Peterborough This Week Asks: Does Peterborough have the infrastructure it needs to grow?

In this article yesterday in Peterborough This Week,  Joel Wiebe explores a recent report on projected growth for the city and county of Peterborough.  One of the main themes of the piece is the need for improved traffic movement in the city and the debate that just won't die: The Parkway.

Facing a 13 per cent population growth and only a four per cent employment growth, he (Jeff Leal, MPP) says reflects the City's demographics, with many retired residents here and more on the way.

MPP Leal points out it also shows increased commuters using services like the Go buses.

The City's director of Utility Services, Wayne Jackson, says it is up to councillors to determine what is too congested for a road. Is an extra 15 minutes in a commute acceptable?

"Time is money for businesses," he says of possible economic impacts.

He highlighted Mayor Ayotte's comments about people heading down residential side streets if the roads get too busy. This leads, he explains, to angry residents.

Good alternatives need to be found, he adds, whether it means expanding or altering current roads to allow more traffic to be handled or to entice people use different roads.

I can't believe I agree with Coucillor Peeters, but:

Councillor Patti Peeters has a simple answer -- build The Parkway.

"Why are we still talking about The Parkway?" she asks. "Because we need one."

This is something I've been vocal about in the past.  Click here for my letter to the editor, and here for a response to that letter about the Parkway.  Councillor Peeters is absolutely right, we need the Parkway and it should have been built 50-odd years ago when the land was assembled.  Roads identified in the print edition of the paper as congested or in danger of congestion included: Monaghan Road, Parkhill Road, and Fairbairn Street.  Sounds suspiciously like the route one would take if the Parkway existed...

Route taken by many city residents today.

Parkway Route as envisioned by city planners 50 years ago.

Of note is that the route most people take today, along Clonsilla, up Monaghan, across Parkhill and then north on Fairbairn, is primarily through residential areas.  I know, because I regularly use this route because there is no alternative.  These are mostly two lane roads built 50 - 70+ years ago when average traffic counts were likely less than a third of the volume seen today.  The people that live on those streets must curse those politicians of the past who didn't have the will to see this road built. 

Not one of those streets was designed to handle the volume of traffic that they see every day.  As a result of driving so much traffic through those residential streets, there are far too many lighted intersections.  The amount of stop and go traffic in a city the size of Peterborough is inexcusable.  Where are the environmentalists on this issue?  I thought that constantly starting and stopping your car was terrible for the environment?  I thought sitting in an idling car was bad for the environment; did I miss something?

I've said it before, I'm saying it again:

Build the Parkway. Now.

Update: There was a really good letter to the editor in Peterborough This Week on February 9, 2010 that supports what I've been saying: Build The Parkway

Nicely put Mr. Bayly!

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It IS Time to Buy Commercial Real Estate

Found this on a cre-advice.com and it mirrors what I'm starting to hear in the market and what I've been screaming from the roof-tops:

Investors have to do something with their money: You can buy in to the investment grade bond market and earn a whopping 3.75%, or you can buy NNN leased, credit tenant real estate and more than double your return. As Bill Gross of PIMCO points out as a cost of capital sitting on the sidelines: “an effective zero percent interest rate, as a price for hiding in a foxhole, is prohibitive.” In 2010, buyers will exit the payless funds earning close to 0% in search of manageable risk. Quality commercial real estate will receive considerable attention in this context.

Because problems with debt structure will motivate a large number of sales, pricing will remain in flux in the next year. As a result, headline measures of cap rates will fail as indicators of the underlying variation in property trades. Rather, buyers and sellers alike will be depending on their Advisor’s knowledge of the market and of the emerging mechanisms of exchange – such as auctions – to guide their investment strategy. Investors with strong operational capabilities who are seeking to acquire assets over the next year are in an ideal position. This group will be able to purchase assets during a period of dislocation, before asset prices normalize and while long-term yields are at the their peak.

What do you think? Would you rather sit back and 'enjoy' 2-3% returns when you know that inflation will eat up most of your buying power over the next several years, or get into a solid commercial real estate investment where you should be able to crank out at least 7% for the forseeable future?  Sounds like a simple choice to me.

Ready to buy?  Contact me.

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Top 3 Expenses Most Often Missed by New Investors

When calculating return on an investment (ROI) or internal rate of return (IRR) there are a number of expenses to take into account and surprisingly, there are a few that get overlooked entirely. I've noticed that, particularly new investors (and often brokers who should really know better!), miss a few essential expenses far more often than I would have expected.

When working on calculating an ROI or IRR, you always need to start with a reconstruction of the net operating income (NOI). A basic worksheet should look something like this but may be more or less sophisticated based on the asset class:


In researching properties for buyer clients, I always ask for a copy of the income and expenses from the owner or from the broker as reported by the owner if the property is listed. A complete picture of the income and expenses, along with all other pertinent physical, demographic, and economic information about the property and the market, is the only way to properly analyze a property on behalf of my client. Omissions or errors here have a direct impact on the valuation of the property and are therefore essential.

I almost always receive a list of the monthly rents or an annual summary of the gross income - though not everybody seems to grasp the concept of total gross income and often it takes a couple of calls to get all of these figures. I usually get a summary of the expenses as well, though often there are a number of glaring omissions. Either by design, because the numbers are too large and the person providing the information is hesitant to be open with me, or by mistake because they don't actively track their expenses or have a poor record keeping system, or simple ignorance.

The top 3 most often missed expenses are basic to the operating expenses of any property, but they are sometimes the most difficult to obtain. They are:

1. Property and liability insurance.
2. Repairs and maintenance.
3. Vacancy and credit losses.

Why are these left out so often? As I said, these are real numbers that have a direct impact on value, so if there is a particular expense or expenses that would negatively affect value, some sellers will intentionally make it difficult to discover them. Most often though, they are missed through simple ignorance.

Property and liability insurance.
While not necessarily a large expense in itself, if you are looking at a smaller investment where every penny counts, missing an expense of this nature can have a very serious impact on future profitability - even if such an omission is innocent.

Repairs and maintenance.
Usually this one is omitted intentionally. Why? "Because the roof is only 4 years old, and the paving is only 2 years old...what else do you think needs to be done?!" From the inexperienced buyer's perspective, it often is left out for the very same reason - there is sometimes a mistaken belief that just because repairs have recently been made that there won't be any further repairs needed for the foreseeable future. Maintenance items like, snow removal and grass cutting are often ignored by first time investors because they intend to do the work themselves and therefore don't feel it's necessary to account for those expenses. But isn't your time worth anything to you? Even if you plan on doing the work yourself, you should be compensated for your time!

Vacancy and credit losses.
This is the most often missed expense in my experience. If the building is full, why should you account for vacancy? There are a couple of reasons: 1) Your tenants are not invincible - one of your tenants could step in front of a bus tomorrow and you'd be looking for a new tenant. If the property is a small one, and one of your tenants just decides to leave or goes out of business, you could be looking at significant carrying costs while you re-lease the space. 2) In the long term, some credit losses are unavoidable. Even with the best of tenants with the best of intentions, occasionally things don't work out the way everyone hopes and there's just too much month left at the end of the money. 3) The last, and maybe the most important, is that when you apply for financing on any investment property, the bank or lender you use WILL include a vacancy allowance to account for lost income that could affect their ability to collect your payments. Go into the financing application process well informed or you could be in for a rude awakening.

So there you have them, my top 3 most missed expenses by new investors. Tell me what you've experienced as a buyer or as an advisor; ever run into these or other items that have put the brakes on a deal you were hoping to close?

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Top 7 Things Clients Look For When Selecting a Commercial Real Estate Broker

What's the difference between a client and a customer? Well let's take a look at the definitions (from thefreedictionary.com):

Customer:
n. cus·tom·er
1. One that buys goods or services.
2. Informal: An individual with whom one must deal: a tough customer.

Client:
n. cli·ent
1. The party for which professional services are rendered, as by an attorney.
2. A customer or patron: clients of the hotel.
3. A person using the services of a social services agency.
4. One that depends on the protection of another.
5. A client state.
6. Computer Science A computer or program that can download files for manipulation, run applications, or request application-based services from a file server.
[Middle English, from Old French, from Latin clins, client-, dependent, follower; see klei- in Indo-European roots.]

In real estate legal terms, a client is someone with whom a brokerage has entered into an agency relationship wherein they agree to provide certain professional services and owe certain legal obligations to the client. In reality, the client relationship, at least a good one, goes far beyond a mere legal obligation. While a customer is treated fairly and honestly, they don't get the same level of advice or counsel that a client gets, nor do they realize the long-term benefit of a true client relationship; they're just there to buy something and move on.

In my opinion the key really is the relationships. As much as new technology has made the job of finding property and property details easier, and much as it has made the task of marketing and finding real estate quicker, it cannot replace the human connection that face to face relationships build. I don't care how much you Twitter or write in your blog or how much time you spend on Facebook! These are good tools to start the conversation, but the connections, the relationships are the ticket.

Given this, it's no surprise that #1 on the list of things most valued by potential clients is the relationship with the broker. If the client doesn't feel a connection and doesn't feel that they can trust you, nothing else you do will ever turn them into true clients for life.

Without further ado, the Top 7 Things Clients Look For When Selecting a Commercial Real Estate Broker:

1. Relationship with Broker
2. Prior experience/performance
3. Reputation of firm/brand identity
4. Understanding of their business/objectives
5. Personalized approach/solutions
6. Fee structure
7. Knowledge and advice

I'm always interested in varied opinions, so let me know what you think. Do you agree with this list? What would you change or add to it?

Watch for my next post on this topic: What frustrates brokerage clients most!

Source: CEL&Associates Inc.

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HST Has Builders Sprinting

HST has builders sprinting - Yourhome.ca

"We've had a lot of customers sitting on the fence, but because of the tax they're much more willing to seal the deal," says Bazely, owner of Barrie-based Gregor Homes and president of the Ontario Home Builders' Association.

"We've ramped up production so we can close on our homes before the HST takes effect next year."

Bazely says he recently talked to his trades and suppliers to ensure they are ready for winter.

"Every week we lose, we get closer to that July deadline."

The new tax, which combines the PST and the GST, will have an impact on homes worth more than $400,000.

It would add, for example, $6,000 on a $500,000 home – enough money to upgrade to a better kitchen or floors, and a good incentive to close early for many consumers.

A $1 million dollar home gets hit with $36,000 in extra taxes.

An EXTRA $6,0000 on a $500,000 new home! Incredible! How in the world can anyone say that this is good for the economy?

In the GTA a $500,000 new home is not out of the ordinary. The Province will be cashing in on the backs of hardworking Ontarians and our fragile economic recovery is likely to take a serious hit when this ill planned and ill conceived new tax hits the road next year. How can they stick to the story that the average person will only see an increase of $79 per year in spending as a result of this new tax? Do they honestly think we're that stupid?! I hope everyone remembers this when it comes to election time.

McGuinty and his band of *insert expletive here* need to go!

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Canadian Real Estate Sentiment Survey Results

“We’re in the third round of a five round boxing match, but in the first two rounds nobody threw a punch. At some point somebody’s gotta throw a punch.”

Source: REALpac / FPL Canadian Real Estate Sentiment Survey, Fourth Quarter 2009, Released November 3, 2009

I'm sensing a recurring theme on this blog about getting into the game. The time is right to get back into the investing game. Money is flowing, and the economy isn't floundering as badly as some had thought it might still be. Granted, the past 12 months haven't been all peaches and cream, especially in the brokerage world, but contrary to popular perception, the sky hasn't fallen on the Canadian commercial real estate market.

In fact, REALpac just released their Q4 Canadian Real Estate Sentiment Survey and found that, overall, investor sentiment is improving in Canada. It shows that overall sentiment about the market has improved, on their index, from 50 to 68 from Q3 to the beginning of Q4 2009. An impressive improvement to say the least.

So why doesn't the overall market reflect this survey? At least in my corner of the world, Peterborough, Ontario, transactions are WAY down relative to 2008. I did a quick bit of research and found some interesting results.

I compared all MLS® sale transactions recorded by the Peterborough and Kawarthas Association of REALTORS® from January 1 to November 4, 2008 vs. the same period in 2009 (it's an odd time frame, I know, but it seemed like a good idea at the time!). I only looked at transactions over $150,000 in order to weed out the business sales that did not include real estate, and leases that sometimes get recorded as sales.

2008 Number of sales: 39
2009 Number of sales: 26
2008 AVerage sale price: $494,437
2009 Average sale price: $357,385
2008 Average sale to list price ratio: 88.46%
2009 AVerage sale to list price ratio: 73.93%

Of note, there were four transactions over $1M in 2008, including one that was over $2M and only one transaction above $1M in 2009. (Remember, this is a small market with a combined city and county population of only about 135,000 people.)

So what do I see in these numbers?

First, there is an obvious trend toward fewer and smaller deals, including a drastic reduction in transactions over $1M. Secondly, and this is my subjective opinion, there isn't really a lack of interested buyers, rather there's been a significant lack of faith in the market in general on the part of would-be buyers. The perception has been that there ought to be more 'good deals' out there, and that by waiting it out, these 'saavy' buyers will be able to cash in on the distressed assets that must surely be just about ready to come onto the market.

But there haven't been that many distressed properties in Canada. I beleive that a lot of the poor sentiment is spill-over from the US media coverage of the severe slide they've seen in their market. In a recent article on globeinvestor.com, Kirk Kuester, managing director of Colliers was quoted as saying,

"There hasn't been that much distress [in the Canadian market], and if companies do find themselves in a bit of a pinch, it's not that difficult to raise equity on the market."

From the same article:

Brookfield Properties Corp. and its partners have an unexpected problem: They have $5-billion to spend on commercial real estate, but markets have recovered so strongly that they can't find the juicy deals they hoped would lead to 20-per-cent returns.

The stock market's resurgence from March lows has allowed many of the world's most challenged real estate companies to issue stock or sell bonds to solve financial issues brought on by lower rents and higher vacancies. Meanwhile, the sector is showing signs of recovery in Canada, further encouraging landlords to hang on to buildings that had caused concern through the recession.

"There really hasn't been that much out there," said chief executive officer Ric Clark. "When we first started thinking about this, we had many companies on the list as potential targets - the public markets have been so efficient that many have been able to solve their problems."

Brookfield set up a $5-billion real estate investment fund in September with Brookfield Asset Management Inc. and dozens of major institutional investors. The plan was to buy malls and office towers from owners that were struggling to keep tenants and pay mortgages.

While the U.S. market is still going through a historic upheaval (7.9 per cent of lease holders are behind on their payments and one in 10 shopping mall stores sit empty), things have stabilized enough that the consortium is rethinking its ability to score its targeted 20-per-cent return on any investment.

In fact, in the hunt for deals, many Canadian REITs have gone out and raised warchests to buy distressed assets that haven't materialized thus creating the real potential of reducing their stock prices. From theglobeandmail.com:

But what if the market isn't all that distressed? Third-quarter statistics from RealNet Canada Inc. hinted that a rebound is taking hold in Canadian commercial real estate markets after 18 months of contraction. If there aren't deals to be found, the REITs may have watered down their shares without giving shareholders any reason to hope for better payouts in the future.

"Most REITs have taken advantage of the open capital markets," said Mark Rothschild, an analyst at Genuity Capital Markets. "Most management teams have expressed confidence this capital will be used to take advantage of distressed opportunities - we believe that there will not be many extremely accretive acquisition opportunities and ultimately many of the recent offerings will prove dilutive."

I know I'm starting to sound like a broken record, but why aren't investors, large and small, private and institutional, looking at the cost of NOT investing? What is the real cost of inaction and hence lost opportunity? Waiting for the market to become more active and therefore more competetive means that there will only be even higher prices and reduced opportunities in the future.

What will you do? Sit on the ropes, waiting for your oponent to wake up and realize you aren't in the game, and be surprised when you get K.O.'d? If you're ready to get started and need some direction, please drop me a line. Get ready, round 4 is coming up!

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Is That Property You're About to Buy Really a Good Investment? Here's How to Tell...

So you've set aside some money or maybe you've inherited a big bag of cash(repleat with dollar signs on the side of course!) from your rich aunt, or even better, you've set up a syndication group and you're ready to start buying commercial real estate.

Great!

The next step is to go out and find some potential investments. Once you've done that (easier said than done!), you need to decide if the investment is a good one or not.

How to do that? Contrary to prevailing belief, there isn't a flood of distressed property flooding the market, nor are prices being affected too drastically in Canada. From a recent Globe and Mail article about the state of the Canadian market:

But what if the market isn't all that distressed? Third-quarter statistics from RealNet Canada Inc. hinted that a rebound is taking hold in Canadian commercial real estate markets after 18 months of contraction.

And this from reportonbusiness.com on the same topic :

Canada's commercial real estate market is on the mend, as an 18-month slump in Toronto has ended and other urban centres are showing signs of renewed activity that suggest the sector has de-coupled from its troubled U.S. counterpart.

After almost two years of flat or declining activity, industry tracker RealNet Canada Inc. said investments in commercial property in the Greater Toronto Area increased by 46 per cent in the third quarter over the second quarter, to $1.31-billion, while the number of transactions increased by 20 per cent.

"This is a statistical sign of a recovery, even if it's not a full-blown recovery," said RealNet president George Carras, adding that sales are still only half of what they were going into the recession. "You can't call a bottom until it's passed, but this data is positive and very factual - it's real, hard evidence, and not anecdotal comments."

So how do you get started?

Do your research and use professionals to find the right kinds of properties. You can do all of the leg work yourself, but why not use the expertise of people who work in the markets where you want to invest? The efforts of several people working toward the same goal will almost always result in a quicker turn-around and hopefully with a higher degree of success.

Once you've found a good investment candidate (or several hopefully), you need to do your homework and analyze the tenant mix, the income and expenses as well as the condition of the property and the general market conditions in your area. Assuming that the market is stable or improving and further assuming that the property is in good condition, and also that the tenants are solid risks, all you really need to do is dissect the income and expenses and consider the cost of carrying a mortgage loan.

Simple, right? Well, the process isn't too complicated, and a competent commercial real estate professional should be able to help you with this.

• Start by looking at the Net Operating Income (NOI). Take a look at all of the income streams from the property and deduct all of the operating expenses, but ignore debt service costs, to derive the NOI.
• Next, calculate the debt service payments required to carry the property. Your lender will give you a clear picture of the required downpayment based on the property and your credit history and will give you an idea of the expected interest rate and loan amortization term. Use this handy calculator to make your calculations (note: this site defaults to a Canadian calculator - if you're in the US, remember to check the button that says US property or the result will be incorrect for your purposes.)
• Now deduct the annual debt service (12 X the monthly payment) from the NOI to arrive at a pre-tax cash flow number. This is the money left over after all expenses save income taxes are paid.

NOI-Annual Debt Service Payments=Pre-tax Cashflow

Is the number you arrive at greater than $0, also called positive cashflow? If not, is it really an 'investment'? Even if it is greater than $0, is there any room for error, or will you be in a negative cash flow position if the property's income drops just a little?

Definition from thefreedictionary.com:
investment - the act of investing; laying out money or capital in an enterprise with the expectation of profit

'The expectation of profit" is the key phrase here. I have seen too many would-be 'investors' either fool themselves or be fooled by others into buying into the philosophy that $0 or negative cashflow is acceptable because 'the market always goes up and you'll realize a profit when you sell'. While this is most certainly the case most of the time, for myself and my clients, that's just not good enough.

If an investment doesn't provide positive cashflow from day one, then it isn't an investment, it's a liability.

The exception to this rule is when rehabbing a building and you go into the project knowing that it will be a set period of time before you can expect a return on your money. In general, however, when considering pure investments where you are simply buying a property based on its existing income stream, if there isn't positive cashflow on the first day of ownership then it probably isn't worth considering.

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The Top 9 Blogs I Read - Real Estate and Otherwise

Thought I'd share some of the blogs I read on a regular basis; these are the places I go to keep informed.

Commercial Real Estate Blogs:

Deal Junkie
Billed as "A Peek Inside The Commercial Real Estate Sector", Deal Junkie is a good place for quick and timely commercial real estate stories and editorial. Deal Junkie is a commercial real estate blog with a focus on the debt & equity market in US and Canada.

Real Property Alpha
"Investment Real Estate, Incremental Innovation, and Shameless Self-Promotion"
Run by John Reeder of Mimi Song Realty Group and Sperry Van Ness, Real Property Alpha is a great site with lots of well reasoned and well researched articles on commercial real estate and finance. Worth the time to explore this site.

Retail Traffic
"Where real estate, retail and development meet"
This is the blog page of Retail Traffic Magazine and provides insight on the retail sector with comments on the impact of retail on commercial real estate development.

The Dirt Lawyer's Blog
"Digging the dirt on commercial real estate transactions and law in Chicago and beyond"
This is the blog of David Stejkowski, a lawyer in Illinois that I found early this year. He's always got an opinion about timely events in corporate real estate and the industry in general. Highly recommended.

The Commercial Real Estate HandBlog
Informative site with lots of 'how-to's' for investing in commercial real estate. I just found this site a few weeks ago, and I'm impressed with the amount of information that they give away. Worth stopping by.


General Real Estate Blogs:
Agent Genius
"Our primary goal is to educate readers to improve their business as well as the overall industry with the end goal being improvement of the consumer experience." Fabulous site for REALTORS by REALTORS with lots of great tips and ideas on how to improve the brokerage business. Tips on SEO, branding, attitudes, you name it.

The Real Estate Tomato
"Juicy blogging advice for REALTORS"
Loads of great blogging advice for agents including mountains of information on content creation. They must be pretty busy over there however, new content on the site has been very slow in being released recently. If you're new to real estate blogging, you should definitely check it out.

Non-Real Estate Blogs:

Problogger
"Welcome to ProBlogger.net - a Blog that helps bloggers to add income streams to their blogs."
While I'm not trying to monetize my blog, I find the ideas and strategies presented here to be invaluable. Darren Rowse has really figured out how to make blogging work - and he does with class.


The Blog of Tim Ferris
"Experiments in Lifestyle Design"
Tim Ferris is the author of 'The Four Hour Work Week" a much misunderstood title. He advocates only doing those things that excite you and reducing work to the bare minimum to acheive your goals. Not for everyone, but I find inspiration in the dream!



I could go on for hours with great sites that have fantastic content, but this is a good start. Take a look and tell me what you think. What other sites do you recommend that I'm missing?

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Further Indicators That it's Time to Buy?

The Analysis and Opinion

The evidence is compelling and the research is strong. This great article from the National Real Estate Investor, gives some really good background on the spread between US 10 year Treasury yields and historic cap rates.

As of the second quarter of 2009, the cap rate spread ... has widened to more than 400 basis points. We believe this trend reflects increased risk-aversion among investors, who are pricing in a negative outlook for real estate.

During the recession of the early 2000s, cap rate spreads also rose to more than 400 basis points, making real estate appear undervalued relative to Treasuries. We believe that entering the real estate market during such periods of above-average spreads may be advantageous to long-term investors.

When most investors are taking a wait and see approach to investing, it's often the right time for those with the vision to start investing. And there is evidence that you should start soon:

These periods of high cap rates and spreads often do not last long. From 2003 to 2007, spreads narrowed significantly as the economy recovered and property values appreciated.

As the economy begins to rebound and real estate fundamentals improve, investors will likely become less risk-averse. We believe it is likely that more capital will flow into the sector in 2010. Consequently, we expect cap rate spreads to eventually narrow gradually, reverting toward the mean, and repeating the cycle.

My thanks to the Dirt Lawyer, David Stejkowski at The Dirt Lawyer's Blog for finding and sharing this. You should consider following David on Twitter: @DirtLawyer for insightful and timely posts on commercial real estate topics.

Other Indicators

via Retail Traffic today:

Bill Rudin, Rudin Management, and Steven Roth, Vornado Realty Trust, talk about their views on the real estate market - where we are and where we're going.

Steven Roth, "We're optimistic that there things, you know, moving in the right direction."

Bill Rudin talks about wanting tenants to sign short term leases, 2 years or so, so that they can play the market as it goes back up i.e. increasing rents along with strengthening markets vs. the tenants who want to lock in now for longer term leases, 10-20 years, now because there is growing sentiment that this is the bottom and they want to take advantage of that.

Really good take on the US commercial real estate market. Thanks to Retail Traffic for finding and posting this video.

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Why Peterborough Retail Rents Are Cheap!

via MSN Money: The world's most expensive shopping districts.

According to real estate advisor Cushman & Wakefield, it costs an average of $300 USD per square foot to set up shop along Bloor, the street that stretches through the heart of the city.

Often, when asked about retail rents in Peterborough, we're surprised when the reaction we get is one of disbelief, "You get how much?" As if $16-22 per foot for new retail space in Peterborough, Ontario is some kind of out of this world number that can't possibly be correct.

You haven't seen anything yet!

Check out some of these statistics as gathered by Cushman & Wakefield in their Main Streets Across the World Report (registration required, but free):

$300 - Bloor Street West, Toronto
$110 - Queen Street West, Toronto
$200 - St. Catherine West, Montreal
$50 - Sussex Drive, Ottawa
$50 - 17th Avenue SW, Calgary
$210 - Robson Street, Vancouver

Still think $16 is expensive?

Now, I know that the naysayers among you will cry, "But there's a heckuva lot more money passing through the doors along Bloor West, than Peterborough!" And to a point, I'd agree. There is more money passing through the tills on Bloor Street - but enough to justify a rental rate increase of 1,838%?! Are the retailers selling 1,838% more per foot? I think not. (Note: If anyone can find some research on sales per foot in Toronto vs. Peterborough, I'd love to see it.)

Retail spending in Peterborough, on a per capita basis, has averaged over 16% higher than the provincial average for the last 6 years according to the most recent GPAEDC Community Profile.

Construction costs are lower in Peterborough, but only slightly. Using rsmeans.com Quick Cost Estimator, I found that a 10,000 foot retail store would cost about $132 per foot to build in Peterborough versus $139 per foot in Toronto - only a 5% difference that doesn't come close to making up the difference in lease rates.

Land is far cheaper in Peterborough though, and this does go a long way to making retail space much more cost effective both for tenants and landlords. But that's not my point...

My point...

Peterborough, like a lot of other mid sized towns around Ontario, is a bargain!

Regardless of what it costs to buy land and build in a given community, from the retailers perspective, the sales forecast for each store on a 'dollars per square foot' scale should be the true measure of a retailers success in a given marketplace. All other expenses, including rent, come out of this top line revenue number. If a retailer can sell $500 worth of product in Peterborough and it only cost $210 to do so vs. $490 in Toronto - which is the better location?

Let me know if you need a little help with the math... :)

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Is it Time to Invest in Commercial Real Estate Yet?

According to this article on netgainrealestate.com, it might be.

Using historical statistics, the current climate can be dissected to some extent. Net Gain describes a recession as a manner of alleviating surplus. There have been 20 prior recessions since the start of the 20th century, all of which have made a full recovery. Statistics show that the length of time between peaks of a recession determines the level of excess, which indicates the severity of the next recession.

In assessing the past 20 recessions, the average number of months between peaks is 59 with the most recent lasting 81 months. The average length of time between peak and bottom is 14 months. Based on this information and fact that the current recession is in its 20th month, investing in income property at this time would be a wise decision.

I've tried in the past to look at various indicators of the 'right' time to buy and have always come up short. I've always felt that if a deal creates cash flow that meets your investment criteria and the risk inherent in the deal isn't higher than the return warrants then it's always a good time to invest in commercial real estate.

That said, if you do need an outside indicator, the one proposed by netgainrealestate.com is probably one of the better methods to follow. Since history tends to repeat itself (no matter how many times we fool ourselves into thinking that, "This time it'll be different. No really! ...why does everybody laugh when I say that?"), taking a look at previous recessions and the inevitable recoveries that followed is as good, or better, a method of market timing as any other.

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Should an Inexperienced Residential Agent be Selling Commercial Property?

Well, isn't that a loaded question and one that I've discussed before. Actually I came up the title for this piece after reading the following headline and question on Yahoo! Answers:

What is the process in writing an offer for a commercial property?

"I am a residential realtor. I have a client that wants to purchase a $8 million property that is listed by another broker. Do I send the listing broker a “Letter of Intent” or a commercial contract to sign? When a letter of intent is signed by the seller and buyer, does it then go to a real estate attorney? And does the real estate attorney handle the rest? Need Help ASAP!!"

Link to original page here.

The question and the answers (and I use the term 'answers' loosely), were posted about a year ago but they resonated with me because it's the kind of thing I hear from my residential counterparts fairly regularly.

First, the posted answers:

1) The answer chosen as the best solution suggested that the best way to move forward is by way of a Letter of Intent (LOI). By itself, this isn't a terrible answer and is often the right thing to do. In this instance though, there wasn't enough information given to know if that would have been the right solution or whether moving directly to an Agreement of Purchase and Sale (APS) might have been the best idea. This first answer, and remember this was chosen as the best answer, went on to say that the agent should at all costs avoid the use of a lawyer because they just charge $300 an hour and get paid whether or not the deal actually closes. Pardon? It is NEVER advisable to suggest that a customer or client NOT use a lawyer! If they feel that they'd like that extra layer of advice, by all means, encourage it! If an agent tries to discourage a client from using the services of a legal expert (we're not lawyers!) and then something untoward happens that costs the client money or other damages, guess who'll be found at fault? I'll give you three guesses, but the first two don't count...

2) The second answer suggested skipping the LOI and moving directly to the APS. Again, there wasn't enough information to make this call.

3) The third answer suggested that LOIs were a waste of time as they aren't binding. This is usually true, but is not always the case. This answer goes on to suggest that the agent must present the offer in person or he'll never learn why the property is actually for sale or what the seller will accept. He goes on to talk about agents that like to 'play games' with LOIs and bullying agents at the negotiating table. Sounds to me like this guy has had a bad experience somewhere in his past!

4) The final answer, while a little superficial, "...keep your composure; appearance is very important...", does give the best advice of the four, at least as far as it goes, "Many of your questions would be best answered by YOUR broker." At least this answer advises getting further would-be expert advice. The problem with this is that the agent is a residential agent and, in all probability, so it the broker. My hope would be that the broker would give the same advice I'm about to...

Sadly, all four of these answers are wrong.

My answer:

Don't do anything you don't have some training to do or where you just don't have a good gosh darn idea of how to do it! If you don't know the process for writing a commercial offer, should you be 'trying it out' on your unsuspecting client? Absolutely not.

I refer to our Code of Ethics, which is now enshrined in law under REBBA 2002:

5. Conscientious and Competent Service, Etc.
A registrant shall provide conscientious service to the registrants's clients and customers and shall demonstrate reasonable knowledge, skill, judgement and competence in providing those services. O. Reg. 580/05, s. 5.

Interpretation:
This provision, deriving from Rules 1(4), 40 and 42 of the previous code, generally focuses on the duty of care owed to all clients and customers. This duty involves reasonable care and skill in providing accurate information, as well as when performing functions to which the registrant has agreed. The standard of care for this duty is one of reasonableness, i.e., how a prudent and informed registrant would conduct himself or herself under similar circumstances.

What does this mean? It means that you have a legal duty to ensure that any service you offer is offered with the competence and knowledge to support it. If you can't perform your duties to your clients or customers within this guideline - you should not be doing it! Not only are you not providing good service to your client - which should be your chief concern - but since the Code of Ethics is now part of the Act, you are breaking the law.

The real solution to such a happy conundrum as having a buyer willing to spend $8M:

Refer the deal to a commercial practitioner in your area who does have the knowledge and competence to provide commercial real estate services. Three things happen when you do this that will seem like magic:

1) Your client gets the service he/she deserves and you get to look like the hero for providing said service;
2) Your client will likely get a better deal by having proper representation in the transaction and there will be fewer road-bumps in the negotiation and subsequent due diligence period; and
3) Everybody makes some money! Your client earns a return on investment by successfully purchasing the asset, the agent you refer the deal to earns the lion's share of the commission because they have the expertise to see the deal through to completion, and you earn 25% or more of the commission for filling out a simple referral contract. Sounds like the ideal win-win-win to me!

If you really want to get involved in the wonderful world of commercial real estate, great! Go get some training. Find a mentor who will work with you during your first few years of learning this rewarding business and have fun with it. This is what I did, and every other successful commercial practitioner I've ever met has done the same.

If you want to take your chances and try to work deals like this flying by the seat of your pants, you might get away with it a few times, but, sooner or later you'll get your wrist slapped at best or found guilty in court and fined or jailed at worst. It's up to you, but think hard about your choices before you act.

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Invest Like Joe and Don't Look Back

NYT - Inland Real Estate Dives Into Troubled Commercial Market

G. Joseph Cosenza, president of Inland Real Estate Acquisitions of Oak Brook, Illinois, is on the right track. At a time when the majority of property investors either have their heads in the sand waiting for the storm to blow out or are standing around with bewildered looks on their faces, muttering to themselves about cap rates and falling values, Mr. Cosenza is buying.

He's buying a LOT of real estate. Since early in 2008 he's been on a buying spree, spending about $4 billion on acquisitions across the US.

He is happy to be swimming against the tide — buying while others watch from the sidelines. “I say to them, thank goodness and just get out of my way,” Mr. Cosenza said. “We’re not looking for trophies; we’re buying solid income-producing real estate that is not in default.”

Some observers say that Mr. Cosenza and other intrepid investors stand to profit handsomely. “For the opportunity fund with the resources, it’s time to make a killing,” said David L. Funk, director of the Cornell University Program in Real Estate, a master’s degree curriculum. “In 10 years, people will look back at 2009 as the year fortunes were made.”

He (Mr. Cosenza) says he intends to keep buying. “I have another six to eight months when people will be frozen in their tracks,” he said, “and I’ll have a clear field.”

The smart money is getting back in the game now - when will you?

Photo credit: Sally Ryan, NYT

Update August 31/09: He's at it again! Inland is setting up a new $5B fund.

Inland Diversified intends to use the proceeds from this offering primarily to acquire a diversified portfolio of commercial real estate. Potential commercial real estate assets will include: retail, office, multi- family, student housing, industrial/distribution warehouse, lodging, medical office/healthcare related facilities, public infrastructure assets and triple- net single use properties.

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Are You the Tortoise or the Hare in Your Approach to Real Estate Investing?

Do you have a plan in place to achieve commercial real estate success? Maybe you’re just spinning your wheels going from idea to idea without any clear direction or consistent actions to reach your goals. Do you even have clearly defined goals?

Reaching success, whatever that means to you, is only possible with consistent and persistent action over a period of time. Take some time to do some research, find a mentor, whatever it takes to get you pointed in the right direction. Develop a plan of action and, most importantly, stick to it! A plan is only as good as its execution. I just made that one up – feel free to quote me ;)

I found this article online and thought that it mirrored what I was thinking in a lot of ways, so I decided to share it with you here in its entirety. As you read it, think of how you can use the underlying philosophy to your advantage whether in your pursuit of commercial real estate or other things you value in your life like health and happiness. It’s an old story, but the inspiration is timeless.

Three Steps to Becoming Consistent and Persistent

To achieve a level of success in most anything in life requires one to be consistent and persistent, as achievements are not typically accomplished in a single or random number of actions.

First let's understand what we mean by being consistent and persistent.

Being consistent is performing a task on some type of schedule or performing a task in a similar manner. Taking a walk every morning is an example of a consistent behavior. Following a select route each day is also a consistent behavior.

Being persistent is refusing to give up or to let go, even in the face of adversity, warnings or setbacks even to the point where one is told they are being obstinate, or there is no reason to continue to go on or to hope for a particular outcome. Being persistent can be having a belief that something will or will not happen such as someone with a terminal illness will get better and continue to live a normal life. If our individual in the example above slipped and broke their ankle, they would be persistent if they started each day by taking a walk even if they were on crutches.

The desire for success and the consistent action to achieve one's goals combines to create persistence. It is the consistent and persistent attitude and behavior over time that leads individuals to success or failure, to winning or losing.

Success Tip # 1
Possess determination and refuse to give up, quit, or be defeated. Individuals with a passion or dream who wish to achieve success will identify their goals and objectives to achieve the success desired. Armed with their action plan and their internal drive they will continue taking regular steps when most others would quit. A part of this component of being consistent and persistent is the pride and quiet satisfaction of an accomplishment. This is not action or thinking related to arrogance or boasting, but the down deep dignity and self-respect an individual possesses who will go to all lengths to complete a task or achieve a goal.

Success Tip # 2
Be willing to demonstrate patience and have the faith of a desired outcome at some point in the future. Success for many is a journey requiring a period of time in some cases a long period of time; it is not just an overnight stop between starting something and completing something. Possessing faith in the outcome and seeing the accomplishment in your mind is actually one of the steps in achieving a goal.

Success Tip # 3
Being open to taking an appropriate risk to achieve the goal is yet another factor in a consistent and persistent individual. You will notice I said "acceptable" risk by only possessing a "play-it-safe" attitude will result in missed opportunities. Yet by being open to untried solutions and understanding and assessing the risks involved, one can move closer to desired success. In other cases it is necessary for an individual to make an attempt and to be okay with failing as long as there is a lesson to be learned and not repeated in future attempts.

I'll take you back to the Aesop's fable of the tortoise and the hare. The rabbit started fast and disappeared down the path. To the tortoise it had to look like the race was hopeless as there is no way on this earth he could keep up with the rabbit. Yet he constantly and persistently put one foot in front of another, and after a while he passed the point where the rabbit had stopped to take a nap. But the race was not over as the finish line was still far away. So the determined tortoise continued down the path one step at a time maintaining his actions. Like many people who work in bursts and then stop for a while, the rabbit woke up and continued speeding towards the finish line. But like the individual who continued to perform the appropriate actions even when it looked hopeless, the tortoise crossed the finish line just ahead of the hare. By all rights a hare should always beat a tortoise.

But in life it doesn't always work that way, the fast and the strong do not always win only because they stop or quit even if it is for just a period of time. So for the individual with determination, patience, and the ability to take a risk, and at times fail the race can be won, the goal accomplished, and success achieved - with the habits of being consistent and persistent.

Sharma, Ajay. (2009, August 21). Three Steps to Becoming Consistent and Persistent The Free Library. (2009). Retrieved August 26, 2009 from http://www.thefreelibrary.com/Three Steps to Becoming Consistent and Persistent-a01073976784

Also found at: easyarticles.com

Photo credit: Chris Hendricks www.screenhog.com

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Commercial Real Estate Is NOT Collapsing

What's causing the slow motion commercial real estate crash?

Definition of collapse:
col-lapse
[kuh-laps] verb, -lapsed, -laps-ing, noun
–verb (used without object)

Number 1 definition: to fall or cave in; crumble suddenly
e.g. "The roof collapsed and buried the crowd. "

Commercial real estate is not collapsing sounds like a crazy claim to make at this point in time, but I'm not convinced that it has collapsed. The meaning of the word collapse has a strong connotation to me. It bears the feeling of imminent and dangerous events. I feel that a 'collapse' in an industry means that it has been decimated if not outright destroyed. If the roof collapses, you'd expect to see bodies in the wreckage at worst, or a tangled mess of scrap at best. Strangely, I don't see that in this industry yet. As the article above alludes, the current commercial real estate meltdown is a 'slow motion collapse'.

Can there be such a thing? Perhaps, and I'm just spitballing here, but perhaps there isn't a collapse in commercial real estate.

*gasp!*

Maybe, just maybe, the economy was starting to look up and the media needed something nasty to report on. Could it be that opportunistic institutional investors latched onto this idea as a way to affect the market by driving prices down? Now, before you jump in and start calling me nasty names, no, I don't have my head in the sand and, yes, I can plainly see the size of refinancing and restructuring of debt that will need to take place in the next couple of years across North America (particularly in the US).

Activity in the commercial market has all but died in some areas, but others are starting to see some light at the end of the tunnel.

From the article above:

Even as the sector continues to struggle, capital has been flowing in searching for opportunities. In recent weeks, hotel chain Hyatt, mortgage modification ship Pennymac, and commercial REIT Starwood Properties Trust, have all filed for IPOs.

and

One possible area of upside for commercial real estate, ironically, comes from the struggles in residential real estate. "The flavor-of-the-month asset is multi-family properties," Malka said. "With all the problems in the residential market, people are running back to apartments and renting," making for a favorable situation...

Some of our clients are actively looking for new opportunities again. Particularly properties that have long term upside and that are considered risky right now. Properties like small and medium strips, and locations in secondary markets are risky, but the long term rewards are high.

A Return to Business?

There was a long period when everyone seemed to be holding their collective breath, but I see a slow return to business happening. I don't see a collapse so much as a group head-scratch and a refocusing of direction with a healthy dose of reality.

What are you experiencing? How have you or your clients been reacting to the market?

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Pessimism is Probably Good News for the Commercial Real Estate Business

Bad News is Good News article from seekingalpha.com

Anyone who reads this blog regularly is probably getting sick of hearing me say this, but here I go again: When everyone else is selling, you should be buying. When everyone else is in a state of immobility, especially after a major market shock like we've just seen, you should be buying. Those who get back in the game now will look like geniuses in 18-24 months.

From the article linked above:

"Predicting a bottom is a fool’s errand but it would be equally foolish not to watch for signs of recovery. Hidden and overshadowed by all the bad news in the report is the fact that sales actually picked up over the last 3 months. Transaction volume showed a nice increase in the 2nd quarter, the first such up-tick in nearly 14 months.

I don’t know when the turn around will happen, but I do know that a predominantly bearish sentiment is a bullish indicator and that just because something is counterintuitive doesn’t mean it’s wrong."

Let's get back in the game before we catch ourselves standing on the sidelines wondering what the heck happened while the smart money laughs all the way to real estate fortunes heretofore unknown!

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Why David Miller is Quite Possibly the Worst Toronto Mayor Ever

Toronto misses out on stimulus money. - Toronto Star, July 27, 2009

I used to wonder where Toronto got such a reputation as an egotistic city. The center of the known universe and all that. I mean, I know a lot of people from Toronto, and they aren't that bad! Most of them are just like everyone else, trying to get by and make life a little better for the next generation.

Then I read this article in today's Star. Seems Toronto won't be getting any federal stimulus money because David Miller decided not to play by the rules that every other city and municipality in Canada had to abide by.

Thanks to David Miller's bravado, John Baird's combativeness and the obduracy of CUPE Local 79, Toronto has scarcely received a dribble of national infrastructure money.

The city was eligible for approximately $300 million of the economic stimulus in January's federal budget. All it had to do was submit a list of "shovel-ready" projects that weren't already slated for construction, created local jobs and could be completed by 2011. The deadline was May 1.

But the mayor chose to ignore the rules. Gambling he could get a special deal, Miller submitted just one proposal: that Toronto's entire allotment be dedicated to the purchase of a fleet of state-of-the-art streetcars, built in Thunder Bay and scheduled for delivery between 2011 and 2018.

The federal infrastructure minister responded with a two-word obscenity. Fuming that Toronto was the only city that flouted Ottawa's guidelines, Baird rejected its application.

When will Miller get it? Toronto doesn't always deserve a 'special deal' just because of its sheer size. Why should it? Especially in this case where the stimulus money would come from all Canadians and not just Torontonians. His 'proposal' wasn't even close to being within the guidelines of a 'shovel-ready' project. It didn't even involve a shovel for crying out loud! No infrastructure improvement, no new employment, nothing within the guidelines at all.

In late June, Toronto filed a second infrastructure application, consisting of a long list of small projects – close to 500 – that meet Ottawa's criteria. "We haven't heard back," said Stuart Green, the mayor's spokesman. "It's still under review."

Yeah. Good luck with that.

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Pricing Commercial Real Estate in Today's Realty Reality

Is it just me, or is there a real sense in the marketplace that buyer's feel that they should be getting blazing hot deals these days? I'm all for trying to get a good deal; after all, isn't that what we get paid to do, negotiate deals that both parties feel are beneficial? But do you get the feeling that some buyer's think that they're doing sellers a favour by 'taking that property off their hands'? I don't know about you, but I think we've got a ways to go before buyers and sellers are on the same wavelength again.

As one of our clients put it, "The point of capitulation hasn't been reached." Well, I don't know about 'capitulation', that sounds like someone has to give up something valuable, and that makes me uncomfortable.

I'm a believer in the win-win scenario after all. If all parties to a transaction don't feel that they got something of value, then I don't feel as though I've done my job well.

Captain Kirk said it best in Star Trek II, The Wrath of Khan, "I don't believe in a no-win scenario."


In talking to my colleagues, clients and customers, I'm getting mixed signals about the market and pricing. Some are extremely busy (as we are right now - buyers seem to be coming out of the woodwork right now!), and others seem to be in the doldrums still. In an effort to gauge how the market is being priced right now, I'm running a little poll to see how listings are being priced.

Please take a moment to vote - the poll is at the top right of the main page of this blog. Assuming I can get a reasonable number of responses, I'll report back with my findings in a future post. Let me know how the market is treating you right now, I'd love to hear someone else's war stories!

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Are You Ready for Some Good News?

Found via Sibdu.

Last week I wrote about the state of commercial real estate in the US and posted a video featuring Richard Lefrak. This week, another take on the situation in the US with a much more positive spin.

William Rudin, of Rudin Management, has a very upbeat and positive position as it relates to the future of commercial real estate. While he agrees that not all of the pain has been felt yet in terms of pricing corrections, he is seeing signs of renewed strength in the market. His firm is doing a lot of new leasing and is seeing a fair amount of sub-let space being taken off the market as firms move back into space that they had formerly vacated.

Here in Peterborough and central Ontario, we're seeing a fair bit of renewed energy in the market too as investors who had been sitting on the sidelines get back into the game. New money is coming into the market from outside as well; we're getting calls from the GTA and elsewhere inquiring about development opportunities again.

The good times aren't back yet, and likely we won't see a boom again for a while, but it looks like the worst might just be behind us.

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The State of Commercial Real Estate

The commercial real estate industry is "in the intensive care unit," according to real estate mogul Richard LeFrak, president of The LeFrak Organization.

This video was brought to my attention by my associate, Harry Huffman. Harry runs his own blog - take a look here.

Great talk about the state of the American commercial real estate industry and the necessary changes that are coming in terms of the mindset of property owners, buyers and sellers. I'm not convinced however, that the same drastic changes will come to the Canadian market - other than perception in the minds of buyers. Granted, prices need to come down somewhat here, and it is definitely more difficult to finance deals today than it was 8 or 9 months ago, but the real problem is buyer perception. Interest rates have not increased that dramatically yet and the spreads are still healthy on a lot of investments here.

As I asked in an earlier post, did someone change investment fundamentals when I wasn't looking?

If I can still invest my money in a stable property with a stable tenant with a good covenant and achieve my hurdle rate, isn't it still prudent to make that investment? Do I really need to wait two years for everyone else to start buying again (increased competition) before I get back into the game? Shouldn't I be buying when everyone else is selling or worse yet, doing nothing? That's how Warren Buffet became so fabulously wealthy - by doing the opposite of what everyone else is doing. It's also how Donald Trump's empire grew - he looked for good deals regardless of what the market was doing. A good deal is a good deal no matter when you look at it. What is the opportunity cost of waiting for the 'right time'?

I don't have all of the answers. Do you?

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