This is the final installment on the state of commercial real estate, continuing from last week’s Commercial Real Estate’s Status, $10MM is the New $100M, Part 2.
Net Lease:
Deal size – “$10MM is the new $100MM”
- With a lack in confidence in credit ratings as a guideline, “default of an ‘A’ rated company may occur, however it almost always is related to many years of bad corporate management, and coincides with downgrades along the way”
- Real estate investors are pressured to move forward but everyone knows the first to act is in the most danger
- Public markets and owners have taken their hits, but there are still private investors trying to hold on to bad assets.
In the Medical Office Sector
- This sector is considered as a recession resistant product type, but the basic fundamentals of market rental rates has to be present
- Tenant creditworthiness is being monitored very closely, as the relatively hot properties must be guaranteed by one of the top two health care organizations in the market place
- While private physicians are good at creating a large amount of cash-flow, they lack the ability to build significant net worth when compared to a typical tenant guarantee in other sectors.
- There are some attractive medical office tenants that fall within the private market for single tenant assets
- On-campus medical facilities will draw a 25-75 basis point premium over off-campus facilities.
Underwriting Credit & Tenant Retention Strategies:
- Experiencing relatively similar actual ratios of defaults, per letter grade, as the early 1990’s recession
- A signaling event that things are looking better would be “Tenants Paying on Time!”
- When tenants want rent relief, they must offer up-to-date audited financials and be willing to have an “open book” relationship between tenant, landlord, and lender (if debt is in place)
- The Sale Lease Back and Net Lease business should be 15+ years view.
- Property types to pursue, if not a publicly rated entity, should only be critical assets that are part of their core business in irreplaceable locations.
The general consensus in this event was a determination to survive and profit while getting out of this mess. They need a lot of debt but have none available. Lower leverage is a good thing, and it will take a while to de-leverage, but near-term debt maturities will sink many owners. Most people understand we have realized the majority of the problems, and now need to focus our efforts on finding a solution. We need to be creative yet conservative to move forward.
In the end, creative investors with equity available will have the best chance to survive and prosper in the next business cycle.
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Craig Higdon
“Head Coach”
Craig Higdon has over 16 years experience in financing commercial loans, small business loans, construction loans, and land loans. He owns Excelsion Mortgage, a commercial mortgage direct lender offering a wide range of commercial lending resources to investors and commercial real estate service providers.
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