MacRo LTD Blog

3 Signs Your Commercial Real Estate is in Trouble

Posted by Rocky Mackintosh on March 26, 2014 Leave a comment

It’s always interesting to tour properties of prospective clients…be it a flex warehouse to lease, an office building for sale, a retail center or a tract of agricultural land.

3 Signs your Real Estate is in TroubleProperty owners, like commercial real estate, come in all shapes and sizes … and for the former all sorts of mindsets.

Most property owners consider their real estate holding as assets, which, of course, is the way it should be. And like all assets, they do require attention. Just like an investor in the stock market keeps an eye on his/her holdings, the owner of any kind of real estate should do the same.

While many pay close attention to their property, others may not as much as they should.

While the title of this post is “3 Signs Your Commercial Real Estate is in Trouble,” most problems that arise are not from the asset, but from the owner.

Consider the following:

1. Neglect.

Consider the investor who bought a stock decades ago and threw the certificate in the drawer and later discovers later that it peaked at double its value a few years back and now it has no value at all.

Property owners must pay attention to their real estate investments … some properties require much more than others, but in these days of volatile economic conditions, it’s not a safe bet that the targeted value will be there in the future.

As I have written in earlier blog posts, problems with real estate are usually not the fault of the property, but the one who owns it.

Yes, there are those acts of God that happen — earthquakes, hurricanes, tornadoes and flooding. And yes, in today’s world one should be aware of crime and sudden economic shifts, but in most cases external factors that negatively impact value can be anticipated. Consider the case of highway relocation and changing traffic patterns, or the exiting of a major retailer in the area. These are circumstances where with proper attention, there is plenty of advance notice.

We always recommend that certain maintenance issues be tended to, such as addressing a serious tenant issue, adding a fresh coat of paint, applying for a zoning change, or taking a bush-hog to a field of thorny brambles.

That rundown property usually traces back to the ownership.

2. No “Staying Power.”

Growing up in a real estate family (father and grandfather brokered and invested in DC area in the middle of the last century!), the phrase I used to hear over and over was “If you’re going to make it in real estate, you have to have Staying Power!” Well, not much has changed over the last 75 years in that category.

Commercial real estate can be purchased with the best laid plans, but whatever a real estate investor may think is a worst case scenario … it can always be worse. Of course the opposite is also true … and HOORAY! when that happens, but what if it doesn’t?  After what we have seen in the overall real estate market since 2007 with short sales and foreclosures in the news all the time, you’d think that today’s investors would have learned something … not always the case.

So, have a plan and a back up plan and a back up plan for the back up plan … not only to cover the service the debt, the real estate taxes and insurance, but also the regular maintenance and improvements as needed. If you don’t … well, one way or the other you’ll more than likely pay the price.

3. Reality Bites.

I can usually tell when things are not going well for a client, and my job is to do the best I can to either assist in turning things around or developing an action plan to make the problem go away.

It doesn’t really matter how or why things went bad, it’s all about what is going on now — the market conditions. The challenge is to find the target market for that particular piece of real estate and plan out the best way to position it compared to the competition from other properties that are on the market.

In some cases, the best plan of action is not feasible, because the owner may not be able/willing to comply — either for financial reasons or irreconcilable differences within the ownership to name a couple.

Sometimes the plan is simple … set a price and put it on the market … or if there is not a sense of urgency, my staff and I may recommend that we wait out the market, knowing that certain conditions will be changing for the positive in the specific area that the property is located.

We may also recommend that certain maintenance issues be tended to, as outlined in “Neglect” above.

All this stated, some property owners are either naive to market realities and unable to accept market conditions or have become so fixated on what they want to believe is the market value, that they can’t face the true picture. My experience has shown that anxiety over a difficult personal or business financial dilemma or a sentimental attachment to the property most typically stand in the way of accepting the real world situation.

A “perfect storm” of poor commercial property stewardship–one that continues to make the headlines in downtown Frederick–is the now infamous Asiana building.  In this case, it seems that the owners really just don’t care what anyone thinks. They apparently have the just enough staying power to cover the minimum requirements of ownership by paying the property taxes, yet have neglected the property and probably have no concept of reality.

That bites!

The author: Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He served as a member of the Frederick County Charter Board from 2010 to 2012.  Many of his articles also appear in  TheTentacle.com 

 
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Topics: Commercial and Industrial Real Estate Ashleigh's Fields Notes