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Few commercial buildings are being sold in the Portland-metro market. While many commercial real estate brokers are being questioned about great opportunities, it is difficult to find these opportunities and, more specifically, a purchaser willing to execute a transaction. With that said, many real estate professionals believe now is the time for owners-users/investors to take advantage of historic opportunities.

The overall market is stabilizing. Local businesses that operate in the national market are reporting that business is picking up in other areas. Markets like Phoenix and Denver are reporting leasing activity not seen in several years. Portland-area brokers in different disciplines and submarkets speak of tightening. There will be significant pressure by the federal government to improve the business climate before the November election. Local banks are discounting values of residential subdivisions, and selling to optimistic home developers planning to commence construction.

From a real estate perspective, current building owners have suffered through this business climate for two years. While they would prefer to retain their buildings, the financial health of their businesses and their personal financial security are more important. Many have equity tied up in their properties, which they would like to access.

From an investor’s perspective, consider:

• No new product is being built on a speculative basis.
• Many suspect that inflation is coming, due to the current federal monetary policy.
• Capitalization returns are at least 150 to 300 points greater than three years ago.

So, is financing available? Today, cash is king. Sellers need cash, and buyers with cash are in stronger positions. Pressure is being applied to banks to lend to small businesses, and insurance companies have cash they would like to lend in real estate.

Other alternatives exist. Small Business Administration loans are available to owners/investors who will be occupying 51 percent of the building. Interestingly, because of the structure of these deals, they seem to be less impacted by appraisals. Additionally, credit unions and private equity funds are lending money. Seller leasebacks, whether a master lease or partial leaseback, can improve underwriting prospects. These leasebacks can be secured by placing a second mortgage on the property as a guarantee.

It is important that buyers, much like home buyers, line up their source of funding in advance and understand the underwriting requirements. The ability to make a clean offer showing the seller a clear solution is very helpful. Environmental companies, contractors and engineering businesses are slow. This enables the buyer to shorten the contingency period. While many sellers may not be ecstatic about the proposed purchase prices, if they are assured that their economic situation will be improved, they are more willing to make necessary concessions needed for an agreement.

So, how do investors structure a deal?

• Make sure the prospective investment rental rates are realistic. There can be no inflated value based upon rental rates of even two years ago. Also, make conservative allowances for lease-up expenses.
• Buy below replacement cost. Buyers must know both current land and construction costs.
• Think positive leverage. The capitalized rate of return should be above the mortgage interest rate.
• Think positive cash flow. A portion of many investments require leasing up vacancy. During the lease-up period, be confident of positive cash flow.
• Qualify the lender. Understand the lender’s underwriting requirements and make sure the lender’s representative has the authority, or at lease can speak authoritatively, about the lender’s requirements.
• When structuring a pro forma, recognize that when a property has 25 percent to 30 percent vacancy, its investment value may not benefit the seller. Transactions have been closed in the last year where the investor made an allowance for one-half to two-thirds of the vacancy with an additional price reduction or holdback for specific lease-up expenses during the first 18 to 24 months. These expenses should include, but are not limited to, lost income, real estate fees, rental concessions, tenant improvements, deferred maintenance, management, accounting and legal fees. While these holdback expenses should be determined prudently, the impact of this structure does not lower the price as much as strict capitalizations of vacancy, and may allow an investor to pursue an opportunity, without undue risk.

Investors shouldn’t freeze up over trying to achieve the absolute lowest price. The general consensus is that we are at the bottom or at least bouncing along it. It is likely that in five years, buyers will be thrilled with any current purchase. Remember that any price or return is going to be significantly better than what would have been achieved three years ago. A return of 8 percent to 10 percent on real estate is a good alternative to the vagaries of the stock market. Depreciation, appreciation and the tax benefits of interest and write-offs of building expenses are still very attractive benefits of owning real estate.

While business news is still uneven, and many are concerned over the passing of Measures 66 and 67, the vast majority of Oregonians will continue to live and work in Oregon. And Oregon’s financial challenges are not just limited to this state – many states are insolvent and looking to individuals and small businesses for the rescue. Remarkably, it has been reported that Oregon’s corporate tax system is one of the most advantageous (top third) in the country. Individuals from other states continue to move to Oregon, and Portland’s Urban Growth Boundary will continue to protect the value of existing buildings.

This may not be the time to be speculative, but a proactive, creative approach is appropriate. Now is the time to take a hard look at investing in commercial property. To paraphrase the film classic “Major League,” “This may be the at-bat we’ve waited our whole life for.”

Steve Dodds is a vice president at NAI Norris, Beggs & Simpson, a real-estate brokerage and asset/property management company. He specializes in industrial leasing and sales. Contact him at 503-223-7181 or [email protected].