Is this a good time to enter commercial real estate ?

Question

According to Buffet’s « when others are fearful i am greedy » principle, is this a good time to invest in retail commercial real estate ?

More and more retail chains, restaurants are announcing bankruptcy. Even some big players are closing significant amount of stores globally. I wonder as a newbie should I start to look into to this industry ?

William Jenkins · Answer

Lumping all commercial together is a mistake in my opinion.  Their are some segments of commercial that will keep plugging along like nothing has happened, and some that will be decimated.

It is pretty easy to open your eyes and separate the good from the bad.  Retail and office in general are going to have a very tough time in coming months/years.  Industrial on the other hand is still thriving and will likely continue to do so in a relative sense.

If a deal is out there then go for it!  Having said that, I would be careful to underwrite your deal using assumptions from the "new normal."

I am not seeing any deals at all in the markets I work. Sellers are still trying to get pre-COVID pricing for properties that are going to have obvious collection issues. I mean its common sense that a strip center with a restaurant, salon, dry cleaner, etc. should be worth less today than a year ago, but sellers are choosing to stick their head in the sand and keep their asking prices high. We will see how it works out, but I think we will eventually see a seller capitulation.... That will generally be the time to buy in my opinion.

Joe M. · Answer

No you shouldnt

Matthew Irish-Jones · Answer

@Payzulla Namat. I am doing it but... I’m buying mixed use buildings.  That allows me to mitigate some risk on a longer commercial vacancy.

Ronald Rohde · Answer

Whoever figures out how to drive income from empty shopping malls and empty retail/office is going to be rich. Billions rich. RIght now, I haven't heard of any concepts except Amazon buying up some JC penney or sears locations.

OP should not be diving into retail!

Joel Owens · Answer

There are people making millions in commercial retail properties EVEN IN this environment.

Experts in specific classes can make money no matter the cycle.

There are (hop-a-long) investors who try to buy any asset at the bottom of a cycle and ride the wave upwards. They do this to try and compensate for their lack of deep level expertise in any one field.

If location is good then land, building or both can be repurposed. The KEY is what you buy it for going in. To buy right you have to have an understand of how retail works on a deep level and what tenants want and are looking for with expansion plans for new sites, areas, and locations.

Matthew Irish-Jones · Answer

@Payzulla Namat. Yes there has been an impact.  In particular banks are more hesitant to loan on the commercial side.  Especially for smaller investors.

Greg Dickerson · Answer

The rule doesn't really apply in the current environment. This is not a fear based trend or even market fundamental down turn. This is straight up no demand or end user which requires a complete adaptive reuse strategy. You need serious expertise and patient capital to be able to take advantage of opportunities this time around.

Jonathan R McLaughlin · Answer

@Payzulla Namat it’s a great time if you have really deep pockets and expertise in repositioning distressed assets. Lots off empty restaurants and discount office space around, some of it probably good. But you are talking about 10s and 100s of millions in Capital and real expertise  :)

Steve Morris · Answer

Depends:

1) You know what you're doing?  If no, then learn.

2) Do you know what you're good at?  Paying cheap for a money sink hard way to find out

3) Do you have a plan to increase NOI?  Then get one.

If you notice, I didn't mention anything about today/tomorrow.

Dan Biber · Answer

@Payzulla Namat, I would suggest as a new investor that you gain knowledge through education first, before investing your hard earned money and potentially losing it.  From a commercial RE perspective, I would suggest looking for opportunities that are less risky in today's environment: industrial, mobile home parks, self storage.  Office, retail, Class A multi-family pose a higher risk.  Experienced investment groups/developers will be looking at retail shopping centers as redevelopment opportunities; especially if vacancy is high.  Redevelop into multi-family, townhomes, smaller scale mixed-use (small boutique office building, some retail outparcels, maybe entertainment, majority would be mixed residential (townhomes, condos, detached, MF)  We looked at 100k SF shopping center before COVID as a redevelopment opportunity, but the asset was 90% occupied and it was challenging to underwrite a market value purchase price for the asset as a complete tear-down.

Thanks for reading.

Dan Biber

Is this a good time to enter commercial real estate ?

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