Purchasing an office building in NJ - steps to conduct effective research?

Question

Hello All,

I am new to commercial RE investing and would like to ask for a piece of advice regarding how to perform an initial marketing research toward purchasing an office building in a different state (I am in NY and the property is in Northern NJ). I have already checked Property Shark and LoopNet and did obtained some information but it is not sufficient to make a conclusion whether the subject is worth investing. I would appreciate any practical steps (course of action to get the property records, financial and statistical data, allowable vacancy ratio in the area, etc. ) that I should take.

Thanks in advance.

IB

Yaro L. · Answer

Hey Ivan,

Wonder if you can help me out, I am in the process of purchasing an office building in NJ as well and was looking for a reputable inspector near Manalapan, NJ (do you mind sharing who did you use  ?)

Also, do you mind sharing your experience thus far with your purchase in NJ ? I also live in Brooklyn and this will be my first out of state commercial investment.

Appreciate your help in advance,

Yaro

Ivan Bovkun · Answer

Thanks a lot Tim, appreciate your opinion.

Best,

IB

Tim Shoultz · Answer

I think this is really risk for a new investor.  I started out buying commercial as an investor and never looked much at M.F. so I don't see that as a bad thing.  With that said, one of my rules going in was a building must cash flow day 1 or I would not buy it.  There is a lot of risk in investing in general and adding on to that risk of a building that does not cash flow is prob not a great way to start out investing.  Adding to that, you are looking at office in an out of state location.  Office TI's can be very costly when you bring new tenants in adding to the cost to rehabilitate.  Office leasing is also fairly expensive.

I would prob look for something in the 60-80% occupancy range if you want to go do value add investing and start there.  A lot more safety having something that can pay taxes, insurance and mortgage.

Ivan Bovkun · Answer

Steve,

Thanks very much for your response. The points you have kindly listed out make a lot of sense and practical value.

Here are some specifics and a question:

1. The building is occupied by only 23% (which is of my main concern); 2. The current cash flows are enough for the owner to break even (at least this is what it seems but it is not a fact); 3. The building's condition is fare meaning there are no major visual defects but an inspection is to be done shortly. Also, the subject is located in a flooding zone and that particular area was severely affected by Irene and Sandy.

Now, as per your quote:"When you buy this type of building you are really buying the leases not necessarily the building.", if you had funds to acquire an almost empty (because 77% or so vacancy is scary but that seems to be due to the current owner's unwillingness and negligence) office building in fare condition selling at really good price, at a theoretically good geographic location (but in a flooding zone, zip 07470), would you, as investor, take the risk of buying this type of investment property in order to put an effort and bring it back to life (by attracting new tenants and thereby to bring the occupancy back to a sound for the area 85-90%)? I would like to hear your opinion.

Regards,

IB

Steve Wilcox · Answer

You have not given enough info to give you sound advice.

Is the building currently occupied, cash flowing, what are the status of the leases, condition of the building? The biggest thing is to be aware of the leases in place and strength of the tenants credit. When you buy this type of building you are really buying the leases not necessarily the building.

What are the market rents for similar products in your area, what is the vacancy rate for your product type in your area, what are the good leasing agents in your area seeing?

You should find out who the players are in office leasing in your area (specifically the type you have i.e. small boutique, medical arts, large single tenant, ect) and set up meetings with them. Talk to them about the specific building you have, the future or current vacancy numbers, get an idea of rates you might get if you went to market for new tenants and how long it would take, what their commission structure is (often different from residential agents).

Next talk to whoever you think is going to finance the building, share your numbers and projections with them and see what if anything they can do for you. Talk to 2 or 3 more local smaller banks or credit unions and make sure your terms are competitive.

If all looks good, the building has good leases, and strong tenants, and you want to be in the office space field in north NJ in the future then buy the building.