For the record, I’m not saying that foreign investment is a bad thing.  I just think that some are giddy (like Kent Brockman in the video) over the existence of that foreign capital, with no thought for the long term implications of our markets needing that foreign investment.  But the principal of my firm is a Korean born American and many of my clients are either Middle Eastern born U.S. citizens or Asian born U.S. citizens.  Many are also syndicating investments to “friends/family” type investors overseas, so I’m extremely comfortable the notion that our markets are attractive to foreign investors.

Globe St. Chief Economist Sam Chandan has a post up today that discusses foreign investment in real estate.  He somehow manages to discuss the topic without embedding the Simpson’s clip.  From the post:

In a departure from the negative perceptions of Japanese investment in decades past, foreign investors in commercial real estate are finding support in Washington DC. According to the Senate Office of Public Records, the Coalition to Reform the FIRPTA of 1980 spent half a million dollars on lobbying activities in 2009. House Resolution 4539, the Real Estate Revitalization Act of 2010, was introduced on January 27 and subsequently referred to the House Committee on Ways and Means, where it now sits. The proposed act seeks to eliminate the Real Property Holding Corporation provisions of FIRPTA and to treat REIT capital gains and liquidating distributions to foreign investors as ordinary income.

Related posts:

1. Real Estate Investing As Religion One of my theories about real estate investors is that...
2. Foreign Investment Dominates Miami Condo Landscape This is a guest post that I thought appropriate to...
3. Making Decisions in a Vulture Market One of the themes that I get back to regularly...

“How many of you watched the Super Bowl?” he asked. “What if when the Saints scored a touchdown, the refs decided to put up 6 points for the Colts?  What if when the Colts kicked a field goal, the refs decided not to award them any points?  What if the refs started making tackles and intercepting passes?  Would you bet on that kind of game?”  Rhetorically, he followed, “No, you would probably turn the game off after 10 minutes.  Why?  Because as entertaining as it may be, its a stupid game and impossible to predict the outcome.”

The current real estate market is a great example of government’s ability to dictate outcomes.  The government is almost trying to get involved in as many ways as possible.  They offer tax credits to homebuyers, directly purchase mortgage backed securities, and require loan modifications.  To be fair to government, most of the programs might create “micro winners” but are aimed at having “macro benefits”.

Related posts:

1. Tyranny of the Majority and Picking Winners The functioning of government is unavoidably about picking winners.  For...
2. More on Picking Winners My post last week pointed out the reality that government,...
3. Comment on Tyranny of the Majority Wisaac has added some thoughtful comments on this site recently...

What are you waiting for?  Go sign up.

Related posts:

1. EFB Blog Rankings When I started the News Dump on this site (click...
2. Retail Chatr On Inland Empire Overbuilding Chris Rodriguez at Retail Chatr has a good post up...
3. Buyer Pool Inversely Related to Transaction Size One of the unchangeable laws of real estate (or anything...

One thing I found to be interesting: construction loan defaults are showing signs of leveling off.

Related posts:

1. Still Probably Too Early to Call CRE Market This article from Bloomberg underlined two key points that I...
2. Construction Spending Declines From Calculated Risk. My two cents: Aside from impact on...
3. Bank on the Ropes: Frontier Bank (Everett, WA) Frontier Bank of Everett, WA is another of the troubled...

But all that is changing. Companies realize they can cut costs and gain efficiencies by letting more of their senior staff work from home. Sure, these businesses retain a headquarters and significant numbers of employees work regularly in corporate offices–but the home officing phenomenon creates flexibility and allows significant reductions in the amount of space companies need to lease. Depending on the enterprise, companies can shed 5%, 10%, up to 25% or more of their space. That all adds up and likely will slow the absorption of vacancy and shadow space as markets come out of the recession.

I think there’s no doubt that centralized office space is becoming less and less important.  My thought is that beyond having implications for the value of the underlying office class, it has implications for the values of geographies and regions.  I would guess that we’re a couple of years away from the kind of internet/telecom innovations that will make telecommuting only slightly less valuable than being in the office.  So what implication does that have for geographies?  If you can do the same thing from San Diego that you can do from New York, why wouldn’t you?  Or if you hate New York and California, but love Austin, maybe you relocate a part of your business there.  I’ve written before that this trend is likely to accelerate the scattering of businesses that don’t rely on geography (note that important distinction – plumbers will not be able to relocate).

When I started this blog I used the term “incremental innovation” as part of the tagline.  So here’s a few thoughts that are sort of forward thinking:

• A slow but steady decline for the regions/geographies where location has been key.  The best example is Wall St.  Already the emergence of trading over the internet has made it possible for traders, or groups of traders to locate anywhere they want.  Places like New York have flourished primarily because of the entrenched industries located there.  When the location of those industries become less important, those places will slowly decline.
• The slow but steady flow of wealth to the “everywhere else” type places.  The scattering of businesses will take place primarily among the low physical/high intellectual output professions.  Wealth is naturally contained in these professions and the wealth will follow the scattering.
• Look for the emergence of places that offer a lot of intellectual capital for a low price.  University towns throughout the country will become more important because of the availability of intellectual capital at a reasonably cheap price.

Following on these thoughts I will offer a bet that will be impossible for anybody to collect, but that I think is an interesting proposition.  Office space in general will be cheaper in 10 years than it is today (inflation adjusted).  The high rent metropolitan areas will be less high rent in 10 years than they are today across most real estate types.  The interesting thing is that the importance of location for the values of these classes of assets and locations will have been supplanted by the importance of tech.  BUT, the underlying tech that enables these changes will also be considerably cheaper in 10 years.

Related posts:

1. Office Vacancy Rates – L.A. vs Inland Empire We’ve been looking at office space for our firm in...
2. Solar Industry Exploding, But Growth Needs to Be Sustainable “Sustainable” is the buzz word when it comes to solar...
3. Office Absorption Comparison (Red State v. Blue State) One of the common complaints to hear about California is...

What we’re seeing now.  We’re seeing generally an uptick in distressed note purchases and sales.  However, there are fewer of these sales than one might expect.  It appears that regulators who in other CRE downturns might have pushed lenders to sell notes to maintain their liquidity, are instead allowing them to wait longer or go through foreclosures and other enforcement actions instead of doing faster note sales.  Many lenders think they can get a better return by enforcing the notes themselves, through foreclosure, then selling the real property collateral.  Further, there seem to be a lot of would-be investors in distressed notes relative to the number of distressed notes on the market, so there seems to be a fairly stiff competition to buy these notes — and many investors seem to be buying them at prices that do not take into consideration the potential costs and likelihood of enforcing these loans through foreclosure, or even despite a borrower bankruptcy; so it is unclear if many of these deals are actually healthy for the buyers.

BINGO!  Go read the rest of the post, but that paragraph boils things down pretty well.  Lots of buyers looking for bargains.  Lots of banks staying in the deal until it reaches REO status.  And maybe, just maybe, some buyers not realizing exactly what they are getting into with note purchases.

Related posts:

1. The Distressed Assets Train I often compare the distressed assets market to a train. ...
2. FDIC Loan Auctions: Non-performing CRE Debt Trades at Premium to Residential Debt Data derived from FDIC.gov. Real estate related loan auctions for...
3. Loan Quality – CRE vs Construction Related to my previous post and the Costar article, here...

There’s generally one item on a Buyer’s resume that matters.  They should be able to tell you what they’ve bought recently.  If they haven’t bought anything recently, they should be able to tell you the last thing they bought and why it’s been awhile since they bought anything.  For instance, if the Buyer acquired 10 deals in 2006, but didn’t buy anything in 2007-2009 because they didn’t see anything that made sense, I’m not going to hold that against them.  Their word that they are jumping back into the market will suffice.

But here’s a behavior that I see from time to time and is a huge red flag.  The Buyer hasn’t acquired anything recently, but has some story about access to a fund.  They have a company brochure that might look nice, but in reality probably cost a couple of hundred dollars to have designed and printed.  The story is too good to be true, and the cost to design the brochure is irrelevant when the offers they need to be submitting need to be in the millions.

Maybe you’re talking to someone and your antenna goes up because it seems like they’re trying to “overconvince” you of their capabilities as a Buyer (maybe they’re telling a story about their experience, maybe it’s a story about how they got access to a fund).  Whether you’re the Seller of the property, or a Broker representing the property, you’re wondering what all of the convincing is for.  Then the kicker comes.  They send an offer with a company brochure attached, a proposed earnest money deposit of $5,000, a purchase price that seems too good to be true, and 180 days of due diligence time.  The only question in your mind is whether you should actually light the offer on fire and watch it burn, or create a fake Wikipedia entry for “Total Waste of Time” and post the offer as an image on that page.

Related posts:

1. Rule #1 – Don’t Screw Around With A Buyer That Screws Around With Earnest Money Deposits Lately I’ve been thinking about some shorthand rules for being...
2. Real Estate Is Full of Characters Anybody that has been in real estate for longer than...
3. Beal Bank; 800 Pound Gorilla of FDIC Auctions The table below shows the top five Buyers this year...

I’m shooting from the hip here, but I suspect that industrial vacancies are probably highly correlated to the dropoff in imports (along with some fluff for overbuilding).  So getting back to 2008 import levels is probably pretty important for the recovery of the industrial property sector, and it’s important that it takes place without further deliveries impacting the supply/demand balance.  The interesting thing is that the recovery in imports is on a pretty aggressive trendline that matches the dropoff in imports that occurred at the end of 2008.

Related posts:

1. First Industrial announces negative earnings First Industrial Realty Trust announced FFO of $(0.89 ) per...
2. Zero Hedge on REITs This piece from Zero Hedge is flat out impressive.  A...
3. CRE: Why are we talking about a recovery? I know the title of this post sounds pessimistic, but...

Rule #1 – Don’t Screw Around With Buyers That Screw Around With Earnest Money

This is something you have to sort of play by feel.  If you are negotiating a transaction and it looks like the actual amount of the earnest money deposit is becoming important to the Buyer, look out.  Is the amount in the offer unusually low?  If the Seller proposes to increase the deposit, what is the Buyer’s reaction?  Does the earnest money deposit get adjusted in multiple iterations of the offer/counter-offer cycle?

In our typical deals the earnest money is refundable until the Buyer has approved feasibility.  So if the amount of a refundable deposit becomes an issue during negotiation it’s a red flag that something is going on.  A few potential explanations:

• The Buyer has limited funds and is going to try to flip the deal.  You can go ahead and set an Outlook reminder for the 4:45 call on the due diligence end date when the Buyer calls and asks for an extension to “wrap up their feasibility” when in reality they just haven’t found anybody to flip the deal to.
• The Buyer isn’t limited in funds, but they are out tying up 5 different deals and they’re going to choose the best deal to close on, so they have to conserve cash in order to be in 5 different escrows at the same time.  This is a huge waste of the Seller’s time.
• The Buyer doesn’t have the money and is going to try to syndicate the deal.  Slightly different than flipping, but the easy solution here is to force the Buyer to syndicate at their risk, not at the Seller’s.  So they should be prepared to close whether or not their syndication is complete.

I use a rule of thumb of +/-3% of the purchase price for the earnest money deposit.  So if the deposit is in that range, I’m good.  If it’s lower than that percent, but is still a substantial amount of money like over $100,000, then I’m also fine.

Rule #1 is first because it’s the most reliable.  Not because it’s the most important.  When doing repeat business, or dealing with Buyers that have already closed on deals, it’s not necessary to screen them based on this criteria, although I would offer that it still works.  For instance, if you get an offer through another Broker and the earnest money is light, but the Broker represents that the Buyer has multiple recent closings, it could be the case that the Buyer is using the “tie it up now and decide later” method of Buying.  In that case you’ve got some mitigating information to discuss with the Seller.

I’ll try to post a few more of these rules that are pretty straightforward and simple for anybody that has been doing this for longer than 10 minutes (although I see people who have been doing this for years somehow still miss warning signs).

Related posts:

1. Rule #2 – If the Buyer Is Trying to Oversell You, Run Rule #2 is that if the Buyer is trying to...
2. Real Estate Is Full of Characters Anybody that has been in real estate for longer than...
3. A Functioning Market When we got involved in the solar business we worked...

The Cliffs Notes version of the story is that a broker that represented Landlord #1 tried to keep a tenant of Landlord #1’s from relocating to a new space which the broker also represented, but which was owned by the less powerful Landlord #2.  There are all sorts of issues related to ethics, greed, legality, and in general just being kind of a jerk.

My take is probably a little bit different.  I see this not as an issue of greed (often thought to be the primary motivator of brokers) although it may be a simple as that.  I see this more as an issue of arrogance.  A good broker has to be naturally good at navigating complex situations and arriving at the brokers desired outcome (and for the avoidance of doubt I will say that the broker’s desired outcome should be in line with the principal’s desired outcome).  The broker needs to be good at essentially getting what he/she wants.  The better a broker is at this part of the business, the more successful they become, which only increases the confidence in being able to accomplish their goals.

The problem is that the line between confidence and arrogance isn’t just slim, it’s often non-existent.  It sounds like the broker in the story was sort of widely known to be a pretty effective broker, so it’s not a leap to assume that the broker probably ran into instances where the broker’s perception of his skills differed from reality (“Son, your ego is writing checks your body can’t cash” – to steal a line from Top Gun).  Or, if you’re a nerd like me, fastforward to about the 4:15 mark of this Star Wars clip to see an example of someone overestimating their abilities with a disastrous outcome.

So in the case of the broker acting dishonorably when the tenant wanted to relocate, it would have been an act of humility that would have saved the situation.  It would have required the broker to understand the limits of his powers to reach a successful outcome.  A simple “I am not good enough to navigate this complex situation, and I cannot make everyone happy here (or even mislead/confuse people into thinking they are happy) ” might have kept the broker out of a blog post that is now making its way around the industry (and when I say “the industry”, I mean “the biz”).

Related posts:

1. Good Clients, Bad Clients The beauty of the commercial real estate industry is that...
2. Change I’ve written before that the CRE industry is slow to...
3. Being a Good Broker is About Putting Clients First – No, Seriously It sounds like one of those idiotic maxims that every...