Transitioning Into Commercial

[Naqi Taylor]

I’m transitioning more of my focus into stabilized commercial assets (primarily retail and medium/large multifamily) and I’m curious how others here approach pricing dislocation on otherwise clean deals.

Specifically — when an asset is already fairly priced and fully occupied, how do you all think about negotiating entry points without relying on value-add or operational upside?

I’m finding that timing, seller context, and certainty often matter more than comps alone, but interested to hear how others underwrite and negotiate in similar situations.

[Doug Smith]

Hi Naqi, Long time commercial banker/lender here, but it's been a very long time since I've owned commercial property. Not that it's a bad thing, but one thing to note...commercial banks have been having concerns about the rate at which commercial operating costs (taxes, insurance, etc) vs rental rates. There is a lot of concern that properties that are cash flowing now might not a few years down the road. Banks split commercial property into two major categories "CRE, or Commercial Real Estate" is any property where the rents cover the debt service...like apartment buildings, office buildings, and retail centers. "C&I, or Commercial and Industrial" is where the debt service is covered by the business operations of the occupant, such as medical offices, factories, and other owner-occupied property. Banks don't like to get too heavy on CRE and are actually pushed by Federal Regulators to focus more on C&I lending. You seem to be CRE-focused. The reason I tell you that is that CRE is typically valued using a CAP Rate (Net Operating Income/Property Cost or Value)...basically what % will the property yield. They aren't really priced like residential real estate. Your "value add" is increasing Net Operating Income by increasing revenue and decreasing expenses the best you can. I know that answer didn't directly cover your question, but it was just what I was thinking when I read your question. I hope you do very well! Good luck to you!