Commercial Real Estate: Why Now?

Question

I think commercial real estate is getting really interesting right now.

Not because I believe every commercial property is a great deal. Spoiler alert: it definitely isn't. 😂

But I think investors are getting more opportunities to actually negotiate.

Higher rates, changing property values, vacancies, refinancing issues, and owners who may need to make a move can create situations that simply weren't as common a few years ago.

For me, the important question isn't:

“Is commercial real estate a good investment?”

I'd rather ask:

“Does THIS property make sense at THIS price with THIS financing?”

I believe that's where investors need to focus.

Look at the numbers: • Current income • Operating expenses • Vacancy • Financing costs • Potential rent increases • CapEx • Exit strategy

A property can look amazing on paper and still become a very expensive headache.

I think this market rewards investors who are patient, understand the numbers, and aren't afraid to walk away.

What are you seeing in commercial real estate right now?

Are you seeing better opportunities, or are sellers still holding onto yesterday's prices?

David Switzer · Answer

I only do commercial real estate and am up to 4 small (600-2000 SF) retail units in Jersey City. There is a lot of opportunity in commercial because it's the reverse of residential:

Residential: Hard to get property, easy to get tenants.

Commercial: Easy to get property, hard to find tenants.I only buy vacant units and then find my own tenant.

The funniest negotiation in commercial which I have experienced twice (and others in commercial have also found) is when a seller will say:

"The property is vacant BUT it's worth $X using the NOI valuation".

I respond buddy, if you want to use the NOI valuation, I am happy to pay because the value right now is $0. You find a tenant and get that NOI yourself and we can discuss.

Michael K Gallagher · Answer

@David Switzer tell us more about these retail units - are they multi tenant buildings? any particular asset class or user you like to go after? you say you like to buy them vacant and place your own tenant, just curious what you look for with that in mind? I do some retail deals so just curious more than anything.

Henry Clark · Answer

OP looks like your interest is from the Lender side based on your tag line. I'll give some input there in a second.

Straight up deals- All of the items you noted. But then I would turn to RISK analysis. Non-Financial- Area occupancies, area market rates, location/location/location, Zoning availability for new builds in that market, CAPEX- how long will it take you to get to Deal Analysis levels of spending (inflation), VPD, Anchor stores/rec/conveniences nearby, Drive times to ????,

Lender Risk items, if you don't mind addressing from deals your making and what your firm possibly would sign up for. My World perceptions is we are in for a Storm. All of our debt I am trying to move to the longest terms possible, even if it takes 1%-point higher interest rate. SBA 20/25 year terms, 7 versus 5 year balloon payments, Interest only payments during construction or Rent up with Occupancy of 60% or 18 months to P/I, 1% point lower rate if we use MM/CD as collateral with your access control, lower LTV with Cash equivalent collateral, just flat lower LTV say 10% down, "SPEED"- want to set up the Lending relationship with all financial data on the table prior to making a deal. Know that I can move on a deal quickly subject to normal Deal Analysis.

The rest is like always. Never get hung up on A property. Always have 3 deals in the wing. Make 3 day offers and move on to the next deal. Prioritize Best to next best. To me this is a Buyers' Market. You just don't know the Sellers situation. Retiring, Divorce, Cancer, getting out of the game, Warmer climate, cash flow issues, meets exit strategy for them, etc. Keep making your offers at your price, someone will bite. Why I need "SPEED" from my lender.

Ashish Acharya · Answer

John, I agree with the way you’re framing it. The opportunity in commercial real estate usually isn’t “commercial is good now,” it’s that certain properties may finally be priced or financed in a way that creates room to negotiate.

From the tax side, I’d add one more filter to the underwriting: what does the after-tax return look like once depreciation is included?

Commercial property is generally depreciated over 39 years, so a cost segregation study can be especially valuable because it may identify shorter-life components that can be depreciated much faster. On a larger acquisition, that can materially change the first-year tax picture.

But I’d still treat that as a secondary benefit, not the reason to buy. If vacancy, debt service, CapEx, tenant improvements, leasing commissions, and refinance risk already make the deal thin, a big depreciation deduction doesn’t fix weak economics.

I’d also look carefully at the exit. If the plan is to refinance, hold, or eventually 1031 into another property, the tax strategy should be modeled alongside the financing and business plan from day one.

That’s probably the biggest shift I see in good underwriting: don’t just ask whether the property works, ask whether it works after financing, operating risk, and taxes are all layered in.

Feel free to DM me, I’d be happy to send over a few resources that might be helpful.

Nikita Loika · Answer

@John Chandler
On the operating-expense line — for multi-tenant retail or flex, the number that's usually wrong in the OM isn't the expenses. It's the recoveries. The OM assumes tenants reimburse X% of CAM, taxes and insurance. The leases decide what's actually recoverable, and they rarely agree with the OM.

Before I'd trust the NOI, I'm pulling three things from every lease: what's excluded from the pool (capital work, management fee, anything above a cap), whether the cap is cumulative or resets annually, and whether the landlord can gross up on vacancy. A center at 85% occupancy with no gross-up clause means the owner eats 15% of every variable cost — permanently. On a $300k expense pool, that's $45k a year the OM quietly assumes someone else is covering.

And get the last two years of reconciliation statements alongside the rent roll. If the seller can't produce them, that's not a paperwork gap. That's a number nobody's actually verified.

Bonnie Griffin Kaake · Answer

Investing in commercial real estate is far more complex than investing in a residential rental property. One aspect of a commercial real estate deal that is often overlooked is the land versus building value. If you are interested in maximizing your cash flow, this is important to include in the due diligence phase. This is especially true if you intend to leverage cost segregation for the tremendous tax benefits and cash flow available.

Here is an actual case study:

Client "Joe" called me about his purchase of a successful restaurant building and property in DT Denver, CO. His purchase price was $9,000,000. He wanted to do a cost segregation study on the property. When I provide a no-cost pre-analysis for a prospect, I do not guess at the land value. I use the county assessor's numbers for the specific county. I found that his land value was assessed at 90% of his purchase price. That would have only given him $900,000 available to do the cost seg and get the 100% Bonus Depreciation. I recommended he get a land appraisal before we created the pre-analysis. The result was the land appraisal came in at 30% which then gave the client $6,300,000 of the purchase price eligible for the 100% Bonus Depreciation. At a 37% tax rate, Joe could not have been more pleased.

Josh C. · Answer

You forgot current leases : duration length, extension options, and rate bumps. This is almost as important as the building in some cases. It once took us a year to fill a small commercial space. Outside of warehouse it's pretty tough around me anyway.

Diana Khan · Answer

@John Chandler, I agree that this market is creating more room to negotiate, but from the legal side, I have learned not to focus only on getting the seller down on price. I have seen buyers get excited about a discount and then realize the real risk was somewhere else in the deal. The due diligence period, financing terms, title, zoning, environmental issues, tenant obligations, and what happens if the numbers do not hold up can matter just as much as the purchase price.

When I look at a commercial deal, I want the contract to give the buyer enough time and access to actually verify what they are buying. A lower price does not help much if you later discover a lease problem, use restriction, major tenant obligation, or another issue that changes the value of the property. For me, the best negotiation is not always just “How much can I get off the price?” It is also “How much protection and flexibility can I build into the deal before I am fully committed?” I like the way you are looking at each property on its own instead of treating commercial real estate as one big category, and I’d be glad to stay connected.

Denise Supplee · Answer

I agree that there are some interesting opportunities right now, but I think patience is really important. A property isn't a good investment just because the seller is willing to negotiate. I want to know why they're willing to negotiate, what the income and expenses really look like, and what could happen if things don't go as planned. As a passive investor, I also pay a lot of attention to who is operating the property. A good deal with the wrong operator can still turn into a bad investment.

David Switzer · Answer

Hi Michael! Here are the retail units: (all single tenant)

600 SF commercial condo, leased to flower shop
1381 SF commercial condo, leased to coffee shop
965 SF commercial condo, leased to Pilates studio
2000 SF building, leased to Dog Daycare

I like retail because:

1) The area I live in is gentrifying quickly and many businesses want to be here
2) Business owners take pride in their businesses and take good care of the space
3) You can find smaller/cheaper properties than industrial, office, etc

I like to find tenants that already have locations and have been in business for years. I also like to choose businesses that will complement my local are and help it grow, although if push comes to shove I would take almost anyone. (ex: I got 2 LOIs, one for a drycleaner and one for a coffee shop, and I picked the coffee shop at a lower rent because I believe it improves the street much better than another dry cleaner).

Commercial Real Estate: Why Now?

Commercial Real Estate: Why Now?

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