Posts Tagged ‘ real estate consultant ’

Time is Money: The Cost of Doing Nothing with Commercial Real Estate

Like us humans, nothing is static … not even a solid building that appeared it would last forever. 

As a property owner approaches retirement, many issues should be considered as to what to do with his improved piece of commercial real estate. If you are at that point in your life, have you got it all figured out?

I am often called upon to assist people in assessing the options that lay ahead as they face the next stage of their lives.

Sometimes such a change is part of a well thought out plan, while others come about due to unforeseen circumstances.

Take for instance the case of a wonderful individual I had the pleasure of working with not too long ago.  He dutifully ran a second generation family business on a substantial piece of commercial real estate he inherited nearly 50 years ago.

In its heyday, the business with a strong following of loyal customers was the envy of many nearby retailers.

As the years passed and times changed, the business could  live on its reputation only so long without finding that the new and creative competition that entered the market eroded his sales.

Maybe it was his sense of loyalty to the old family tradition of the way things had always been done, or maybe it was an unwillingness to try new things.

Whatever it was, my client slowly came to realize that while he was real estate rich, he was becoming cash poor.

At the point I was called upon for some advice, I found a property that looked tired.  The business had suffered such that my new client had deferred the maintenance of his commercial real estate so much that many would be customers chose to drive by instead of stop in for a look.

Of course the appearance of the property now only added to the decline in the business, which had shifted to operating in the red.

Sometimes when one can be so close to a situation that the obvious is not apparent … and that can go on for decades.

In my client’s case, while he grew very attached to the legacy that he wanted to continue for as long as he was physically able, he was now really feeling it in his bank account.

His primary asset was fatigued yet unencumbered real estate.  None of his children were interested in carrying on a loosing enterprise.

Several options were considered:

1.         Refinance the property and reinvest in giving the property a face-lift in hopes it will bring business back to those heyday years.

2.         Sell the assets of the business and lease the property to an energetic entrepreneur.

3.         Sell the real estate and lease the commercial real estate back from the new owner, who will commit to invest in making major improvements … the face-lift that is needed.

4.         Sell the entire package of real estate and business and reinvest the proceeds into another investment that generates passive income … stocks, bonds, mutual funds, investment real estate or any combination thereof.

As we walked down the path of each scenario with my client’s financial adviser and attorney, it was determined that a refinance was too much of a risk at his age.

Option two offered my client the ability to step away from the business while continuing to own the real estate; however the question arose as to how to deal with the tremendous amount of deferred maintenance.  While MacRo could find a tenant who was willing to pay rent that would provide my client with a reasonable income to live on, did my client really want to be a landlord?  Answer: No!

Option three was not appealing, as it meant my elderly client had to find the energy to start fresh in a property he no longer owned … not easy when the property has been in the family for nearly 100 years.

As hard as it was for my client to make the decision, he knew that if he just stayed with the status-quo and made no decision, the suffering business and the depreciating real estate would only eat away at his retirement nest egg.

In this particular case the second generation retailer came to the conclusion that the risks outweighed the possible rewards in choosing any path other than selling the business assets and the commercial real estate that housed it.

Within a period of just eight months an enthusiastic young business minded couple found the opportunity just too hard to pass up.

Today the old commercial building has been restored and given an exciting new look, and with the original business name incorporated into a new retail enterprise, my client could not be more proud that his family name lives on in a thriving new Frederick County, Maryland business … and he is living comfortably on a very low risk investment portfolio and enjoying a life with freedom to travel and enjoy his grandchildren.

Have you thought about your options as you approach a time of change in your life?  Maybe the team at MacRo can help.

Please contact us for a confidential meeting.

The author: Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He has been active in the Frederick, Maryland community for over four decades, having served as chairman of the board of Frederick Memorial Hospital and as a member of the Frederick County Charter Board from 2010 to 2012 to name a few.  Many of his articles also appear in  TheTentacle.com 

 

3 Signs Your Commercial Real Estate is in Trouble

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.

Property 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 

 

Property Virgins – Commercial Real Estate Edition

Got a brilliant start-up idea? Avoid 5 common mistakes new businesses make when leasing commercial space.

Macro Commercial Real Estate Virgins

One of the best things about practicing commercial real estate in Frederick County is the entrepreneurial culture.

It’s a rare week that MacRo doesn’t get a call from prospective clients launching new businesses or medical practices, or moving start-ups from dining rooms and garages.

A structure of bricks and mortar is a significant investment for any business, but particularly for one in its infancy.  Costly mistakes in real estate acquisition can often be the difference between start-ups that make it and those that don’t.

Following are just a handful of the missteps that commercial property virgins commonly make:

1)  No business plan.  

It’s not unusual for would-be entrepreneurs to show up at the MacRo offices with a great idea for a new business having no clue as to how much it will cost to manifest what the cash flows and revenues will be.  That’s okay–we actually prefer to begin advising on real estate acquisitions early in the process.

What we do find cringe-worthy are clients who decide to push forward and lease space before they develop that fleshed-out business plan.  Here’s why:

  • It puts the client in a terribly weak negotiating position.  This often means paying higher-than-market lease rates and tying up personal assets to guarantee a lease.
  • The client doesn’t have a clear sense of how much real estate the business can afford — potentially putting the business in jeopardy if cash flows ultimately can’t sustain lease payments.

2) Hire a commercial real estate virgin to represent them.

Unfortunately, a real estate license is a real estate license — agents can legally broker commercial or residential deals with it.  That doesn’t mean they SHOULD, however.  The world of commercial real estate operates very differently than residential real estate, which is a blog post in and of itself.

Here are just a few of those differences:

  • Residential real estate has in place an enormous amount of protection for buyers and tenants, which largely do NOT exist in the commercial world.
  • Price is only ONE of many negotiating factors in a commercial deal.  In leasing for example, every commercial market, including Frederick, has a selection of concessions routinely used to sweeten deals and lure tenants — these can be worth tens of thousands of dollars or more — and concessions differ for each segment of the commercial market.  (Get yourself a good commercial broker if you want to know the goodies you may be entitled to when you lease commercial space!)
  • There are a host of complexities in the commercial real estate world including zoning, building codes and change of use permits that need to be factored into the decision making process when a business is leasing property.  Failure to do so can result in unforeseen and sometimes catastrophic expenses down the road.
  • Seasoned commercial brokers KNOW THE COMMERCIAL MARKET.  The last thing a new business needs is a 10-year lease in a turning market.

Don’t get us wrong–Frederick has many real estate professionals who successfully straddle the residential and commercial real estate worlds, and they are competent professionals in both.  Just be sure you don’t hire one who is a commercial real estate virgin.

3) Underestimate the costs of rehabbing commercial space. 

In the Frederick market, the small-business tenant can often eat the lion’s share of tenant improvement costs to make space usable for its intended purpose –whether retail, office, restaurant or medical.  It’s a big investment, and as they say, you can’t take it with you.  When the lease expires on the dress shop, that gorgeous wide-plank wood floor now belongs to the landlord.

As a means of getting an accurate picture of the required improvements, take the time to get solid estimates from reputable contractors for costs of planned improvements BEFORE negotiating lease rates and concessions.

4)  Forget about parking.

This sounds like a no-brainer, but it’s surprisingly easy to get so caught up in the location and the interior of a property that prospective tenants forget to check whether available parking is adequate to their business needs.  Lack of parking can be a business killer!  Check lots and garages at various times of day to monitor the ebb and flow of parking usage BEFORE a lease is signed.

5) Fail to have an attorney review the lease. 

As mentioned earlier, there is little in the way of protection for tenants built into commercial leases, which are largely written in such a way as to protect the property owners.  A competent real estate attorney who knows Maryland real estate laws can ensure the tenant’s rights and best interests are represented as much as possible within the framework of the negotiated deal.

Planning to lease space for your new or expanding business?  MacRo can help you avoid the landmines that commercial real estate virgins often step into.

The author:  Kathy Krach is a commercial sales and leasing agent with MacRo.  Finding homes for new and expanding businesses is her favorite.

 

Frederick County Considering TDR Program

How a TDR Program Works - MacRo Report Blog

A Transferable Development Right (“TDR”) program is once again being considered by Frederick County.  Earlier this year, the Frederick County Farm Bureau submitted a proposed zoning text amendment to the Board of County Commissioners (BOCC). In response, the BOCC established a workgroup to evaluate the opportunity for a TDR program in Frederick County. I have the honor of having been appointed as a member of this workgroup.

Rocky and I have been involved in land preservation efforts, including TDR programs, for over twenty years each.  Our clients include buyers and sellers of TDR’s, as well as owners and purchasers of land in Montgomery and Howard Counties affected by TDR programs.  What we have learned through our experience is that TDR programs can be very effective in preserving land, but the programs are complex and controversial.

If the county commissioners decide to move forward with a TDR program, we hope the citizens of Frederick County take an active role.  MacRo will keep a close watch on this issue.  Feel free to contact Rocky or me if you have any questions.

Think you have a property that would qualify for the TDR Program? Contact MacRo!

Contact Dave at
301-698-9696 ext. 203 or
dave@macroltd.com

MacRo Report, Spring 2013: Is the Land Market Heating Up?

Is the Land Market Heating Up?

The following MacRo Report entry is written by Dave Wilkinson, Vice President of MacRo, Ltd. regarding the current factors that can influence the market price of land in Frederick, Maryland.

Spring is officially here – the vernal equinox occurred on March 20th.  But through early April, winter didn’t want to let go.  The market for land has been behaving similarly.   While there are signs that the market is warming up, it’s difficult to determine yet if the cold headwinds that have suppressed the market for the past few years have abated or not.

The spring 2011 MacRo Report included an overview of the market for land in Frederick County.  At that point in time, the market was still trending down and it was hard to see many positives.  How do things stand today?  In summary, it appears that the market for land has hit bottom and may be ready to rise.  The number of land sales reported by Metropolitan Regional Information Systems, Inc. (“MRIS”) experienced a steady downward trend between 2000 and 2008, dropping from 287 sales to 50 over that time.  Between 2009 and 2011 the number of sales effectively ‘bounced along the bottom’.  In 2012, sales increased to 86, an increase of 72% above the low point experienced in 2008, but still only 30% of the peak in 2000.

Of further interest is the behavior of prices.  Since prices are dependent on acreage and whether the lot is “buildable” or not, we’ll only consider lots between 1 and 2 acres in size that are perc approved for one residence.  In 2000, the median sale price was $73,000.  Prices then increased rapidly reaching a peak of $257,000 in 2006.  Then the real estate bubble burst and demand dropped.  As the number of sales fell, the median price plummeted; by 2011, the median price was down to $103,250.

Now the good news: in 2012, the number of sales increased AND the median price had risen to $111,500.  It appears that prices have finally hit the bottom of their cycle and could be firming up.  It will be interesting to see if an  “upward” trend takes root in 2013; while it’s very early in the year, both the number of sales and median prices are above 2012 levels. At MacRo, we’re not predicting a substantial escalation in prices anytime soon, but we do feel that the market is improving.

We know that the sultry days of summer will be here soon enough, but it’s much harder to predict when the market for land will experience a sustained recovery.  If you’re thinking of buying or selling land or a farm, please give me a call and let me assist you in your evaluation.

Dave is a licensed Realtor and brokers many of MacRo’s real estate building lot listings, using his knowledge of zoning and subdivision regulations, real estate market conditions, and land development options to help MacRo’s clients achieve their goals. Contact Dave at 301-748-5670 or dave@macroltd.com

Click here to download the complete PDF version of this spring’s MacRo Report!

MacRo Report, Spring 2013: Latest News

Here’s the latest news…

Now Recorded: 20 Exclusive Estate Lots at Manor at Holly Hills

Site construction has begun on Manor at Holly Hills, a one-of-a-kind community situated on 185 idyllic acres just east of Frederick City.  The community includes 20 custom building lots ranging in size from 1.2 to 26 acres, with mature forest areas, streams, and untouched natural rock formations preserved.  MacRo has already received contracts on half of these lots, and continues to field a steady flow of inquiries from prospective buyers.

Visit www.manorathollyhills.com for sitemaps, amenities, and frequent updates on the project status.

To arrange a personal tour of the lots and for additional information, contact Rocky Mackintosh at 301-698-9696 ext. 202 or rocky@macroltd.com.

Kathy Krach Joins MacRo’s Sales Team

 This past November, Kathy Krach made the transition from MacRo’s strategic marketing consultant to licensed commercial real estate agent.  She’ll still be contributing articles for the MacRo Report Blog, but with a new perspective now that she’s active on the sales side of the business.  Her consultative approach with clients is already proving quite successful and we’re happy to welcome her to MacRo’s sales team!

Click here to download the complete PDF version of this spring’s MacRo Report!

The (R)Evolution of Frederick Office Space

A whole new sub-market of commercial real estate is emerging in Frederick County.

I’ve written before about the fact that the commercial real estate industry is ripe for disruption in terms of the new technologies being developed and utilized for sales and leasing.

But the market for the very product itself—commercial real estate assets—is also experiencing a major upheaval.

We are over a decade into the “Information Revolution,” and like the “Industrial Revolution” before it, we have experienced tremendous changes in a very short time in both how people work and where they work.

Businesses are seeking flexibility from what has traditionally been an extremely inflexible asset—commercial office space. Here are just a few trends that are disrupting the commercial office market:

  • Younger generations, including X, Y, and the millennials, prefer working within the framework of highly collaborative business processes and environments. This preference is driving dramatic change in both organizational charts and office space configuration.
  • Rapidly developing and changing technologies have forced companies to become highly nimble in responding to consumer demand and shifting markets in order to survive.
  • The lingering recession has caused a bad case of what I’ll call “commitment issues” in corporations across the U.S. Traditional commercial office space is a pretty big commitment.

Shadow space plays a part in all of this as well. I’m not sure who coined this bit of wisdom, but it’s true: the most expensive piece of real estate on your balance sheet is the space you are paying for but AREN’T using.

And so in a relatively short period of time—about 15 years—an entirely new sub-market of commercial real estate has emerged: serviced office space.

In a nutshell, serviced office space is lease-able commercial office space—from just a desk in an open bullpen to multiple locked offices and conference rooms—leased on very flexible terms (anywhere from a day to months or even beyond a year). The leases often include facility maintenance and business office services. These office spaces can be unfurnished, formally furnished and anything in between.

Frederick has had a few local players in this market, including Monarch, A Corner Office, and FITCI (which is actually more of a technology incubator than just a serviced office provider).

However, the game in Frederick is about to change, as serviced office giant Regus opened its first facility in Frederick this month, with 43 offices in a total of 9,700 sq. ft.

Regus accounts for 20% of the global market in serviced office space. (Their next-largest competitor holds bragging rights for just 2% of the market). Regus offers sleek, formally-furnished Class A offices and meeting rooms, business services such as mail and phone answering and amenities including a staffed and catered coffee-shop style eating area.

Why Frederick? Given that Washington, D.C. is the 14th largest serviced office market in the world, and that Regus has over 1,500 offices there, it makes sense that they would explore the Frederick market.

According to David Fraser-Hidalgo, Regus’ Frederick Area Sales Manager, his target market for Frederick is “government contractors, agencies, and consultants seeking flexible, short-term office solutions for project work teams; entrepreneurs ready to leave their basements or who need formal conference space or offices to meet clients; and traveling professionals who prefer to work at Regus locations wherever they find themselves doing business.”

In addition to Regus, Cowork Frederick also opened their doors this month.

Coworking, a phenomenon MacRo report covered last year, is a secondary trend that grew from serviced office space— in fact, it was conceived by a former Regus tenant. Coworking spaces tend to be more open, informal, and collaborative—think more Starbucks coffee-shop vibe than formal Class A office suites.

Glen Ferguson, owner of Cowork Frederick, already finds professionals in marketing, IT, and creative fields to be drawn to his space. “Opening day signups exceeded our expectations and new members are steadily joining,” said Ferguson. “In terms of membership we are seeing some clustering—freelancers and entrepreneurs in similar fields but with different skill sets who want to collaborate, share ideas, find partners for project—exactly the kind of people who gravitate to co-working spaces.”

A third coworking space, the Business Factory of Frederick, was slated to open by October of 2012, but according to General Manager Peggy Richman it has been a challenge for local landlords to grasp and embrace the coworking business model. She and her partners are currently in negotiations for a space in Frederick County.

Richman’s target market is non-profits, businesses in transition, and start-ups requiring reasonably-priced commercial office space and a jump-start from what she is calling a “business accelerator.” In terms of the facility, Richman plans to “fall somewhere between Regus and an open-bay collaborative workspace.”

“The Business Factory won’t be a formal incubator like FITCI, but we will be a lot more hands-on with business mentoring than a typical coworking space,” said Richman. “We want to be that resource for people to overcome the paralysis and fear that keeps them from pursuing their professional dreams. So many people don’t like their jobs and would love to open their own business or nonprofit, but they don’t know where to start. And then you have entrepreneurs who won’t get to the next level until they stop meeting clients at Starbucks and Panera. That’s where a business accelerator can help.”

On the surface, the rampant growth of the serviced office market industry, and its spread to Frederick, may appear to be a threat to the traditional commercial office market here.  I don’t agree—in fact, I see a number of promising trends and opportunities coming our way as both serviced office and coworking providers in Frederick gain a foothold in this market.

Read more on this topic in Part II!

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes forTheTentacle.com and Want2Dish.com.

 

MacRo Leases Space at Ambers Professional Center

MacRo Ltd. is pleased to have brokered a lease renewal for Maxim Healthcare Services at Ambers Professional Center on Thomas Johnson Drive. 

Rocky Mackintosh represented the landlord.  Maxim is leasing casino online 1,921 square feet of medical office space.

For more information on how MacRo, Ltd. Real Estate Brokerage Services may be able to assist you in the sale or leasing of your commercial or industrial property, contact Rocky Mackintosh at 301-748—5655 or rocky@macroltd.com.

 

The Cost of Indecisiveness in Commercial Real Estate Investment

Analysis paralysis can have tragic consequences for real estate investors and business owners.

A few years ago, I met with a prospective client whose retail store a decade earlier had been – by all definitions – experiencing success.  Everything appeared to be smooth sailing for this to be the vehicle to a comfortable retirement.

During those boom years, however, new commercial properties began to pop up a few miles down the road closer to town. Traffic patterns began to change, and his business slowly started to wane.

In order to counter the change in the tides, funds were borrowed to make improvements and step up marketing. Then it seemed within the blink of an eye the bottom fell out of the economy.

The handwriting was on the wall that a recovery could not come too soon.

At the point that I was asked to provide some counsel on the prospect of selling the property and business for a reasonable gain to pay off debt and put the rest away for retirement, the debt-to-value ratio was about breakeven.

We sat together and reviewed the situation inside and out…accountants, lenders and lawyers were brought in … all of whom suggested the business owner sell now.

Unfortunately, it’s been nearly two years and the business is barely covering the cost of inventory and labor. Maybe it’s an issue of pride of ownership or not having an alternate plan, but no decision has been made … other than by the lenders, who have a sense of urgency as they now find their customer in arrears on outstanding debt that exceeds value.

For the small to medium-sized business owner, real estate is not always part of a diversified portfolio of investments acquired as a growth and/or retirement strategy. Instead, many of these investors hold title to the facilities that house their business – be it retail, industrial or agricultural real estate – essentially putting most of their eggs in that one basket.

Investment diversification is essential to survive and prosper through the economic roller coaster one experiences during a business career.

I recently read a quote in the by the late Joseph A. Schumpeter: Capitalism “never can be stationary. . . . The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.”

No investment is truely stationary … consider the tried and true municipal bond market. Who would have ever figured that holding Stockton, California bonds would be anything but safe?

Commercial real estate always does not win or lose value as the sole result of global, national or even regional economic swings.  It is usually as simple as the relocation of a road or a new retail center that changes the flow of traffic or brings new competition for products and services.

When severe and unanticipated swings occur in business cycles, many small business people can be caught off guard and forced to rethink an entire business and/or life plan. And in combination with unstable real estate markets – like the one we are presently experiencing –investors often become locked into a state of paralysis by analysis.

More often than not, when a property owner falls into this prolonged indecisive comatose state, more opportunities are lost than could be gained by “waiting it out.”

In a January 2011 post to the MacRo Report Blog entitled Staying Power and Real Estate Investment, I discussed the value of making very difficult decisions in the aftershocks of a real estate bust that appears to be on the verge of a recovery.

If the decision is to wait things out, does the investor have the financial capability and other resources to survive what could be a very long stretch of time? And if so, what will the TRUE cost be – in terms of lost investment opportunities – of tying up capital and paying taxes and expenses during the years or even decades it could take to wait out the market?

Those of us who follow the land and commercial real estate market (and many who don’t) are aware of the history makers in the business: Donald Trump, Sam Zell and lest we not forget Peter Minuit, who on behalf of the Dutch West India Company in 1626 acquired the island of Manhattan from the Native American Lenape tribe for trade goods valued at 60 guilders … the equivalent of about $1,000 in today’s U.S. dollars.

Success in real estate investing seems to come with varying degrees of dumb luck, market timing and a business savvy that leads to making the right decisions at the right time.

These real estate owners have learned to make their acquisition and sale decisions on sound business principles. Whether it involves a piece of commercial or industrial real estate, a farm or a home, they know that as hard as it is, there is no place for emotions and ego in this process.

In the case of Zell and Trump, real estate ownership is the foundation of a business strategy toward personal wealth and other life goals in our capitalistic economy. They both have had their share of losses, but they know when to move on to something more profitable.

In the case of my paralyzed client, there was an opportunity lost to get out of debt and start over with a new plan.

By holding on he has had to find a new revenue plan (a job away from the business) just to carry this real estate until the market forces of a recovery that will return at least some of the equity he lost … and that may take a while.

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes forTheTentacle.com and Want2Dish.com

Outlook for Frederick County’s Commercial Office Market

High vacancy rates have created a renter’s market for Frederick office space.

In our last post, MacRo Report shared an overview of the 1Q 2012 performance of the U.S. commercial office market and broke out some statistics for Frederick. Although vacancy rates for Frederick area office spaces have begun to tick down, and small businesses are coming back into the market, commercial lease rates in this area continue on a downward trend. We spoke with Rusty McCabe, Assistant Vice President at McShea & Company, about the near-term outlook for Frederick’s office market.

MacRo: Costar reported this past quarter that small businesses are back in the commercial office market across the nation. Are you seeing that trend in Frederick as well?

McCabe: Definitely. Most lease deals we have done for the past couple of years are smaller deals, under 5,000 sq. ft. and in the $2000-3000 per month range of rent mostly. And during the past couple of months the little guys are really coming out, those in the 2,500-3,000 sq. ft. range.

Now that vacancy rates are starting to drop, are rents rising in this region?

Right now there is a lot of downward pressure on lease rates. You have got to be competitive if you want to make a deal. The only larger tenant deals we are seeing now in Frederick are lease renewals. In most of those cases, the tenant will tour the market, get leverage, and go back to the landlord asking for a better deal. Tenants are finding good deals now, spaces that were going for $26.50 a couple of years ago are now $20 and under.

What is putting so much pressure on lease rates in Frederick?

Frederick vacancy rates are still fairly high [nearly 16%].  A more healthy vacancy rate for Frederick is between 12-10%. Also, businesses are starting to look at flex space as an alternative to traditional office buildings, because flex is $2-3 sq. ft. cheaper in price. St. John Properties, which has about 200,000 sq. ft. of empty flex space sitting on the market in Frederick, has recently become a lot more aggressive and responsive in making deals. A number of tenants are getting quotes from St. John to use as leverage when they renegotiate leases with their current landlords.

Is shadow space still a drag on the Frederick market?

Definitely. We recently saw a large tenant in Frederick with a 3-year lease on nearly 10,000 square feet of Class A office space come to the landlord asking to downsize to the best half of that space, and asking that the $60,000 in retro-fit costs be covered by the landlord. Where lease renewals are concerned, tenants are in the driver’s seat right now. Many need to downsize because of the economy, and they are coming to landlords to ask “do you want to keep me?” Landlords need to renegotiate lease terms in this market to keep tenants; 90% of the time when they renegotiate they keep the tenant.

Costar also reported that there is currently a severe shortage of small office spaces under 10,000 sq. ft. in D.C. and Bethesda because so many smaller businesses have entered the market there. Will that trickle up to Frederick and impact the market here?

Increased activity in D.C.’s office market has been a rent driver for the Frederick in the past, and eventually we will see smaller tenants forced to come north to find office space.

And in terms of larger businesses, companies will start to look north to relocate to cheaper spaces located closer to where their employees are living—this seems to happen in cycles every five years or so. Frederick has very little Class A office space, really only five or six buildings, so it won’t take much activity to put upward pressure on Class A rents in Frederick.

However, office vacancies in Gaithersburg are at about 30%. I own a building near the Kentlands that had a law firm as the sole tenant. When the firm needed to move to expand, my partner and I eventually found five smaller tenants to replace it. Recently, some of our tenants renegotiated their monthly rents down 50%, because that is all the market will bear right now.

Until office lease rates start rising in northern Montgomery County, we won’t see much business migration from the D.C. region to Frederick. There isn’t a significant enough difference right now between prices per square foot in Frederick versus Montgomery County.

Rusty McCabe is Assistant Vice President of Leasing and Sales for McShea & Company, Inc.  McShea is a privately owned, full-service real estate services company founded in 1983 and operating throughout the Washington metropolitan area.

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes forTheTentacle.com and Want2Dish.com.

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