“Advice is like mushrooms. The wrong kind can prove fatal.” – E. C. MCKENZIE, Mac’s Giant Book of Quips & Quotes
Those of you who follow me on Twitter and LinkedIn know I like to share differing perspectives on what 2016 commercial real estate will look like from an industry perspective. I put as many differing opinions out there as I can, but choosing whom to believe is up to you.
Commercial real estate is fond of the baseball inning analogy to describe where we are in the current cycle. In this analogy, the first inning is the beginning of the cycle and the 9th inning means we are nearing an end – the worst-case scenario for some.
NAIOP New Jersey’s January 2016 Chapter meeting was titled “Are we in the 7th inning?” Sam Zell, who is known for his timing thanks to the $39 billion sale of Equity Office Properties Trust on the eve of the 2007 downtown, says we are in the 8th inning, or worse. Green Street Advisors sent a client letter titled “The Ninth Inning” in October 2015 (no link, clients only). Last November, SNL Financial, a REIT investor, blogged that we are closer to the 4th than the 8th.
Regardless of who you believe (or don’t), many think that 2016 will be a banner year in commercial real estate (some don’t believe this is true, see above). Regardless, indications are that lenders are ramping up for increased issuance. Current owners are selling and prospective owners are buying. Prices and rents are setting high-water marks in many areas and property types – with some arguing there’s still room to grow. Cranes are in the air in many markets, construction lending is up, and developers are working toward groundbreaking. Many industry sectors are booming, and depending on your local fundamentals the ride could be just starting (or already over). But, if the late inning analogy is true, 2016 could be one of the last busy years for a while.
This is why it’s more important than ever to put your trust in a third party provider who knows your needs – on your specific deal. My advice, if you choose to accept it, is not to always go with the fastest, or cheapest, provider(s) just to get the deal done quickly.
Deadlines exist; we all work under them daily, but proceed with caution. Many of us have seen the nightmare scenarios that can arise from making this mistake and hiring the wrong firm. An “approved” provider may not be enough to ensure a level of comfort with the deliverables. With a single phone call, one can tell if the provider truly knows your business and can deliver to suit your needs.
– What kind of transaction is this? Is this a purchase, disposition, 1031 exchange, first loan, refinance, loan modification, etc.? Each of these makes a difference in what you should order. My Advice – Ensure your consultant knows your transaction and the ultimate user’s needs.
– If you are buying, what’s the ultimate use for your reports? Do you need a “deep dive” into specific building systems? What’s the plan after purchase? Will you put debt on the deal? Will you renegotiate purchase price, will you use it for CapEx planning, or have you already made the purchase and you are now financing it. Knowing what you will use the reports for is key to getting the right deliverable. My Advice – Ensure you have this conversation on every deal.
– If you are financing your property, who is the lender? Is it a CMBS shop? A local, regional or national bank? Insurance Company? Mezzanine or Construction Lender? Credit Union? HUD or Agency lender? A lender to be determined? All will require a slightly different approach depending on the real estate type, loan term, deal structure and more. Most have different, lender specific scopes of work and particular needs – an “off the shelf” deliverable often won’t work. My Advice – Ensure you are getting what you need to get your deal closed.
– What reports do you need on this deal? PCA, Phase I, Seismic, survey, zoning, title, appraisal –all of the above? Will a zoning report or letter be required? What kind of appraisal is needed – Property assessment, revaluation, tax protest? Does your lender require certain Table A items on the ALTA survey? Do you need cost segregation services on your purchase? Does the title order require title rates, transfer taxes, closing costs, other (endorsement) fees? Some providers only offer one to a few of these items. My Advice – ensure you are purchasing only the deliverables you need and will use.
2016 looks like it will be a busy year. Hopefully there are good things in store for everyone reading this blogpost. My advice to you this year is to not treat due diligence as an afterthought or “checkbox” item. Take the time to talk to an expert, I am happy to help.
Choosing to read and take this advice, however, is up to you.
About GRS Group
With offices across the United States, Europe, and affiliates around the globe, GRS Group provides local market knowledge with global perspective for institutional real estate investors, occupiers and lenders worldwide. The GRS Group team has evaluated and advised on over $1 trillion in CRE transactions.
GRS Group delivers an integrated suite of services including Financial Advisory, Transaction Management, Assessment and Title Insurance. Jeff Coyne is one of our single points of contact, capable of leveraging the GRS Group portfolio of companies, and delivering customized solutions to assist our clients in achieving their investment goals.