Recession Proof Commercial Real Estate
Real Estate Coach · Malibu, CA · Member since 2020 · 34 posts · 5 votes
Recession Proof Commercial Real Estate
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Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
6y@Terry Hale If its all the same, I'll save my time, and yours, and avoid a sales pitch that will go no where.
I have looked at a few SS portfolios and am well aware of the intricacies of the business model. I know for a fact they they are not "fool proof" because no investment is fool proof; they have their own unique challenges and pressures, just like any other asset class.
Sounds like you buy under-performing assets that have been mis-managed, which a is great niche. However, that's a J O B and not passive by any stretch of the imagination.
Free advice is worth what you pay for it, but I'd re-read read the forum rules about self promotion. BP is a great community and it seems like with your unique perspective you could add a lot. However, it isn't a place to come and lead generate for your business without giving anything back. If you want to stay long term, I'd tone down the self promotion and let your high quality posts, based on years of experience and expertise, bring clients to you.
46 Replies
- Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes6y
Originally posted by @Terry Hale:
Hello, hope everyone is staying safe. This is the time to invest in storage facilities, do you agree?
Yes historically self storage has performed very well in down cycles. This is a very different and very unique situation and depending on how long and how bad things get it could be a real test for the sector. If this is relatively short lived it shouldn't affect things much.
- 6yRonald RohdePro MemberAttorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
I think mini storage still has issues with over capacity, people need to be moving, not just losing jobs and staying put eviction free.
analyze the deal on it's own merits, not some macro economic thesis.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes6y
My clients are buying STNL NNN properties that are national investment grade necessity based businesses in retail. They have not asked for rent concessions and are actually hiring for more workers. They get a check like clockwork every month and passive in nature.
Self storage is active yield although to a lessor degree than some other asset classes.
A lot of people think retail is hurting across the board and it is not true.
- Investor · San Francisco, CA · Member since 2016 · 338 posts · 444 votes6y
@Joel Owens, Hey Joel, I'm wondering what sort of commercial investments you would target coming out of this downturn besides STNL? I've read a lot of your posts, and you are clearly an expert in the commercial space. I'm in multifamily and don't know that much on the subject. My one commercial experience was a two-tenant (restaurant and dry cleaner) that left a bad taste, and I haven't been back since.
All I hear as an outsider (even prior to the virus) is that retail has been in trouble. And with the economy shut down, it seems to me that would affect many of the businesses that were doing well (restaurants, event/activity spaces, office, hotels). So what's left? How do you invest in commercial properties in the wake of Amazon + Coronavirus?
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes6y
Hi Robert,
I like STNL personally because of the passive nature of it. I am 45 years old. I value TIME more than any kind of monetary return. There is active yield and passive yield. I have been down the road of SFR and Multifamily and it's not passive yield.
Not all retail is doing bad. For STNL (pharmacies, grocery stores, home improvement stores, Costco, Wal-mart, auto stores, national to strong regional corporate gas station brands, dollar stores, some national corporate credit QSR's, Davita Dialysis & Fresnuis) still have lenders bullish with 30 to 35% down and some have interest rates in the 3's. So to hit a 200 basis point spread or higher for national grade credit tenant between cap rate and debt on a passive asset is a win for most investors. STNL industrial is also a good one right now ( Fedex and or Amazon type hubs).
Your place a restaurant and dry cleaners would have to know the credit mix. You might have bought a higher cap rate but tenants and quality of location might not have been an A.
For location you can have A,B,C,D and tenant quality (mom and pop tenant single operator, mom and pop tenant multi-unit operator, franchisee single tenant operator, multi-franchisee location operator, national tenant (private credit), national tenant (publicly credit rated but not investment grade), national tenant (investment grade).
Then you get into how many locations or type of credit is backing the lease and a ton of other factors.
- Investor · San Francisco, CA · Member since 2016 · 338 posts · 444 votes6y
@Joel Owens, Appreciate the response. Are STNL's mostly cashflow plays, or is there an appreciation expectation as well? My understanding of STNL's is that they depend on the quality of the tenant, and the terms/length of the lease. Does the value of the product decreases as the lease term shortens? What's a typical exit strategy?
- Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes6y
I bought my only self storage facility in Bonita Springs, Florida approximately 10 years ago. It was only 55% occupied and during the era when you would drive down Tamiami Trail, which is the Main Street between Tampa and Miami and see commercial strip after commercial strip empty. Houses were not selling. To create traffic in a self storage facility, you need houses selling. It always surprised me that both buyers and sellers ended up needing storage space. I even had a section we referred to as valet parking. There were many snowbirds that would leave their car inside our facility when they returned north.
When houses started selling once again, the occupancy increased quickly to 93% and I decided to sell on 1031. A storage facility is great cash flow but very little depreciation or write off to cover it. I exchanged equity into multi family in the Dallas area and made approximately the same cash flow. The difference was the cash flow was covered mostly by depreciation and no taxes owed.
Good luck.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes6y
Hi Robert,
Cap range values tend to change by price point. 3 million and below you have lots of all cash or exchange buyers and some debt used. 4 million and up it flips with mostly debt used by buyers and some all cash. The reason is buyers do not typically want all that cash in one property for a larger concentration.
As far as value going up that depends on tenant type, location, and structure of the lease. You could have great tenant, good lease, and mediocre location.
With single tenant as the primary lease term years wind down the cap rate to sell starts increasing typically as finance is harder to obtain so can decrease buyer pools. If location is a B+ to A then lot's of buyers might still want it and pay a premium even with a few years left on the lease. It tends to be more of a passive investment. Lenders like to see 7 years left on primary lease term or more for the best loans in most cases. They want time for mortgage paydown so if tenant does not renew the option and goes dark then if lender has to take back chances are high they can be mad whole on the remaining mortgage balance.
There are value add STNL plays at higher cap rates. I have 2 buckets. Buyers that buy through me where I am a broker and then my syndicate side where I am the sponsor. Value add ideas is buying mom and pop tenant locations with below market rent leases, buying properties in bulk at above market trading cap rates, land deals, blend and extend current lease to change cap rate value, etc.
If you have great dirt then lots of options with it for long term upside value. The key is when buying STNL to not overpay with inflated rents for the property. Some developers in exchange for giving more TI - tenant improvement money then typical the tenant agrees to higher rents starting out that are above market. This also usually has the rental increases not going up as much as typical so maybe 1% annually instead of 2%. So basically the developer by structure has maximized their return on the sell off and left little to nothing for the purchaser. I don't like those deals. Tenant goes dark in that situation and buyer overpaid. Now second generational tenant lease up at reduce rent rates then when purchased and equity from down payment is mostly gone.
STNL can be great properties if you buy with the right locations for the right terms.
- Real Estate Coach · Malibu, CA · Member since 2020 · 34 posts · 5 votes6y
I have my doubts about STNL @Joel Owens @Robert C.. Self storage is a fool proof investment. That's been the focus of my firm to great success. If a tenant leaves in STNL, you are left with zero. Self storage, you have hundreds of units and there is always a need. Why bother with uncertainty of retail, especially during these times!
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes6y
I like retail because it can be more passive. I am an expert in retail looking at over 1,000 properties a week so I know the space very well versus dabblers. Experts can extract value when others see risk. My clients are buying essential businesses that have not asked for rent abatements and have been paying like clockwork. We can still get fixed rate debt in the 3's with 25 to 30 year amortization fixed for 10 years because of location and investment grade tenant quality .Everyone has something they like over one asset class or another. No asset class is impervious to losing money and that includes self storage. It's whatever the investor feels comfortable investing with for their capital.
I would agree if you have a weak single unit operator, location, business type model, or existing overinflated rents on the lease then lots of ways to lose money and have a building sit for a long time. We don't touch that type of stuff just like you underwrite Self-storage and certain properties do not work for A,B,C reason. It's the same in varying asset classes there are deals and there are duds. A dud can still be a deal if you can turn it into a diamond.
- Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes6y
Originally posted by @Terry Hale:
I have my doubts about STNL @Joel Owens @Robert C.. Self storage is a fool proof investment. That's been the focus of my firm to great success. If a tenant leaves in STNL, you are left with zero. Self storage, you have hundreds of units and there is always a need. Why bother with uncertainty of retail, especially during these times!
1.What do you define as a fool proof investment?
2. If you have a STNL and a credit tenant, you still get paid until the lease expires under most circumstances. Not saying STNL are the end all and be all, but there are more to them than barber shops and dry cleaners.
3. SS is a great asset class, but like hotels, it straddles the line between business and RE. It is less business than a hotel, but more than lots of other forms of RE. It most certainly isn't a cure all panacea.
- Real Estate Coach · Malibu, CA · Member since 2020 · 34 posts · 5 votes6y
By fool proof, its basically apartments without the people, you have a unit that's full of items, without running toilets, leaky faucets, without tenant headaches, statistics show most people stay 12 months business stay 24 months on average, the best part is most people do not visit their belongings. And from my experience, usually the only time they show up is when they are moving out. We are able to modernize and automate these facilities, so they run on autopilot, giving us monthly passive income, once they are at market occupancy and stabilized, it is the best asset to own.
@Bill F. I have built my strategies over the years, and I educate my clients on recessionary proof commercial real estate. So I can't give away my strategies, but if you're interested to find out how we do business successfully, I'd be happy to schedule a call, we have lots of opportunities.
- Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes6y
@Terry Hale If its all the same, I'll save my time, and yours, and avoid a sales pitch that will go no where.
I have looked at a few SS portfolios and am well aware of the intricacies of the business model. I know for a fact they they are not "fool proof" because no investment is fool proof; they have their own unique challenges and pressures, just like any other asset class.
Sounds like you buy under-performing assets that have been mis-managed, which a is great niche. However, that's a J O B and not passive by any stretch of the imagination.
Free advice is worth what you pay for it, but I'd re-read read the forum rules about self promotion. BP is a great community and it seems like with your unique perspective you could add a lot. However, it isn't a place to come and lead generate for your business without giving anything back. If you want to stay long term, I'd tone down the self promotion and let your high quality posts, based on years of experience and expertise, bring clients to you.
- Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes6y
I wasn't going to reply originally but I think I need to add my two cents. Storage units are not foolproof. I'm speaking from experience as I spelled out a few emails above. When real estate is not moving, neither our people or units in a storage facility. I purchased my building as stated above at 50% occupancy. There were empty commercial strips up and down the street as well as many single-family residences, near new, under $100,000 and not selling. I was "lucky enough" to purchase at the right time and able to increase the occupancy rather quickly to over 90%. People started selling and people started moving and people started needing storage space. It was not foolproof for the people that owned it before me......
I have never found a foolproof investment and I've been doing this for nearly 50 years. My history is on my biography and I'm not attempting to sell anything on bigger pockets.
- Real Estate Coach · Malibu, CA · Member since 2020 · 34 posts · 5 votes6y
Not trying to sell you anything man, always great to connect with people to possibly do business with. My webinars are free, that's not what I do... you misunderstood...
But with anything, if you wait around for a free lunch you can starve, purchasing under performing properties is just one of my strategies, it does take some elbow grease, no doubt about it, but I do not landlord, or listen to people who cry on my shoulder because they can not pay rent and I suggest, using professionals, I hire the best and have the cash reserves to reposition the property, have cash flowing, and take it from a liability to a highly desirable asset.
- Real Estate Coach · Malibu, CA · Member since 2020 · 34 posts · 5 votes6y
Hey @Rich Weese I appreciate the feedback, although reading your post, sounds like you had success, correct me if I'm wrong. Btw, if anyone has an underperforming self storage facility, I'm your man :)
- Member since 2020 · 26 posts · 43 votes6y
I think we can all agree there is no such thing as foolproof 100% of the time all the time.
My family and I own a large amount of real estate across California, residential and commercial. Our commercials are all net lease. All of our corporate/big box net-lease tenants stopped paying rent as soon as March 15th hit. Our non-corporate net-least tenants have continued to pay us rent, but who knows for how long. Our residential tenants have all paid rent thus far as well.
Before all of this, the prize net-lease properties were restaurants, gyms, office (we own some of these with corporate tenants). All of those are dead in the water right now and our concerns are growing by the day.
What about medical? Surely that's a segment of real estate that should be foolproof, especially now. Nope. I have medical and dental laboratory clients who lease large medical office spaces and they've been closed since this started in March and they're not paying rent. People aren't going to see their dentists, optometrists, even primary care physicians, at least not enough to warrant demand from medical labs supplying tools, materials, supplies, etc.
Point is, unless your tenant is Amazon, if this goes on long enough, we're all going to feel the pain, directly or indirectly, no matter how "foolproof" our portfolios are.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes6y
Gyms I don't like at all for NNN. They go out constantly and operate on razor thin margins. They have been doing this for years pre-covid.
None of my clients own gyms.
Only way I would look at that is if for that box size of say 30,000 sq ft rent was like 6 bucks a foot when I knew I could get 10 with another tenant. Then I might have some upside in a great location. If it's top market rents for that box size then nowhere to go with a poor tenant type but down and lose money.
Lot's of buyers just tend to look at higher cap rates and return where I look at the whole picture not just the potential return.
Restaurants depends on who it is. Lots of them have low shelve lives of surviving. Owner gets newness euphoria of opening a location and sales rush in but if the operator doesn't execute at a high level for customer service, fair pricing, and consistent great food time after time then the customers won't be returning on a regular basis if at all. That makes sales plummet when newness factor wears off and the operator can't figure out with a new shiny building and design that the sales aren't there.
Medical I have lots of doctor clients. There are essential services and then secondary services. Secondary services they are doing some telehealth options by phone or video and then emergency type services so general revenue is down. Essential stuff like Davita Dialysis and stand alone emergency clinics I am seeing doing well. The medical services in the short term will be affected some but as economy rebounds a lot of elective procedures will have a huge back log and ramp up so doesn't concern me that much.
Anytime a tenant asks for rent concessions that can be an opportunity to modify the lease for long term value to the landlord in exchange for a shorter term reduction.
- Property Manager · TX · Member since 2019 · 327 posts · 69 votes6y
@Joel Owens. Totally agree with you on gym. We Got burned with our first purchase last year with a gym tenant. First month they paid, then no pay the next 3 months. Just didn't have enough clients. Finally kicked them out at end of 2019. Ever since then each time someone called and asked about the space and said they are gym I just flat out turned them down. But how do you feel about martial arts ? I feel like they are just like gym, but a guy told me it's good business therefore can be good tenant. We have been getting interest from those too and I am not sure since I don't have experience with it at all.
- Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes6y
"Recession proof" doesn't exist, and I say that as a Self Storage investor. Our property is doing well, but seeing any asset class as recession proof is a recipe for doing bad deals. Many markets are oversupplied with Self Storage, and the fantastic fundamentals of self storage as a business do not make owners in those markets immune from the laws of supply and demand.
- Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes6y
Originally posted by @Rich Weese:
I wasn't going to reply originally but I think I need to add my two cents. Storage units are not foolproof. I'm speaking from experience as I spelled out a few emails above. When real estate is not moving, neither our people or units in a storage facility. I purchased my building as stated above at 50% occupancy. There were empty commercial strips up and down the street as well as many single-family residences, near new, under $100,000 and not selling. I was "lucky enough" to purchase at the right time and able to increase the occupancy rather quickly to over 90%. People started selling and people started moving and people started needing storage space. It was not foolproof for the people that owned it before me......
I have never found a foolproof investment and I've been doing this for nearly 50 years. My history is on my biography and I'm not attempting to sell anything on bigger pockets.
I would agree with there are few or any risk proof in RE. As I recall funeral homes have the lowest failure rate in the small biz sector. I think Harvard Endowment has a billion or so worth. Still not risk free but maybe as close as possible.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes6y
Courtney Duong,
Most gyms money is not made that much off of the memberships. Most people sign up based on closeness to home, how cheap per month dues, and amenities offered in base membership.
The real money is private trainer sessions, vitamin and protein food shop, clothing and accessories etc. Especially with a franchisee or a small time gym they better be an amazing operator to stand above the crowd. I look for investment grade credit from a huge entity or if franchisee they better have personal guarantee and amazing liquidity and net worth to back the lease. Otherwise it's like putting a bad tenant in that won't last. Now if you had DEAD SPACE in a bad spot of a retail center that nobody wanted for years and sits vacant then you can plug in that iffy tenant. If by some miracle they make it you have increased NOI on a non-producing space that almost everyone passed on.
I really do not like gyms no matter what the cap rate is. I do see from time to time planet fitness take on empty pharmacy spaces at super low rent per ft on a hard corner and traffic count. Those can make sense sometimes as box size is about 10k to 15k sq ft so if they go out you have multiple tenants who might want the location.
Karate or martial arts schools. I know about this. Over a decade ago I looked into opening a martial arts school. I haven't trained in awhile but made it to 3rd degree black belt and was fixing to go to fourth so had been taking for many years. The master instructors usually 6th degree black belt or higher are the ones that make any decent kind of money. They get this through pupils they have trained up to black belt to then go and open their own schools. The master instructor then gets a percentage of testing fees etc. as residuals to fund their income and eventual retirement. Not all schools work this way but a lot of them do.
Then you have schools that are mainly child focused and then ones more adult focused in training and curriculum. Really the kid schools the parents tend to use them as date night outs and babysitting to instill manners in their kids. I took martial arts for the spiritual side of it and not the mcdojo junk. So lots of kid schools are glorified babysitters. I like kids and have my own but doesn't mean I want to be around 40 to 50 of them 5 days a week for hours on end.
When I ran the numbers there was really no money in the business. An owner operator might make 50k a year profit for themselves. Top ten percent of schools maybe they make 100k a year profit. They have very high breakeven. If you have 100 kids at the school for 100 a month fee which parents complain is to expensive most of the time then only 10,000 gross a month. Back out salary to live on, utilities, rent, equipment needing constant replacement from wearing down, insurance, etc. and not much left over.
If I was to look at a martial arts school I would want to know the liquidity and net worth of the tenant and have a personal guarantee. If it was a newer younger person on behalf of the master opening a school then the master with the stronger net worth and liquidity would absolutely have to be on the lease. I would not pay any TI for a risky tenant like that either and rent would go up every year no blocked rent going up 10% every 5 years like a national tenant.
The schools where the type of training and style is more specialized toward adults those owners can charge usually much more money per month for a membership and testing so can often reach higher profitability.
These days I don't like stuff that takes up a lot of my time I don't care what the returns are. I can go make more money any day of the week but can't get back the precious time in my life to live in a way that makes me happy and fulfilled everyday.
I am all about good passive return with less of a headache. I don't want a complicated life. I find peace and happiness in simplicity but that's just me.
See if you can split up the former gym space into multiple tenants or maybe try to hold out for medical type tenants. Regular lenders really don't like gyms much for loans buying STNL. The local credit unions and community banks often pass and then stuck with really expensive and cumbersome CMBS to deal with. Also stay away from big buildings with NN leases because the rent often generated at low cost per foot doesn't give enough room for adequate saving up of reserves to pay for parking lot or eventual roof layer recovering or total replacement.
- Property Manager · TX · Member since 2019 · 327 posts · 69 votes6y
Thanks so much for taking the time to write such a long response and sharing your wisdom/knowledge. I really really appreciate it.
Oh, and thanks for the referral to Andy the commercial lawyer out of Houston. I contacted him last week and like the guy. He is reviewing a lease for us as of now. I did tell him you referred me to him.
3rd degree black belt? Wow. My son took Karate a while back and I have so much respect for the instructors who have 2nd degree black belt in Karate. I joined them in practice sometimes and liked it. They are retired police instructors. Problem is, when they showed us those deadly moves like that poke in the neck, or the eyes, or don't yank the bad guys in the head because that will kill them, guess what I want to do if I have to fight the bad guys? :) So we stopped because you can't teach and show me those moves and tell me not to use them!
Looks like we share the same philosophy on many things. I also don't want a complicated life. I enjoy simple things in life and do think beauty is in the simplicity. Don't know if you play tennis but my son does and I pick it up after him and the coach and I keep telling him keep it simple, no need to complicate your swings and he does gets it. He is at a point now where he can see how keeping it simple really works beautifully, effectively, and efficiently. Not only his form/fundamental doesn't change (as with other kids it can change after with just 1 day without practice) but it is so consistent it also holds up very well under pressure instead of cracking. His practicing partner is another story, not nearly as good but looks up to Rafael Nadal and therefore always does those extra weird things that drive us crazy. And, it doesn't work!
Ok, enough with tennis, back to commercial real estate. We (as in my brother) bought that retail (multi-tenants) last year before I knew/heard about you or BP. It's about 15,000 sqt and the gym space is about 2300 sqt. It's outside of Houston, about 45 minutes northwest of Houston. This retail was built in 2018, on the busiest street of that city, and the busiest section of the street with many many retails, all are doing well. My brother is in Vietnam and wants to invest here so last year we started and bought that and hire his nephew-in-law to be property manager. I only help out here and there since I was having a 9-5 job as a programmer working for an HR outsourcing company and was working on Federal Reserve account. That company has been trying to outsource work to India for years, nothing new there. The thing is, being on Federal Reserve account make people think I am safe, and I was, until this February. I got laid off at end of February right before covid-19 hit Houston. And my friends have been asking if I am going to brush up my resume and look for job. I told them after working on Federal Reserve account for almost 20 years and dealt with everything they had thrown at us I have just had enough. It's about time for me to move on something new and better. Lately for about a year now each day I woke up dreaded how much work I was going to get for the day and urgent it would be, so much that it was not fun for me anymore. So in a way I am glad that I got laid off. I never had the gut to quit because I am a singly mom and I need insurance for me and my son. So here I am, going to help out my brother in real estate investing from now on.
We don't have loan on this property (bought it at almost 7mil, 6.75 cap, 100% occupied with 9 tenants. By now 3 tenants are out: a gym at end of 2019, a vitamin shop at end of Feb, a smoothy shop at end of March). And have enough to invest/buy some more when things are settled with this pandemic. I hope I will get a chance to work with you soon, and learn from you.
We did think about splitting the space up into 2 but the cost might be a little much now while rent is down a little bit. Still exploring options. That's when this young martial artist called and asked. He owns another school locally and wants to try out at this location. Looks like they mostly teach kids. He said he can only pay $3000/month and can pay first 2 months in advance, 1 year lease then after that we can get rid of him and rent to higher pay tenant, or we can re-evaluate and re-new. Our base rent is $2.50/sqt/month, NNN is $0.50/sqt/month. So this $3000/month is not even half what rent is supposed to be. However, given everything is slow down with covid-19, and we have a tenant just moved out at end of March (vitamin shop, yes, you did mention this in previous post, sigh) I am wondering if we should take this instead of running into risks of having it vacant for longer period. Looks like he is doing good at the other location but like you said his profit margin is really low and can't afford high rent.
Could you please explain how the personal guarantee work? I need to look into these lease and see if any of our tenants have that or not. I am still in vacation mode since I had been at that programming job for 20 years without any break (first and only job since college). But starting in May I will need to get more involve.
Thanks.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes6y
Sounds like you have a bunch of mom and pop type tenants. While talking about different types of assets is within the general nature of the original posters topic (recession proof real estate) your specific situation you might want to create a separate thread or contact me on here directly.
I want the original posters thread to stay on general topic.
For exercise I go running these days. 45 years old and I run 15 miles at a time at least 4 times a week. Pace is about 8:50 minute per mile.
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