I am amazed at the amount of investor activity these days!
We recently discussed two types of investors – those who use their money to buy and those who don’t. We call the first private and the second institutional. As you remember, private investors usually provide debt as a supplement to their down payment, with the result that the institutional group will have capital pools ready to be deployed.
We launched a proposal last week. So far we have received over 76 requests and two offers. We expect the deal to take place at a record price. Here’s another example: a class A building has just been rented out – pending completion. Quite voluntarily, the investor offered to buy it – subject to a new lease – with a return and a price per foot that would break any record. Our client said no, thanks! It is too difficult to find land and get a building permit in the city. Their plan is to last for a long time.
Both of the above are great examples of what is considered most important to investors these days. Indulge me as I share some of my observations.
Typically, motivation starts with money. In particular, the source of these dollars. With our new offer, the property owner bought a building for his company. He pooled the proceeds with a 90% loan from the Small Business Administration to close the deal in 2013.
Flash forward. Its business model changed in 2018. The warehouse is no longer needed. We found him a tenant to replace his home. Then he turned into a private investor, whereas he used to be an owner-tenant.
So why sell? After all, the tenant pays a good check every month. Two reasons. A relocation of an owner from a state to a tax-friendly state means that he will be exempt from California tax if he sells. Plus the market is hot! If you take a shoe and buy it somewhere else, you get more. What’s the most important thing? Net cash flow is what remains after he pays the bank and income tax.
Now, in the case of a new class A lease and an unsolicited offer, we have a different set of circumstances. Let’s start with money again.
Until 2019, our client worked with a Canadian pension fund. The structured fund had a clear purpose: to acquire industrial deals in filling markets (those that are largely developed). Existing structures and areas requiring re-profiling are taken into account. The dollars invested will bring retirees income for years to come.
Therefore, if a new project is developed and sold, a more serious problem arises – where to invest the profit – because there is a shortage of investment grade real estate. What’s the most important thing? Long steady stream of income.
Are there any institutional investor sellers these days? Seldom. Those who turn to Wall Street as investment capital – real estate investment funds, for example – are governed by how much they are allowed to dispose of each year. Others who buy on behalf of retirement funds, such as CalSters and CalPERS, must keep a percentage of the pool in asset classes such as commercial real estate.
Sure, they could make a lot of profit by selling, but as mentioned above, what then? Cash refunds at a bank or treasury bills are void. What could trigger a sale? Remember our Canadian retirement dollar client? As a rule, when the business plan is fulfilled – dollars are invested – the sunset comes according to the plan for five, 10, 15 years. Thus, you will see that there will be real estate objects on the market, which have the maturity of fixed assets. If their time is now – what a bonanza!
Allen S. Buchanan, SIOR, is a director of Lee & Associates Commercial Real Estate Services in Orange. You can contact him at firstname.lastname@example.org or 714.564.7104…