07/28/2010
The lingering economic downturn has created problems for investors in commercial real estate. Generating a bid now begins with a fundamental analysis, says Ed Kearney, managing director of Kearney Commercial Realty/Sperry Van Ness in West Palm Beach, Fla.
The recent recession and collapse of the housing market in Palm Beach County has made it more difficult to determine Florida commercial property values, says Kearney of Kearney Commercial Realty. Prices that soared during boom times have sunk, pushed down by foreclosures, bankruptcies and rising vacancy rates.
“For too long, investors looked at appreciation when determining the worth of a property,” says Kearney who has worked in the Palm Beach real estate market for 25 years and seen several real estate cycles. “That was too tempting when prices were rising and financing was cheap and easy. That game is over.”
The market should be returning to fundamentals such as property location, condition, occupancy rate, tenant credit quality and the like, says Kearney of Sperry Van Ness.
“Investors now have to think of holding properties – not flipping them in three years – in part because demand is weak and financing is not readily available,” says Ed Kearney. “And we are not likely to see much appreciation for at least the next five years and probably longer.”
Here is a checklist for investors in Palm Beach County, says Kearney of Kearney Commercial Realty:
- Does the property’s location serve a market? Too many properties were built anticipating residential and commercial growth. Existing properties and land should be well situated on or near major roadways.
- What improvements or repairs are needed? Owners and landlords have deferred maintenance in recent years to save money. New owners should find out what’s needed — before being hit with a repair bill — and figure that expense into their bids.
- What is the current occupancy rate and how does that compare to one year ago and four years ago? The trend will be revealing and offer insight on what to expect over the next 12 to 24 months.
- Also in factoring the occupancy rate, how many leases are coming due in the next 12 months? Next 24 months? Look at both the number of tenants and square footage.
- What is the credit quality of the tenants? That may be trickier to be determine, but a review of late payments should help determine which tenants are the most likely to default on their leases.
- What would be the return on investment if conditions were static for the next three years? Companies are not hiring or adding space, so assume no new demand.
“Investors should not be bearish about the commercial real estate market, but they should be realistic about the opportunities for immediate gains in revenue and property values,” says Kearney of Sperry Van Ness. “Buyers should take a longer view and see that they have an opportunity to buy properties at sizeable discounts to prices three or four years ago. Someone else’s loss can be their gain.”
About Edward Kearney and Sperry Van Ness
Edward Kearney is managing director of Kearney Commercial Realty Inc./Sperry Van Ness with an extensive background in various aspects of commercial real estate including investment analysis, landlord and tenant representation, and property tax abatement. SVN is a leading national brokerage firm that markets commercial real estate properties to an investment and brokerage community of more than 100,000. Kearney welcomes investors, brokers, and others with an interest in the Florida commercial real estate market to contact him today by calling 561-616-6262, or visiting http://www.svnpalmbeach.com for more information about the services he provides.
For more information about Edward Kearney and Kearney Commercial Realty Inc./Sperry Van Ness, please visit http://www.svnpalmbeach.com.
