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Dealing With a Slow Commercial Property Market

Aug 4, 2008
Have you noticed a slowdown in the sales of commercial properties in your market. Well you certainly aren't the only one.

A recent report from the research firm Jones Lang LaSalle comparing first-quarter United States Commercial Real Estate sales volume of 2008 to the first quarter of 2007 shows...

A 69% year-over-year decrease !!

And that's not all...

Worldwide Commercial Real Estate transactions are down a whopping 46% comparing first-quarter '08 to first-quarter '07. Now those are some impressive numbers. We have certainly noticed a major slowdown in transaction volume in the Texas markets.

I had a chance to interview the CEO of Investortours University - Monte Lee-Wen - this week and asked him specifically what he sees as the major cause for the slowdown. Here are his observatons...

Investortours: "What can you say about the CRE Transaction slowdown this article points out?"

Monte Lee-Wen: "The number of sales are definitely slowing down for a couple of reasons: The credit markets are making it difficult to obtain financing. Many pending sales are taking 2 to 3 times longer to close as well. Lenders are being far more conservative in their underwriting which is resulting in lower LTVs. The cost of capital is increasing as lenders increase their spreads and up-front costs. And this all results to higher costs for investors and, therefore, lower return on their investment."

Investortours: "So the costs are up and returns are down. How does that affect the behavior of the Sellers and Buyers?"

Monte Lee-Wen: "Well that creates a spread between bid and ask price for Commercial Properties. In this new environment, Sellers are asking too much for their properties and Buyers are offering less than before. Many Sellers are realizing they can't get the prices they might have 18 months ago and that now may not be a good time to sell. And many of the Buyers that were in the market 18 months ago are out - the 1031 buyers for example - so we are seeing less transactions taking place"

Investortours: "What do you see with regards to Sales Volumes looking forward?"

Monte Lee-Wen: "I think the slowdown is temporary. Credit markets will come back to more normal conditions and it will gradually become easier to secure financing. Sellers will eventually come back down to earth. Over the the rest of this year and in to 2009 we will continue to see slower sales volumes than in the past. In the meantime, there will still be a small number of distressed Sellers who have to sell and will do so at depressed prices. A lot of the people we are seeing sell now are in trouble"

Investortours: "What tips would you give our students who are eager to buy?"

Monte Lee-Wen: "Be patient. Build your team. Keep your lead generators going and watch for bargain properties as they show up. Make sure you only offer what the property can justify based on current income. And expect Sellers to begin accepting your offers again soon as they get a better understanding of what their property is really worth today. I can't tell you how long the slowdown will last ... no one can.

AND in this market remember a few more very important things when it comes to getting your deal financed

- Use conservative underwriting in your Proformas
- Don't expect any more than 75% LTV
- And write in an extra 30 days extension on your financing period ... because loans are just taking longer these days."

Investortours: "Thanks Monte."
About the Author
Learn the Insider Secrets of Commercial Property Investment from Monte Lee-Wen who has personally purchased over $150M in Commercial Real Estate. CLICK THIS LINK NOW to start your Commercial Real Estate Investing Education with his 14 page FREE Report "35 Reasons You Should Invest in Commercial Real Estate".
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