What’s most important to a real estate investor these days? – Orange County Register

I am amazed at the level of investor activity these days!

Recently we discussed two types of investors – those who use their own money to buy and those who don’t. We refer to the former as private and the latter as institutional. As you will recall, retail investors typically secure debt to supplement their down payment, with an institutional group having ready pools of equity.

We started an offer last week. So far we have had over 76 inquiries and two offers. We expect the deal to trade at a record price. Here’s another example: A Class A building that was just rented – before construction was completed. Completely unsolicited, an investor offered to buy it – subject to the new lease – at a rate of return and a price per foot that would have broken any record. Our customer said no thanks! It’s just too difficult to find land and get the city’s building permit. Your plan is to hold out for the long term.

Both of the above are great examples of what investors consider most important these days. Pamper me while I discuss some of my observations.

Motivation generally starts with money. In particular, the source of those dollars. With our new offer, the owner of the property bought the building to house his operations. He paired earned funds with a 90 percent loan from the Small Business Administration to close the deal in 2013.

Flash forward. In 2018 his business model changed. The warehouse was no longer needed. We found a new tenant for him to replace his apartment. He then became a private investor, previously he was owner-occupier.

So why sell? After all, the tenant writes a nice check every month. Two reasons. Moving the owner to a tax-friendly state means avoiding California taxes on a sale. Besides, the market is hot! Taking the boot and buying elsewhere will bring more. What is most important Net cash flow – what remains after paying bank and income taxes.

In the case of the new Class A leasing and the unsolicited offer, we now have different circumstances. Let’s start all over with the money.

Before 2019, our client worked with a Canadian pension provider. A fund was structured with a clear objective: Acquisition of industrial businesses in infill markets (which have largely been developed). Existing structures and locations that need to be re-used are taken into account. The dollars invested will bring retirees a return for years to come.

So when a new project is developed and sold, there is a bigger problem – where to put the profits – because of the lack of investment grade real estate. What is most important A long, sustainable source of income.

Are institutional investors sellers these days? Rare. Those who use Wall Street for investment capital – such as real estate investment trusts – have rules on how much they can sell annually. Others who buy on behalf of pension funds – like CalSters and CalPERS – must hold a percentage of the pool in asset classes like commercial real estate.

Sure, they could make big profits from selling them, but as mentioned above what then? Cash returns in a bank or T-bills are measly. What can lead to a sale? Do you remember our customer with the Canadian pension dollars? Typically when a business plan is executed – dollars employed – there is a sunset of the agreement of five, 10, 15 years. They will therefore bring properties to market whose underlying funds have matured. If your timing is now – what a bonanza!

Allen C. Buchanan, SIOR, is a Principal at Lee & Associates Commercial Real Estate Services, Orange. He can be reached at [email protected] or 714.564.7104.