can do better than gov't bonds, given the emotions I am experiencing. Maybe I'm no longer a low risk bond investor, maybe I'm parking my money in $VOO instead, CRE REITs, or perhaps higher risk higher return bonds.

Again, OP, if we're operating on the assumption that everything is about rationality and logic, then there is no explanation for what we are observing. The only way to explain it is to throw in emotion and irrationality. NOW it makes sense. 

You wrote commercial, but then talked about offices specifically. 

If you want some very broad strokes that are asset class specific, but not location specific.

Highest risk and return to lowest risk and return, offices is at the top. Extensively commented on, no need for me to add to it.

Warehouses is somewhere towards the bottom. If millenial homeowners can't even change their home's air filters, or snake a toilet, or change the oil in their car, that's guaranteed future business for HVAC companies, plumbers, mechanics, and those places all need a place to conduct business in.

The commercial mortgage pricing software I use has somewhere around 50 different asset classes in it. To say "CRE is X," but then only discuss offices, is overlooking a lot of stuff. Heck, even within offices, the small 1-tenant office buildings suitable for a dental practice or law practice, those are in a very different world. Apartment buildings, assisted living facilities, self storage, restaurants...

To be fair I'm not super up to date on the "uber of offices" concept that you are hinting at, except inasmuch as to say "um, didn't that idea kind of die off with COVID?"

My understanding is that the ballpark standard of "unless it would be outrageously tough" (something along those lines) is what applies if you're doing a rehab, seeking new permits, doing structural changes anyways, and things of that nature.

For existing pre-ADA structures, my understanding is that the standard is more along the lines of "if it can be easily/cheaply done, you have to do it." So the places we all encounter that don't even have a wheelchair ramp at the entrance (at the appropriate incline, etc), even though it would be relatively easy to put in, aren't compliant (envision a storefront set back 10 feet from the sidewalk). But the places we all encounter that could only have a wheelchair ramp put in that intrudes into the public sidewalk (which neither the landlord nor the tenant owns, and now the sidewalk may not be sufficiently wide or accessible for a wheelchair), or that would require tearing down the storefront's façade (envision a storefront right up against the sidewalk), are grandfathered in. 

Not an ADA expert, certainly not a lawyer.

The companies that market themselves as "garage door companies" (residential) also almost always do commercial stuff as well, such as what you are looking at. It's a fairly unregulated space (charging grandma $750 to puts around for 3 hours, after moving the old box from the horizontal sensor, which was the only problem with the garage door to begin with), so some combination of carefully reading reviews (you have to actually read them to make sure it's not 200 fake reviews), and maybe not giving them the full contract all at once, is in order. 

If you're more of a 'personal referral' person than a 'do research online' person, and this is local to you in Manhattan, KS, hit up one or two of the trades people in the "little apple all stars" BNI group. Click link, click "show members," pick whom you might think would have cause to need a good garage or overhead door person. https://strongchapters.com/ks-northeast-bni-little-apple-all...

GL.

 I'd say the logical paradigm in the question is a bit off.

CRE includes everything from airports to golf courses to hospitals to campgrounds.

So saying "residential versus commercial" is like saying "bacon versus plant life."

Are we comparing bacon to Christmas trees, to apples, to venus fly traps, to tomatoes, to grapes, to kelp? What does the question even mean? Bacon is more yummy than a Christmas tree, but I bet I'm going to have a whole lot less regulation growing Christmas trees... however, before we even get to that, it's necessary to know that the inquiry is even about bacon v Christmas trees, rather than Bacon v grapes. 

 In Godless California the listing agents on churches are always certain to point out the flexible potential uses of the property. Office, event space, wedding venue, warehouse, etc. They usually sell for a really attractive price because investment property financing is (obviously) difficult, somewhat limiting the buyer pool to owner-operator small business owners (who in turn are typically great clients, as well). 

Indoor shopping malls as they existed in the 1990s are dying, but retail is not. It's shifting to a model of a big anchor, a Target or a Costco, and lots of little businesses in that same shopping center. 

Anyways, I think @Caleb Brown hit the nail on the head. If the trade value of an old shopping mall is less than the build cost of a new storage space or warehouse, then it doesn't make sense to build a new storage space or warehouse, just buy an old shopping center. I do see lots of self storage and warehouses going up, so my default assumption would be that the old shopping malls do NOT trade for less than build cost, but it's possible that the marketplace is not perfectly efficient. 

There would potentially be some weight issues with the 2nd+ floors of some shopping malls, depending on what the potential tenant wants to store in the upstairs unit. 

The Hilltop Mall (standard shopping mall, Macys, JC Penny, escalators, if you were alive in the 90s you know),  in Richmond CA was purchased in 2021, but the buyers aren't doing any of our brilliant peanut gallery suggestions. They are tearing it down to build a logistics facility. Given it's location not far from the ports of Richmond and Oakland, and that the Chevron oil refinery is nearby as well, some of that is likely be driving the highest and best use assessment.

I can run some numbers and share some options on the financing side if you like. No social or credit pull needed upfront. 

If you have a solid tenant lined up, like say Bigger Pockets HQ (yes, I put 2 and 2 together there, I'm sure you have too :), or some other business you  or someone you know personally runs, I think it's a no-brainer. You are buying at, or close to, the bottom of the market cycle for offices. 

The hypothetical six months to find tenants might actually be 3 years, we don't know (if it was so easy to place tenants in that building, why haven't the current owners done exactly that?!). But if you've got one or more day zero tenants to occupy all or part of the space, that could blunt the unknown in a big way. Having either tenants or a business lined up, that needs office space anyways, is the "office hack" (see what I did there? Given that this website invented the term "house hack," it's only appropriate that BP as a business pull off an "office hack" - and btw, yes, the financing is better for owner operated offices, as well) that blunts much of the risk.

We all know folks that purchased lots of SFRs in the aftermath of 2008, I also know some folks that purchased offices in the aftermath of 2008. There were 100% some rough years early on, to be certain, simply because it's hard to perfectly time the catching of a falling knife, but those that weathered the storm are sitting quite pretty today. The example that comes to mind are often are of folks that operated a dental practice, an accounting office, a bankruptcy lawyer and her staff that did quite well in the 2008 aftermath, and so on, during those first few years, taking up a portion of or all of the space.

Once you realize what a dumpster fire it is finding good financing for offices, if you need it, I'll be available. 

Quote from @Isadore Nelson:

Quote from @Chris Mason:

You are wasting your time. This property will require about 45% down to hit the 1.25 DSCR that is the median requirement for a commercial real estate loan.

If you want to be at that price point with that much for the downstroke, you need to be looking at higher risk properties with a higher cap rate. Or you need to adjust the price point down.

"45% down to hit the 1.25 DSCR"

What does this mean? Can one not get a DSCR loan with 20% down?

 If the property cashflows with 20% or (if you want good terms) 25% down, then yes it's doable. Key word there is "if." 

In the residential 1-4 unit space, efforts are earnestly underway to recreate 2008, for example by calling it a "DSCR loan" but not having any reasonable DSCR requirement. But OP is asking about a 6-unit which, to be fair, there are some residential "DSCR loans" that will dabble in the 5-10 unit space, so maybe it's out there, I can't speak to that.