The conference I attended this week was a very eye opening experience on the state of the retail sector of commercial real estate.
At the moment both banks and investors are running away from retail buildings across the board. The is due to a number of fairly obvious reasons:
- The American consumer is retrenching due to economic pain
- Americans are borrowing less to fund their spending
- Lack of credit/financing available to purchase/refinance buildings
- As leases come due rents are being adjusted downward in price
This is a trend that is not short term and will most likely continue to accelerate over the next 2 to 3 years.
In general, banks will not lend on any building that is not stabilized. This means a building has a certain percentage of its square feet leased with quality long term leases. (5 years or above)
For example, a retail strip with 5 stores (of equal size) has 4 of those 5 stores leased with a quality business. If one of those stores were to leave or go out of business, the strip would now only have 3 of the 5 stores occupied.
This brings it's occupancy from 80% to 60%. The building is now no longer stabilized, meaning no bank will lend it money to refinance AND no bank will lend a new investor funds to purchase the site.
An investor can secure this troubled asset through what is called a lease option in real estate terminology. If they can bring in a strong tenant during the lease period, they can then secure real financing or sell the asset back into the marketplace to a much larger buyer pool.
This phenomenon, which will continue as retail deteriorates, will present tremendous opportunities for investors in the future. The key is to understand what type of business will thrive based on the surrounding demographics, income level, etc.
In addition, an investor must understand that we are in the early stages of a depression, and the real economic pain is ahead of us, not behind us. Real estate owners must focus on businesses that will perform under this environment.
I will continue discussing the coming commercial real estate opportunities in great detail as we move forward. Until then, continue to accumulate precious metals and enjoy the early stages of what may become the greatest bull market in history.