Realtor Roundtable – Real Estate Reflections

In this edition, we asked our panel of expert realtors to reflect on surprises from 2014 and look ahead to the remainder of 2015.  They’ll describe their most challenging deals of 2014 and let you in on their vision of the ideal buyer and seller.   

Meet the Realtors
Surprises in the 2014 market
Hottest sector in 2015
Most challenging deals
Ideal buyer/sellers

Meet the Realtors

What surprised you the most about the market in 2014?

Alan Rasmussen (AR):  I think what surprised me most was how quickly things heated up during the last few months of the year.  Starting about November, the market got (and remains) frenetic!  Commercial buyers watch the economic indicators to determine when they should invest in a larger warehouse, buy an office versus renting, etc, and they feel confident with the economy.

Jordan Metz (JM): Agreed, the tremendous velocity in sales and leasing across the board in all industries and in all market sectors took me by surprise.  I started in this business 10 years ago so I’ve seen one complete market cycle, and this was very reminiscent of the 2005-2007 years, only deals are now being made easier and faster.

Erica Davidson (ED):  My take is a little different – what surprised me about the market in 2014 was the lack of new industrial inventory, both for lease and for sale.  As a result, prices have increased sharply and we expect the trend to continue for the foreseeable future.  Also, I was surprised not to see more start-ups and small firms in the marketplace, considering the improved economy.  They still seem to be gun-shy when it comes to real estate.

Stan Kurzweil (SK):  I think the impact of e-commerce and consolidation had a big impact on the retail sector.  Small businesses had trouble competing with online sales and national retailers.  And those that were in desirable communities found themselves being priced out of the leasing market.

Ian Grusd (IG):  But along those lines, I was surprised that e-commerce didn’t have as negative an effect as I was expecting.  With the ability to buy so much online, you would think it would have grave consequences on retailers, but that was not always the case.  And when you look at retailers that are not affected by e-commerce, like new fast casual food concepts (Panera, Chipotle, etc) – they are expanding.

Steven Winters (SW):  Along those lines, the major retail corridors in Union County, especially Route 22, have experienced a great deal of activity.  I’ve found that my large properties that sat for months are now experiencing increased interest.

Catherine Goski (CG: ) I was most surprised to see developers scrambling to acquire multi-family projects  along the rail lines to NYC.  “Transit Village Redevelopment” seemed to be the buzzword of 2014.

Tom Skobo (TS):  Despite low cap rates (the ratio between net operating income and capital cost of a property), demand for investment real estate remained very high.  The artificially low interest rate has created the environment for record-setting prices and buyers are willing to pay them.

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What’s shaping up to be the hottest sector in 2015?

(CG): With the Panama Canal expansion project underway, industrial buildings in and around the ports will be the hottest sector in 2015.  And I think it’s very likely that the demand will overflow in areas such as Linden and Roselle.

(SK): Without a doubt, the hottest sector is industrial, with the emphasis on large warehouses.  That’s because there’s a huge demand, given Elizabeth and the ports, and very little room to expand.  What’s more, much of the existing inventory is antiquated – they don’t have the necessary high ceilings, drive-in ramps and other logistical requirements for tractor trailers. On top of that, where it’s possible, industrial property is being converted to residential use, like in Clark and Cranford.

(ED): I’d also suggest that multi-family is still very hot and shows no sign of cooling off.  Also medical and medical-related properties, although service providers are still unsure about reimbursement rates now that the Affordable Care Act is fully in place.

(TS):  Investment properties remain strong followed by industrial buildings.  What’s making it all possible is historically low interest rates.

(JM):  Sellers/landlords are taking advantage of high demand in the industrial sector by asking high prices, but buyers/tenants are willing to pay the price because of the limited inventory and low interest rates. We’ve seen a little creep in the rates lately, but they are still dirt cheap.

(IG): Without a doubt, warehousing and distribution are very hot properties. The rise of the eBay and Amazon re-seller has really contributed to that situation.  There are hundreds of smaller e-commerce companies that “partner” with Amazon and eBay and they all need their own warehouse space.

(SW):  I specialize in retail and within that sector, the restaurant segment is doing very well.  Theme restaurants with liquor licenses, fast casual concepts, and fast food restaurants are aggressively expanding throughout the region.

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Tell us a little about the most challenging small-mid size deal you completed in 2014.

(CG): That would have to be the sale of a former gas station in Cranford.  On top of the expected environmental issues, it was also about to undergo foreclosure!  But we were able to represent both the owner and the purchaser (Investors Bank), who purchased the site with plans to build a new branch in town.

(ED): My biggest challenge was also in Cranford.  We had a difficult seller who was always away when we needed them.  They were emotionally attached to the property and had a hard time coming to terms with what the property was really worth.  On top of that, the property had numerous deferred maintenance issues and was vandalized several times in the midst of our marketing.  But we got the deal done.

(TS):  I had a medical office building in Clark that took nearly a year to close!  It sold for much less than the underlying debt, so we had some intense negotiations with all of the lien holders.  Then, on top of that, the existing tenants were paying well below market rates and weren’t bound by leases.  So the buyer was taking on a lot of risk.  Fortunately, I was able to negotiate leases with all of the tenants at significantly higher rents post closing.

(IG):  I sold a 43,000 sf warehouse with practically every problem imaginable:  environmental issues, burst sprinkler pipes, easement concern with neighboring property, tax liens, no sewer connection, and it was a short sale!  We launched an extensive marketing campaign focusing on the property’s most important asset: its location.  We went through three contracts but they all fell through during due diligence. Finally, the property closed, all cash/as is to a well-qualified developer who will reposition the building for mult-tenant use.

(JM):  I’m just closing on a deal now that was worked through the entire 2014 calendar year!   It’s a 100,000 sf warehouse that I leased some years ago during the recession.  The lease came with an option to purchase which has been exercised by the tenant at well below market value.  But it’s quite an intricate deal – the buyer is a public company that’s just gone through a massive debt restructuring.  There were so many moving parts!  But we got it done and it’s one of the highlights of my career.

(AR):  My challenge wasn’t with a particular property – it was with a whole segment!  The glut of office inventory was killing me – nothing was moving.  But then the floodgates opened up in November and I was able to sell all but one condo.

(SW): My story is from the tenant’s perspective.  The execution of the lease wasn’t the hard part – but dealing with the small, inexperienced developer has been very difficult.  He missed deadlines and didn’t communicate properly with the municipality and so all of his permits were delayed.  The property still hasn’t been delivered and although the tenant doesn’t blame me, it’s still terribly upsetting.  And because of this, the tenant is prevented from opening up additional locations. So that’s lost business for the tenant and me!

(SK): My project was an industrial transaction in Kenilworth with approximately 18,000 sf.  The challenge was in the financing and appraisal process.  It took a very long time to get final approval because banks today are hyper-cautious about crossing their t’s and dotting their i’s.  it was also very difficult to get the property appraised correctly – there were few if any comps in the market.

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Describe your ideal seller/landlord.  How about your ideal buyer/tenant?

(ED): The ideal seller or landlord understands the market and is willing to price their property accordingly.  Their property is prepared to be sold or leased, they have all the necessary documents, and proper ISRA preparation.  The ideal buyer should be clear on what they are looking for, have financing in place, and a good sense of market values.  A tenant should be prepared to submit two–three years of audited financial statements to demonstrate their ability to pay their rent.

(AR): The ideal parties are those that are educated to the market.  Buyers start low, but if both parties are fair, the price eventually comes up to a level that is acceptable to both.  And with sellers, they have to remember that there is a delicate balance between pricing something for the optimum sales price and not having it priced so high as to not have any showings.

(SW):  Exactly.  Ideal parties are sincere and understand the markets in which they are negotiating.  As Sy Syms used to say – “An educated consumer is our best customer.” When both parties are realistic in their expectations, obviously they are more reasonable when negotiating the deal.  This doesn’t mean that either side shouldn’t fight for what they want, but ultimately supply and demand will help guide the transaction …or not.

(IG):  My ideal seller/landlord is motivated to get the deal done and is realistic on market pricing.  And from the buyer/tenant side, you need to understand the challenges that come with limited inventory.  The perfect property may not exist in your price range (or at all!).  Be honest about what you must have, what you can afford and be respectful of your broker’s role and time.

(SK):  The ideal seller/landlord would hire an environmental expert, have all the necessary environmental information, improve the appearance of the property and take care of all necessary maintenance.  The ideal buyer/tenant is financially sound, with pre-approvals.  The buyer would also understand his/her expenses, hire a real estate attorney and have an architect/space planner to layout electrical, HVAC, etc.

(TS): My ideal seller is one who understands that the value of property is determine d by current market conditions and recent comparable sales and agrees to set an asking price that is reflective of those conditions.  Rents are the same – the ideal landlord understands that his/her price has to be competitive. Plus, they may have to invest significant capital to improve the premises for a new tenant.  As for the ideal buyer/tenant:  be well capitalized, knowledgeable of the marketplace, and have realistic expectations.

(CG): My ideal seller/landlord is someone who is excited to work with brokers and sees the advantages we bring to the table, such as getting the best price for their property by creating competition and getting the most exposure through our marketing efforts.  My ideal buyer/tenant is pre-qualified by a bank and agrees to have us exclusively represent them.  When we represent a client exclusively, we are able to really focus our efforts on their needs.

(JM): I guess I would sum it all up with a simple answer:  Everybody needs to be reasonable.  If you have empirical data that show what properties are going for and you have a buyer and seller that agree on a reasonable price that hovers close to that comparable rate, all things considered equal – you have an ideal seller/landlord and buyer/tenant.

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