Commercial Land - Market Activity and Analysis

As luck would have it, I have several Commercial Land listings again.  Recently I have shared some analysis of the Commercial Land - market activity with some of my land clients.  So I thought I would share it here as well.  

 

In general, there was sort of a bump of activity last year (2012) and there were signs of interest  with a number of calls in the first quarter 2013 on land but it seems that things have quieted down a little as we enter into the summer.  

Looking back at Commercial Land sales, I found that KCREA (Kentucky Commercial Real Estate Association – our Commercial Information Exchange) reported 23 sales of commercial land larger than 5 acres for the 12 month period beginning 4/1/2012.    So about 2 sales per month.   Interestingly, 8 of those 23 were foreclosure sales, auctions or bank sales.   In April of 2013, there were 253 commercial land properties larger than 5 acres which were listed for sale on KCREA.  So there is presently about an 11 year supply of land on the market.

It is no longer news that commercial land in general depreciated about 40% since 2008.  What this tells us is that with roughly a third of the commercial land sales being distressed sales, and an 11 year supply of land at current consumption rate, we can see this downward pressure on prices is still with us.  

On the positive side, the metro market area’s Industrial occupancy is very high and we are beginning to see a shortage of Industrial space.   This has led to some Industrial spec projects for the first time in quite a while.  If this demand continues and if financial institutions begin to loosen their credit somewhat and allow more of these projects, we should expect to see the demand for commercial land to increase in tandem with this activity.  

Of course, land is not a homogenous product.   Location, size, zoning, traffic, roads, visibility, availability of utilities are all factors in addition to price as projects come available.   Each of these will ultimately be a factor in the demand for a particular parcel when new projects are being considered.  

Let me know if you have any questions. 

 

I hope you have a great day!

 

Side note - I am a licensed real estate broker in Kentucky and Indiana and I specialize in Commercial Real Estate.  I handle Office, Industrial, Retail, Commercial Land, Investment and International Properties.   I work with Sellers, Buyers, Landlords, Tenants, and Investors.   Heck I can even set you up with a Residential specialist if you need help.   If you need any help with real estate, give me a call or send me an e-mail.  I would love to help.   

 

David

 

David W. McCoy

Associate Broker

Commonwealth Commercial Real Estate

10444 Bluegrass Parkway

Louisville, KY  40299

 

office: (502) 379-6005

Cell: (502) 905-5274

e-mail: DMcCoy@ccre.biz

 

 

Another Commercial Real EstateTax Trick

Seems like there is always more to learn.  I attended a conference on Monday and learned a new accounting trick for commercial real estate.   There is a procedure known a Cost Segregation which can allow you to reallocate some of the cost of the building in a way that can allow you to accelerate the depreciation.

Actually this trick has been around for a while but it is not widely known.   It is the result of a decision regarding HCA from I believe 1997.     The IRS then clarified the decision with a ruling in 2004 that specified what was necessary and acceptable to make these determinations.    Until this time, it was only practical for very expensive real estate transactions.  

Bottom line here is that this can lead to big tax savings.   

If you want to know more about Cost Segregation or other Commercial Real Estate issues, give me a call.   I specialize in Commercial Real Estate and handle Office, Industrial, Retail, Land and Investment properties.   I work with Landlords, Tenants, Buyers, Sellers and Investors.    

Have a great day!

David

David W. McCoy
Associate Broker
Commonwealth Commercial Real Estate
10444 Bluegrass Pkwy
Louisville, KY  40299

dmccoy@ccre.biz
Ofc: (502) 379-6005
Cel: (502) 905-5274

Bowling Green Field Trip

Yesterday, I took a field trip to Bowling Green, KY, about 2 hours down the road.    Bowling Green is much closer to Nashville than to Louisville and is one of the only areas in Kentucky that has continued to grow during the recession.     I am told that while Bowling Green also had housing prices decline and foreclosures increase, it did not suffer the loss of jobs common to most of the rest of the country.   This leaves a healthy market of people who really cannot afford to buy a house but who would like to rent.

My field trip was to work with a client interested in finding rental properties.    My client had found a house about 2000 square feet for sale at about $35,000.     The house was built around 1960 and was situated in a low income area of town.      It had been through the foreclosure process and was owned by Fannie Mae.   

Stop there.   Before going any further, Let me warn you, not to get too excited about finding a 2000 square foot home for $35,000.   Here is why -

• All of the carpet needs to be replaced.  
• The main floor may have rotted away and was replaced with decking strips instead of plywood, so that there was no solid barrier between the house and the crawl space. 
• Water runs under the house.  
• Although the shingles look fairly new, the roof appears to sag and it would appear that the attic either is not properly ventilated or the shingles were installed incorrectly because the shingles were popping up.  
• The gas lines were not installed correctly.  
• The water heater wasn't vented correctly.  
• The kitchen really needs to be completely reconfigured to work correctly because the only outlet for the stove would block almost all of the cabinets.  
• The house does not have central heat or A/C.  There is a furnace of some sort sitting in the middle of a family / living room that doesn't appear to be safe.  
• The vinyl siding had moss or perhaps mildew on it and had several spot where it was cracked or had holes in it.  
• The gutter on one side of the house had apparently been crushed when a tree had fallen on it.  
• The upstairs bathroom is leaking into the downstairs bathroom.   
• All of the windows need to be replaced. 
• A deck on the back of the house has a roof that is leaking and needs to be taken down.   
• Previous owners or tenants had run panelling over existing windows.    
• The ceilings all appear to be old asbestos tile.  
• The utility room may have asbestos floor tile.   

So, welcome to the world of low income housing.    These were just the items that we were able to see in our short visit.  This does not even include any possible electrical or plumbing issues which would not be possible to detect with the water and power off.  

In evaluating a property like this, THE MOST IMPORTANT CONSIDERATION is how much rent can you expect to get for this property.  We were told that the average home in this area would rent for between $500 and $600 per month.   So the questions becomes, how much would it take just to make this place livable?   Then the follow-up question is, would a rent of $500 to $600 per month be enough to justify your investment?

There were a number of things that I would have to do to this property if I was going to live in it. However, those are not necessarily the same concerns of your potential tenant pool.     But if the budget cannot even cover the necessities, there is no reason to spend any time or money on this project.  

In this particular case, although the property was inexpensive, we estimated that it would take $20,000 to $30,000 in additional expenses just to make the property livable.   With those additional expenses, the annual debt service would be about $3800.    Then you would have insurance and taxes and other maintenance expenses for the property.   With an expected rent of about $6000 per year, you would likely be making less than $2000 per year on this property.   

Thanks for reading.  Hope you have a great day.

BTW - If you know someone needing assistance with real estate, have them give me a call.  I specialize in Commercial Real Estate and work with Buyers, Sellers, Landlord, Tenants and Investors.  I handle Office, Industrial, Land, Retail and Investment properties.  Heck, I can even set you up with some help on residential real estate, if you need it. 


ALSO - I am sure that my managing broker would appreciate me clarifying that the opinions expressed here are my own and do not necessarily represent those of Commonwealth Commercial Real Estate, its brokers, agents or employees (other than me, of course.)    Should you wish to offer an opinion, feel free to call me or to put one here in the comments sections.   You should not feel free however to post anything inappropriate or objectionable.   Should I see any such comments, i will exercise my right to delete them.

David

David W. McCoy
Associate Broker
Commonwealth Commercial Real Estate
10444 Bluegrass Pkwy
Louisville, KY 40299

Ofc: (502) 379-6005
Cel: (502) 905-5274
e-mail: DMcCoy@ccre.biz

Delivering Bad News

Unfortunately for the last few years, I have had to deliver a lot of bad news to property owners.   With the economy in a deep recession, I have often had to tell people that there property has declined in value often as much as 40%.   Sometimes, however I get a little help. 

A property owner recently contacted me to ask about some property he has had leased for several years.   The present lessee has struggled to pay the rent and a potential buyer of the lessee's company contacted the owner to discuss a new lease. 

After reviewing the market around this property, I concluded that the market rent had declined by nearly 33% since the last lease on this property.   Although he would have liked to have heard that the market rate had not declined, actually the property owner was pretty happy with the news.   It turns out that the new prospective tenants had asked him to reduce the rent by 70%.

The advice for this property owner was to try to hold onto the tenant if possible but to target the new rent at the current market conditions.   Since the tenant was having problems paying the rent, I suggested that part of the rent could be done as a percentage of sales.   By setting a floor and a percentage of sales, the owners does share some of the risk however, the owners can expect to get near market rates and perhaps better than market rates if the store can increase its sales.  

Sometimes, fate steps in and makes things a little easier. 

Have a great day, all. 

Notes and Disclaimers and such -

BTW - If you know of anyone needing assistance with Real Estate, have them give me a call.  I specialize in Commercial Real Estate and handle Office, Industrial, Land, Retail and Investment properties.   I work with Buyers, Sellers, Landlords, Tenants and Investors.   Heck I can even find you help with residential real estate.

ALSO - I am sure that my managing broker would appreciate me clarifying that the views expressed here are my own and do not necessarily represent the view of Commonwealth Commercial Real Estate, its brokers, agents or employees (other than me, of course.)   If you have a question or a comment on anything here, you are free to make a comment.   However, you are not free to make inappropriate or offensive comments.   Should I find any such comments, I will exercise my right to delete them.

David

David W. McCoy
Associate Broker
Commonwealth Commercial Real Estate
10444 Bluegrass Pkwy
Louisville, KY  40299

ofc: (502) 379-6005
cel: (502) 905-5274
mailto:DMcCoy@ccre.biz
www.ccre.biz

Commercial Property Analysis - Case Study

Well, after all this is suppose to be a real estate blog.  So, for now, I thought I would step out of my arm chair economic advising / political role and throw some real estate at you.  

I recently was asked by a prospective client to analyze and list their property.  I thought I would present this as sort of a case study.   My analysis and recommendations follow:

Property and Market Analysis

In reviewing sales data, I was unable to find a single property like theirs which had sold in their area in the last 2 years.   Given the change in the financial climate, I do not trust any comps older than that.    I did find two units like theirs which were on the market for sale. 

Checking out the leasing market for the property, there were several possible options in the area with some 32 other similar options within a mile of the property.

Looking at the market stats, our commercial real estate information exchange (KCREA) showed 29  Industrial Sales, 86 Industrial Leases, 30 Office Sales and 94 Office Leases for our entire area YTD.    On the day of the analysis KCREA showed 219 Industrial Sales Listings, 337 Industrial Lease Listings, 254 Office Sales Listings and 771 Office Lease Listings.   Looking at the amount of inventory and the rates of sales and leasing, it would take more than 64 months to sell all of the sales inventory and it would take more than 49 months lease all of the lease inventory.

Property Recommendation

 
With this amount of inventory and competition, it is critical to position property in the top 5% or 10% of the properties on the market in price and condition in order to move it.   

I advised the prospective client to price the property below the offering price of the two similar properties in the area, which had not sold AND to be aggressive in pricing, terms and property condition in order to lease it.

Client Response

In spite of the analysis, the owners insisted on a listing price approximately $70,000 more than I recommended (and to put this in perspective - about 33% above the recommended price)   And while they were happy enough with the suggested lease rate, they insisted on not less than a 3 year lease and property to be taken "as-is."   Also, they insisted that any commission I earned in leasing the property should be refunded to them in the event someone decided to buy the property.

Result

When all was said and done, I passed on taking the listing.   In my opinion, the property would not sell at that price.   Accordingly from my perspective, the most I could reasonably expect to make would be a commission on a lease, which in this case would have been a small amount anyway.  Then on top of that, the owner wanted me to rebate that commission if I managed to sell it after all.

There have been times earlier in my career when I would take a listing and list it at a higher than recommended price thinking that I would satisfy the client and we could adjust it later.  My experience has been that this doesn't help anybody.   If the property is priced too high, you often cannot even get anyone to look at it.  And while I certainly want my clients to be happy, any project I take on has to make sense for me from a business perspective.  The bottom line is that if there is no way for me to earn any money off of the deal, it isn't something that I can afford to waste time on.  

Well, with that out of the way, I guess I want you to know that I am still taking listings.  If you have property that you would like me to take a look at, let me know.   I specialize in Commercial Real Estate and am a licensed real estate broker in Kentucky and Indiana.  I would love to help!

Thanks, all.   Have a great day!

David

David W. McCoy
Associate Broker
Commonwealth Commercial Real Estate
10444 Bluegrass Pkwy
Louisville, KY  40299