Commercial real estate........

[Bluegrass]

Assume a large commercial development on all four corners of an expressway interchange in Central Florida. Assume it’s been going gang busters. National tenants like Walmart, high end supermarket, fast food, Starbucks, luxury theater, office users, specialty medical users, hotels, etc.
Massive amount of existing residential in the immediate vicinity with more coming out of the ground daily. Significant Disney influence.

Assume rates keep going up, and the long anticipated stock market crash occurs.

In broad strokes, what would be the expected effect on the market velocity of a real estate development like the one described above?

[COcheesehead]

I own commercial property. The time to buy was 5-7 years ago. I know others who are selling at top dollar now.

[Bluegrass]

The dirt was bought right. At or near the bottom tick several years back.
This is an income producing buy and hold for the investors.
It’s in mid-development, but with the various flags I summarized above already planted and yielding.

My question relates to the expected future performance of a large commercial real estate development of the kind I described with rates rising, and in light of the fact that we are seemingly in the late innings of a bull market. I ask in part because the developers (who have delivered on every promise and then some) are doing another relatively small raise among existing investors to construct some additional buildings. It’s not diluting the ownership, it’s just teasing out some already approved density that the pro forma did not contemplate based on the originally expected demand.

Putting aside all of the usual caveats that you probably don’t know enough of the details to give a meaningful answer, I’m kinda trying to compare the opportunity I’ve described above to equities.

[Another Reader]

The real estate market is easily timed. I laugh at the listings that cross my desk and and computer screen these days. The projections are ridiculous. Now is not the time to buy. Great time to sell, though.

In a few years, interest rates will be higher, the economy will be weaker, the new residential construction will sit unsold and vacant, and half the commercial tenants will be bankrupt and gone. The project will be sold for pennies on the dollar and the buyer will "reposition" the property. Consider buying in then.

[haha]

Quote:

Originally Posted by COcheesehead I own commercial property. The time to buy was 5-7 years ago. I know others who are selling at top dollar now.

For many, patience is a virtue that they don't have and likely will never get. And that is good for the rest of us.

It is also interesting to me that people can accept that there are seasons to buy property, and seasons to sell it. But at least on this board many seem to argue that this same judgment is useless or worse when applied to stocks and bonds.

Ha

[Bluegrass]

I’m not asking my question effectively.

The development group bought this property at an ideal time: at the bottom of the market, in the immediate aftermath of the last crash and before certain immensely valuable roads were completed. I’ve been a minor player from square one. The development has unfolded beyond all expectations. Homerun.

I would be surprised if any of our tenants go bankrupt in my life time no matter the economic conditions. They are top shelf type tenants. But we’ll see.

The development is not complete. The users summarized above are open and kicking ass. But we are still filling up the boat. As I mention above, because of the incredible demand, we are doing an internal small raise to build a couple of extra buildings. The entitlements were already there. Simply doing this to meet unanticipated demand. No dilution of ownership is occurring. No premium for the land (we already own it). Just a small internal raise to build.

That opportunity got me thinking about a larger comparison. That being, this is a 50% developed, immensely successful project that will easily make it to the finish line as a raging success absent some unforeseen derailment. Critical mass has already been achieved, location, location, location, etc. How does that kind of a scenario compare to a potentially super extended stock market in an environment where rates are going up?

[Another Reader]

I understand your "question" completely.

It's only a home run if you sell it while its' value is at a maximum. If I owned this project, I would be selling it now, pointing out the "opportunity to expand" to prospective buyers to insure I got top dollar.

The real estate market, like the economy, is cyclical. Lots of equally "can't lose" projects have gone under when the economy shifted. Do you recall the days of the RTC?

You are not asking a question. You are not interested in the advice or opinions of others. You have convinced yourself you have a winner. You are looking for confirmation.

The bank of Another Reader is closed until the cycle turns. That's my opinion, backed by my dollars.

ETA: It would be interesting to see the capital structure of this deal. My guess is the individual investor is pretty far down the food chain. What do the principals have into this? What's the exit strategy?

[flintnational]

If it is a "home run" and the property was bought at a low price, why would the developer cut you in on the deal?

IMO, above average return almost always means above average risk. Market highs rarely produce high return low risk deals. As others have mentioned, those are found closer to market bottoms.

[Bluegrass]

Thanks for the insights.

[Another Reader]

Mixed use projects like this one heavily depend on consumer income and employment. The cost of borrowing is important, but the total overall leverage and its' structure are more important. What are the loan terms? Do you have to refinance at some point? Are there guarantees that were made to the lenders?

Why are they raising equity? Is it because no loan is available or the terms are really unfavorable? Is equity cheaper and easier?

Have you read the leases with these large national retailers? Do they have the right to close if the store does not perform? What happens if occupancy drops at the hotels? Can they shut their doors? What kind of tenants occupy the office space? All Class A? If attendance at Disney World drops 15 percent, what happens to the tenant revenues?

What happens if interest rates go up and the stock market crashes is that consumer spending declines. Add in the resulting rise in unemployment, and your tenant revenues drop. Some of your bigger tenants may go dark but continue to pay base rent. Some others will move out and declare bankruptcy. Depending on the structure of the financing and secondarily on your leases, the ownership may or may not be able to weather the storm.

I was involved in the valuation of commercial real estate for over 30 years. I do not have an opinion about your specific property or the likelihood of its' success. Nor do I have an opinion of the stability of its' ownership. Not enough information supplied to have an opinion.

I have seen a number of similar projects go down in flames over the years as markets changed. It's my opinion that the rent and resale markets today are priced for continued growth but it's looking more like that these markets will contract and drop instead.

If you don't have enough knowledge of the project, its' leases, and its' financing agreements, in my opinion your risk is unknown but probably pretty high. If your interest in this project is a large percentage of your net worth and your anticipated future income, in your shoes I would look elsewhere for safer investments for new money.

And that is my opinion, worth exactly what you paid for it.