Carpet Removal in Industrial Spaces

As a word to the wise, be sure to include in any lease or sale of industrial property, that if they are removing the carpet in the unit, or any other form of flooring, that you include language that ensures that they return it to a fair and usable condition.

I cannot tell you how many of my clients have been so pleased that they had language in the agreement to cover that: most of the time, removing carpet leaves behind unsightly and problematic glue stains and other spots that may have been otherwise covered by the carpet — and those can really be costly to fix.

For more quick tid-bits of advice on commercial real estate in Los Angeles, please visit our website — Monocle: experience the difference.

10,000 SF Office Available for Rent — $3.25 PSF

Looking for a good place to place your business? With the frequent upswing in available office space in Irivne, there are a lot of options. That is why you should take the time to check out this beautiful 2-story stand-alone building, and see how the amenities could be perfect for you.

For more listings and information on Los Angeles Commercial Real Estate, please visit our website.

Sorry Home-Owners: 5 Reasons We Haven’t Hit Bottom in Real Estate

With real estate markets across the country in relative shambles, and some of the darkest days in real estate in memory, home-owners are desparately in need of some good news, and some relief.   The bad news? It’s only going to get worse.

Below is a list of the five major indicators that we have not yet hit bottom of the real estate market:

5. Interest Rates and the Tightening of Lending Practices

One of the most important factors that determines the  value of real estate is the Federal interest rate, and the availability of money. 

When the interest rate is low, the actual cost of borrowing money is also lowered, which means that people can afford to take on greater debt.   Affordable debt means that people can afford to pay a greater purchase price with the same relative cost to them, and that, in turn, drives of homes values.

In the last 10 years, we have seen unprecedented lows in interest rates, and the availability of money in the U.S.  Not only that, but banks were lending money to anyone that asked for it at rates below the federal interest rate (that is the “sub-prime” part of sub-prime mortgages….but more on that later.)    

To give you a historical perspective, see the chart below, which graphs out the historical mortgage interest rates in the US:

 

As you can see, as recently as 2000 the average interest rate was floating at around 8-9%, as opposed to the 5-6% that has been the average of the past several years (bear in mind, this chart excludes adjustable-rate mortgages…the number of which more than quadropled in the last few years.) 

The reason it has been so low is because of Fed rate slash right after 9-11, which dropped the rate from around 7 to a mind-boggling 1%.  It has been on the gradual incline since then, but it is still well below historical norms.  Extended periods of low interest rates are bad for our economy, because it devalues the dollar.  As such, the government is incentivised to increase the interest rate to promote economic stability, so whenever they can, they will raise it.

On top of that, with the recent foreclosure rates and general replication of the S&L crisis of the 80’s, burned banks are going to have to severely tighten lending restrictions, to ensure that they are making loans that will proform.  Gone will be the 0% down teaser rate mortgages with no credit requirements:  alerady, federal banks and the government have issued requirements that will take effect later this year that will require strict credit checks, and a miminum percentage down payment (likely around 20%.)

HOW MUCH FURTHER WILL IT DROP?

So what does stricter lending requirements and higher interest rates mean to the housing market?  Well, with fewer buyers, and a higher rate, prices still have a long way to go.  To give you a frame of reference, it is a 33% increase to go from 6% interest to 8% interest, that means the negative effect on price from that alone could be a 25% drop in prices which has not yet happened.  On top of that, restrictive limits on lending means with far few buyers, that downward pressure could be incredibly significant.

SHOULD I BE WORRIED?

While the immediate jump in interest rate is highly unlikely (especially given the current economic situation), but over the long term, it will happen if America wants to restabilize the economy.  On those timelines, however, it will likely only slightly affect prices as compared to various other factors, including inflation, appreciation, and population increases. That said, the tightening of lending restrictions is going to happen, and it is going to happen soon; expect it to become a lot harder to get a loan in the coming years, and for that to affect prices accordingly.  

4. REO Bank Holdings and the End of the Fiscal Year

Real Estate is an interesting market – because home purchases are largely not an pure investment choice, housing prices tend to have a “sticky floor.”  What that means is that rather than sell it for a lower price, many home owners would rather sit on the property and wait for the price to return in value.  The effect of that is that instead of housing prices having a natural oscillation between high and low, the prices tend to go high, drop some, and then flatten out for an extended period of time, until they go up again.

That would be good news, if it wasn’t for REO properties.  REO (Real Estate Owned) properties are properties that have gone through the foreclosure process, and are owned by the banks or lending institutions that made the loan on the house. Unlike home-owners, banks ARE investment owners, and sell their homes based on economic need, rather than lifestyle. 

What this means is that with the unprecented numbers of foreclosures and REOs, banks are holding a lot of homes.  And an unoccupied home makes them no money, provides them with illiquid capital, and in fact costs them money through real estate taxation and HOA dues – none of which banks like.  They are extremely motivated to sell, and sell at severely discounted prices, so long as they come close to meetings the balance left on the original loan. REO properties are the single greatest tangible downward market force on home prices, and the more of them there are, the lower the prices will go.

On might argue that banks don’t seem to be slashing their prices nearly as much as I am alluding to.  The reason is two-fold – 1) like any investor, they do still want the best price possible and 2) chances are you weren’t looking near the end of the fiscal year.

Banks and lending institutions are investor-heavy companies, and as such, their business cycles are very much dependent on the fiscal year.  They are heavily incentivised to liquidiate their real estate holdings at the end of each quarter, and specifically at the end of the year, when they must report earnings, and validate their financials to their investors.

HOW MUCH FURTHER WILL IT DROP?

As we get closer to the end of this year, and indeed, even through the end of next year, expect sales volume to start picking up, and prices starting to get slashed.  Some analysts predict a drop of around 10% over the next 5 months, but if the rest of the financial world stays as bad as it is, that number could go even higher.

SHOULD I BE WORRIED?

While this is a very real market condition, and forclosure figures are still very high, this is a more of a symptom than a cause.  The drop will only reflect how worried the market is, and won’t drop anything like it has over the last year.  And if the slump continues through 2009, that drop would be even lower.

 3. The Home Surplus

A very big reason we are not yet at the bottom is our current home surplus . Please look at the chart below for the number of months supply of U.S. homes of the market as of Q2 2008:

 

In a healty market, home inventories tend to stay at or around 6 months worth of homes on the market.  Today, we are nearly at two times that value, and growing.  What it means, simply, is that prices are still to high. 

This is simple supply-and-demand economics: as the supply of homes continues to grow, and the number of willing and able buyers decreases, prices must drop. 

HOW MUCH FURTHER WILL IT DROP?

It is hard to say, because it is closely linked to many of the other causes in this list, but that in order for us to half the supply, it could take up to 50% of of asking prices.

SHOULD I BE WORRIED?

That said, it won’t.  Instead, the return to 6 months supply will be a gradual process that will be part of the “sticky floor” recovery for houses, during a period of stable pricing. More likely, I think it will show an decrease of around 20%, which includes the numbers from the above downward factors.

2.Resetting Sub-Prime ARMs

Ah, the subprime adjustable-rate mortgage (ARM).  This was really the root of so many of our real estate woes.  A near carbon copy of the S&L crisis of the 80’s, where lenders repackaged bad loans to unqualified borrows and passed them off to national investors, only this time, they were international ones.  The fundamental problem was that the teaser rates would reset from the rediculously low rates to something the borrow could no longer afford, and would have to be foreclosed.  Trillions of dolloars of losses later, banks have learned their lessons, and have stopped offering subprime ARMs, and have again started to tighten lending restrictions.  That was only after the hundreds of thousands of bad loans have gone through the pipeline, and left the real estate market in foreclosure hell.  And it isn’t over.

 

Take a look at the graph below, which charts subprime ARM mortagages in the US, and when they are going to reset the rates on those loans (the subprime ARMs are in gray):

 

 While it may look promising that we are nearing the end of resets, bear in mind that the forclosure process is a 6-MONTH process at least.  Go back sizx months on that chart, and you realize that we are barely halfway through it.

HOW MUCH FURTHER WILL IT DROP?

With billions of dollars worth of real estate subprime ARMs in the pipeline, this can again severely boost foreclosure figures, and drop price significantly. 

SHOULD I BE WORRIED?

Yes.  With only 2/3s of the subprime mortgages reset and through foreclosure, we could be looking at a further 100K+ of foreclosed homes in the coming year and a half.

1.Household Income Vs. Median House Price

Instead of doing much explaining, just take a look at the chart below:

 

From just 20 years ago, housing has gone from at or near median household income, to nearly 4 times.  Why?  For many of the reasons above – cheap and unregulated lending, frenzied consumerism, and international speculation.  Nowhere else in the world are these figures even CLOSE to ours, and it is all value that we will eventually have to give back.

HOW MUCH WILL IT FALL?

This is actually a much larger issue than just the real estate market, and has more to do with the US economy in general.  With our rampant overconsumerism, heavy personal debt, and unrivaled international debt, our economy is largely relying on the support of our international connections to keep us afloat.  Could housing plummet to one quarter of its present value?  Yes. 

SHOULD I BE WORRIED?

Will it?  No.  The US government, and our foreign allies have a vested interest in propping up the US economy for as long as possible.  If that were to happen, we would have to see catastrophies not only in the US, but in European economics, as well as Asia.  It is the one of the interesting elements of global economics: things tend to be far more complicated and interrelated, and, as a result, more stable.  Maybe over 50 years, we will see those numbers back where they belong, but for now, we are safe.

 

SO WHEN DO WE HIT BOTTOM?

This is the multi-million dollar question, and probably why you read this article. 

It is impossible to know for certain when it will happen, or how far it will drop.  My predictions, based on historical housing booms and slumps, seems to indicate that late 2009 to 2010 will have seen the majority of the downward swing, and that when we get there, prices will have dropped a further 20-35%.

That said, there will be clear indicators when we do hit bottom.  The interest rate will have risen by around a point, housing prices will have remained consistent for several months, and the surplus of homes will be on the gradual decline, back towards 6 months. 

As I’ve talked about before, real estate markets have a “sticky floor” for pricing, and tend to have extended periods of nearly flat prices when we have hit bottom, which will remain that way until things go up again.  In the last slump, that flat lasted for 5-7 years, depending on the area.  This crisis was far larger, and far uglier, and I would not be surprised if that flat period lasted for 8-10 years.  My advice to first-time buyers and investors is to wait for 6-8 months of stability before you consider purchasing, and when you do, expect appreciation rates to maintain only with inflation for severla years to come.

 

 

Darren Guttenberg is a real estate broker in Los Angeles, CA, and specializes in commercial real estate investing.  For any of your Los Angeles Real Estate needs, please visit his website.

 

 

Financial Nose-Dive and the Real Estate Market (pt 2)

Eventually, the government will get their heads out of the sand, pass a deal, and start heavily restricting loan practices to all troubled institutions. And what does that do? It creates the slow weening of the US people off of debt.

When the restrictions retighten to historical norms, it will seem like the end of days: housing will drop another 20-30% in value, credit limits will go back to within reason, and cars and education will be among the most expensive parts of our financial equation. It will be hard times, but necessary to create a country that functions realistically within its means, its output, and its place within the global economy.

For more information on Los Angeles commercial real estate, visit our Monocle Real Estate Services Website.

Commercial Real Estate for Beginners — Mello Roos

Mello Roos tax is an interesting and new development in real estate markets as an additional tax and work-around to proposition 13. The problem was this: the theory was that home owners property tax was in large part used to upkeep the necessary streets and infrastructure. The only problem was that prop 13 capped the inflation of that cost, which did not keep up with the infrastructure costs of keeping up a city.

Mello Roos is a special assessment that provides particular charges for street and infrastructure costs — similar to a non-elective HOA. The only problem is that these assessments only come from new homes with that assessment, and do not cover the old developments. So while they have helped to stem the influx of underpaid infrastructure expenses, it is not a permenant fix.

What if you are in a place that assesses Mello Roos? We’ll good news and bad news. Good news is that you are likely paying less purchase price, and will have a well-kept area, but the bad news is that the price reduction will not be equal to the overall cost of the tax, and it does hurt your resell value. Plus, there are no assurances that it will only be used for your area.

For more information on Los Angeles commercial real estate, visit Monocle Real Estate Services.

Commercial Real Estate for Beginners: Leasing Commissions

Everyone knows how regular real estate agent commissions work: the seller agrees to pay a certain percentage of the sales price (normally around 6%), which, in the event of a sale, is due at closing, and will be split evenly with the buyer’s broker. If there is no buyer’s broker, then the original broker keeps all 6%.

But what about leasing commissions? Who pays the brokers, and how much?

The answer is that it is pretty similar, with a few notable differences. The landlord agrees to pay a certain percentage (same sort of range), which will be shared evenly with the tenant’s representation. However, instead of being based on the price of the building, it is based on the total aggregate rent for the duration of the agreed-upon lease. So if, for example, a tenant agrees to pay $1000 / month, for 3 years, the commission would be paid on the total amount the tenant WILL pay for the entire lease, or $1,000 x 12 months x 3 years = $36,000.

There also a few rules. Leasing commissions do not include any rights to extend or options (which will be made, commission free.) They also do not see any money spent on tenant improvements, or on concessions given by the landlord (like, for example, free rent.)

Pretty straight-forward, but I figure it is a useful thing for people to know.

For more information on commercial real estate, or if you are looking for listings, please visit our Los Angeles commercial real estate site.

Commercial Real Estate for Beginners: Commercial Flipping

So, all you house flippers out there have probably felt a little discouraged…with housing prices in a freefall, your job has quickly become fixing broken fixtures in your rentals, and wishing for a housing miracle. Too bad there is no other way to use your skills…

Oh wait! Residential’s nerdy stepbrother, commercial real estate is a phenominal place to apply your skills, and make big profits flipping apartment complexes, office buildings, industrial complexes, or retail. Like everything else in commercial real estate, it has a different name for it — called “repositioning” — but guess what? It is strikingly similar.

So the theory behind house flipping is that you increase the appeal, usability and overall percieved quality of the home, and thereby increase the value. Commercial real estate seems like, with all of its “hard economic” valuation methods (cap rate valuation), the same model would not apply. But it does.

Let me use an example, one that is most like housing: apartment buildings. Lets say its valued at $1,000,000, and brings in an net operating income (total rents – expenses) of $50,000. That means it is a 5% CAP. Now, at 50,000 / year NOI, you know that the rent values are below market value for the area, and there is room for doubling that number — all it needs is to be brought up to the standards of the rest of the block (sounds ambitious to an outsider, but seasoned house flipper’s ears should be starting to hear something very familiar….) You put $100,000 repainting, fixing up the individual problems, and doing whatever else it is you houseflippers do, and behold! Renters are willing to pay twice the rent because of the “percieved value” of the apartment! But what kind of value did you add to it?

Let’s go back to our “hard economics” — if the NOI is now twice what it was (as the improvements did not increase the monthly or yearly expenses of the property), that means that the NOI is $100,000 / yr. Now, if you were to sell it at the same 5% Cap rate — it would be worth $2M!

Now here’s the REALLY cool part: if you’ve been reading this series, you remember that “cap rate” represents the “percieved risk” associated with a property — it correlates to how likely it is to command the full suggested NOI. Well, in fixing up the property, giving it new paint job, and improving its percieved value, that also decreases its percieved “risk.” And NOW you can sell your property at a lower cap rate — Let’s say you made it a 4% instead of a 5%. $100,000/.04= $2.5M!

And in putting in your initial investment, and doubling the rents, you have mor than doubled the value of the property. And this same logic can be applied to offices, retail or industrial — remember that all these building’s values are based on what people “feel” the space should rent for.

Pretty cool, no?

There is a lot more depth that I can go into commercial real estate flipping, but I think I will hold off for another post. For all of you Los Angeles commercial real estate needs, feel free to contact us at Monocle Real Estate Services.

Beach City Retail – Is it Worth the Extra Money?

Everyone loves the beach — beautiful, luxurious, and full of tourists. And real estate prices around the beach are unerstandably astronomical — the views, the weather, and the joy of beachfront. But does that mean you should pay more to put your business there?

In most cases, the answer is no. While tourist traffic can boost the quantity of people there, it is often very seasonal, and does not constitute a consistent business. Furthermore, with fewer land within a target radius (IE half is covered by unhabitable water), the likelyhood of having a consistent demographic is greatly reduced. In most cases, you would do better to put your business in a retail location with a large, captive audience, like around colleges, in strong business centers, or even large residential developments.

When does it make sense? When your business depends on tourists to make a living. What are some examples? Art dealers, beach shops, high-end restaurantsm and other luxury shops may consider it worthwhile to pay the extra cash to have the visibility in a tourist-heavy area.

For more Los Angeles commercial real estate investing advice, visit us at Monocle Real Estate Services.