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Commercial Real (E)state of Affairs
By: Ante Trinidad

Market realities are farthest away from perception when the market crests its periodic swings.  Commercial-investment real estate buyers and sellers make their gravest miscalculations then.

Perception:  With retrenched demand and foreclosures flooding the market, commercial real estate prices in the Glendale- Burbank-Pasadena tri-cities area are at give-away levels.

Reality:  Prices have moderated, but far from the levels of collapsed markets of Inland Empire and desert areas’, La Vegas’ and Florida’s, to name a few.

Borrowing from S. Holmes, the explanation, my dear, is elementary -- simple supply and demand.  Commercial real estate pricing and market activity generally act in tandem.  When they behave sharply in varying degrees, erroneous market interpretations are commonplace.
The (in) balance between supply and demand manifests as pricing level.  Market activity, on the other hand, is matching buyers’ and sellers’ needs, assisted by financing.  Indeed, demand has slackened but supply has had even greater contraction.  Thus, though prices have moderated --primarily due to lowered rent levels and increased vacancies, competition has not relatively much lessened for small- to medium-sized properties.

Stable or increasing population generally equates to stable demand.  Supply dynamics from development, rollover sellers, cash-out sellers, and foreclosure, on the other hand, are more complex.

Demand based on real needs and use is sustainable, but not short-lived speculative demand.  Excepting one-dimensional economic-based markets, collapsed real estate markets – past, present, and future, are characterized by over developments fueled by speculative demand.  Overdevelopment may occur only when there are vacant and/or in-fill build able lots, the latter with underlying land more valuable than existing improvements.  Presently, practically all land supply had been absorbed in previous development cycles, rendering the tri-cities area commercial supply from development non-existent.

Rollover sellers trade up or down.  Due to tightened loan underwriting, together with the limited availability of replacement properties, rollover sellers can only wait by the sideline for now, further restricting supply.

Cash-out sellers pay on the average as much as 28% capital gains tax on combined federal and state levels.  When the stock market is jittery and money market returns are next to nothing, very few sellers opt for cashing in on their real estate equities, paying taxes, and moving them to alternative investment vehicles.

Overdevelopment and spiked foreclosures are inseparable twins.  Contra-positively, diminished development means fewer foreclosures as well.  In the S&L industry shake up about 20 years ago, loan underwriting shifted from primarily appraisal-based to progressively more restrictive cash flow based, requiring greater down payments.  With more equity to hang on to and lower loan payments, property owners are longer able to weather turbulent times.  Accordingly, troubled owners have more opportunity to sell at market level, rather than abandoning their properties.

To reiterate, with less demand and even fewer supply, prices in the area have moderated but is way far from collapsing.  And while the foregoing may be true, there is still market price tiering on property size and type.  From their peaks, following are the current commercial real estate market estimates in and immediately around the Glendale-Burbank-Pasadena area:

1) Owner-users pay about 10%-15% higher than an investor would for the same property.
2) 2) Residential rental market, and small retail/industrial space rental market have about 7%-12% average downward adjustment.  That is more in line with equilibrium pricing wherein both tenants and landlords have about equal bargaining powers.
3) Residential properties with 2-4 units have gone down 15%-25% less, depending on their specific locations and desirability; 5-12 units about 10%-15% less; and, 13 and more units 15%-20% less, depending on size and desirability.  Two-to-four unit properties have higher foreclosure rate compared to most categories.
4) Though some well-located small commercial/retail property prices have held steady, most others have gone down around 12% on the average.
5) As the building size goes up to 25,000 or more, or as the values get relatively higher in absolute dollar amounts, rental and sale prices of office and industrial properties may have tumbled by as much as 20%-30%.
6) Depending on one’s needs, resources and risk-aversion, the best values for most small- to medium-sized users and investors are in the 10,000sf to 20,000sf buildings, or within the $1.5M to $4.0M range.
7) The best owner-users’ business property financing source is the SBA loan program, at 10% down payment, with approximately 4.25% P.A. variable interest, amortized over 25 years.
8) In declining rental market and rising vacancies, a viable alternative strategy for long-term property owners is by installment sales in lieu of cash-out sales.
Ante Trinidad of Stevenson Real Estate Services in Glendale.  For information call: (818) 956-0081 x30 or