All Forum Posts by: Michael Anuzis

@JD Martin, to clarify: the vacancy rate for this submarket declined from 25% in 2012 to 8% currently. (red line)

Considering acquisition of a class B office in Michigan. This would be my largest investment so I'm trying to be conservative in my models. The office is currently 5% vacant, but 25% vacant as recent as 3 months ago. I'm looking to make an offer based on a forecast of its average expected vacancy over a 10-15 year hold.  A prior thread on BiggerPockets suggested using a 20% vacancy rate for offices due to their volatility, but I'm having a hard time making that case to the broker based on the market data available. Sharing the data below and appreciate any advice on how you would forecast vacancy.

For reference: I plan to acquire for cash flow and maintain as needed; no active development.

Q3'16 Metro-Detroit Data; source: CBRE

Sub-Market data specific to the building in question (classes A,B,C); source: listing broker

(shows 8% vacancy)

Historic Vacancy & Forecast specific to the building's submarket; source: listing broker

I requested historic data dating back to 2005 to observe how vacancy was effected by the last recession, but historic data was only available to 2012. (chart shows: 15% vacancy in 2012, down to 8% currently)

I inquired how the aboveforecast was modeled, but no explanation was available. Can't say I trust it.

Unemployment: currently the lowest it's been since 2007.

Given: the property has 10 units and short leases expiring in 2017-2018. 3 tenants moved in 2016 (30%).  60% of tenants moved in since 2010. 80% of tenants moved in since 2005. For simplicity, assume all units are equal size, niceness, and cost.

Before receiving any data on the submarket (shared above), I initially used a 25% vacancy based on:

• 19.9% (20%) class B vacancy across Metro-Detroit currently
• increase 5% (to 25%) because unemployment is currently near record lows

I further expect unemployment to gradually trend up over 10-15 years due to automation & A.I.

25% vacancy won't fly with the broker or seller given the submarket data available, however, the submarket isn't the nicest of areas and isn't exactly up-and-coming. It sits 2-3 miles away from nice areas, and 2-3 miles away from un-nice areas.

Question: what vacancy would you find fair in making your offer?

Appreciate any advice.

@Oren K., I appreciate your insights and learned a lot from your posts. Thank you.

@Joel Owens, thanks for confirming.

If anyone has had success with class B offices I'd love to learn more. It doesn't seem fair to conclude that office investors naively take higher risk for lower cap rates.

If I owned enough multifamily to cover costs of living and was sitting on excess liquidity I could see delving into offices to diversify, but it seems savvy investors may be able to make sound office investments more directly.

Related: investors in mobile home parks insist on valuing properties primarily on lots, mostly ignoring park owned homes. Given the office maxim "you're buying the lease and the building comes free", can someone confirm how empty suites are treated in practice? Valuing a 3-suite office with a vacancy as though it's a 2 suite investment seems likely to offend.

Anyone with experience owning both offices and multi-family properties able to share the relative risks of each? Looking to invest in class B properties between $450k-800k and 7-10% cap in Michigan. I've read that with offices "you're buying the leases and the building comes for free", but every office I see listed has 30-50% of revenue associated with leases expiring within 2-3 years.

It's difficult to be confident in lease renewals when I see hundreds of office vacancies large and small around Michigan. It's also a turn off that class B offices with only 2-3 tenants easily cash flow negative with the loss of one tenant. Compared to multi-family buildings in the same price range with 15-20 units that remain profitable with 3-4 vacancies, which are generally straightforward to fill, offices look more risky in almost every way.

Attracted to offices having lower maintenance tenants, but that doesn't seem worth the riskier investment dynamics. Cap rate is supposed to reflect investment risk, but 7.5 cap multifamily appears significantly lower risk than 7.5 cap office. Am I missing something?

Appreciate any insight from more experienced investors.

@David Thompson & @Kaz M., thank you both for the excellent suggestions. I was under the impression syndication deals didn't provide the tax benefits of investing in real estate, but came across an interesting article on BP yesterday explaining that syndication deals often can provide full tax benefits if structured right. (particularly: deductions for depreciation & interest)

• fundrise.com only provides a 1099-DIV (dividends)
• realtyshares.com provides a K1, but captures all deductions through a second LLC that appears to maximize tax benefits for the platform, not investors. (not a tax expert; I may be mistaken)

From your advice and the above article, I gather it's possible to find syndication deals structured to share tax deductions proportionally with investors. I haven't been able to find anything like this. Shared tax deductions was the main reason the deal through an acquaintance looked attractive.

Any suggestions how best to find syndication deals like the ones you've discussed? It sounds like there might be waiting lists to invest with the top sponsors you've described.

Looking to make 3 commercial real estate investments in the next year, two as primary (sole) owner, one as a limited partner. Just finished 10 years in industry, and just returned to the states after 6 years in Japan where I wasn't comfortable doing real estate. Roughly $0.5M in liquid assets saved up I'm eager to invest in real estate. I understand I missed the optimal timing from the last real estate cycle, but it still looks viable to invest today in cash flow deals with a plan to buy and hold.

I've read 15+ books on real estate investing (analysis, due diligence, financing, etc.) and feel comfortable with the theory, but lack experience. I've been warned commercial real estate is an easy area to get screwed if you're not careful. Appreciate any advice from more seasoned investors.

Investing Strategy:

• Purchase a 15-30 unit apartment complex; self manage for one year to learn the ropes, then hire property management. Criteria: 8-9% cap, 10-15% cash-on-cash.
• Purchase one mobile home park (30-50 lots); convert park owned homes to tenant owned; position for low maintenance long term
• Participate as a limited partner investing $75k-120k as one of 4-5 co-investors in a 40-60 unit apartment complex. Expecting 6% cap, 8% cash-on-cash. The deal will be found and managed by a high school acquaintance with a successful property management company with whom I have moderate trust.

I'm attracted to the last deal (limited partner).  However, I've been warned limited partners can get screwed in a variety of ways (general partners increase operating costs that go into their own pockets; limited partner yield approaches 0-3% and becomes virtually unsellable).

My high school acquaintance explained the last 3-4 deals he's done in the $3M range have included 4-5 wealthy investors who go in together and receive roughly 8% cash-on-cash. I understand one incentive to not screw them is for continued investment on more deals, but wonder how reliable that is.

Questions:

• Anything you'd do differently re: investing strategy?
• Any advice as a limited partner?
• Any advice overall?

Greatly appreciate any feedback or suggestions,

-Michael