On the way up, Risk increases every day

and on the way down it decreases every day.

These are the words of wisdom from Ozzie Jurock, a long-time real estate investor as he shares his take on how to make a move in the current down cycle.  This concept is especially hard to wrap your head around when you are watching price drops happen around you, you are reaching for your wallet to commit, and your neighbor is shaking his head at why you are “overpaying” for a property.

Real estate always has, always will, be cyclical in nature, and smart investors make their decision based on fundamentals, not the emotion of the neighbors, their city, or the media.  Here are a couple more bits from Ozzie, then I suggest you read the full article entitled, “Shop Wisely and Make Offers” here. 

Buy “use” to you or your family — buy your own business space … and don’t worry. The best deals come in down markets.

For 40 years, prices soared because we lived through the most unreported inflation of all times, because we printed more money than ever.  Today, this is even more the case. All that extra cash created out of thin air will continue to compete with the money you and I make and drive hard asset prices eventually higher again, after we clear out the messes and the excesses, just like we did in 1992 (or 2001, 1998, 1987, 1981, 1974).

From an investor’s perspective, we like cash-flowing properties anywhere — where there is a good employment base, low vacancies, capital investment and a good price-to-rent ratio.  We see that developing in Edmonton and many small towns throughout Alberta.

Another piece of Ozzie’s advice is to “overcome your fears and write offers.”  I can’t stress how important this is in the current market conditions.  So many vendor’s I have spoken with know they are priced high, but stress verbally they are negotiable.  They aren’t negotiable with a tire-kicker making a verbal offer – they need so see a signature and a deposit.  With more available product now is the time to shop hard by writing offers on multiple properties – leverage your opportunities against each other.  One thing you need to understand about most vendors is that they don’t have a store full of product to move off the shelves – often they only have one product.  Can you blame them for pricing in such a way “just in case” they can pull it off?  

Many vendors are on the verge of dropping their price, and all of a sudden your low-ball offer isn’t so low, its right in line with their new price.  Do you want to have the first crack at a lower price?  Or wait until the new more attractive price is advertised in the newspaper for all your competitors to see and jump on?  An offer with a signature, deposit, a well-written cover letter featuring a price backed with new comparables will take you places you never expected.

I have to throw in one more Ozzie quote – forgive me for the blatant self-promotion but sometimes its just too easy:

The key is that you shop wisely, get a professional realtor, research, overcome your fear and make offers.

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Mid 2009 Real Estate Rebound?

 

Can you expect a mid 2009 revival?

I certainly enjoy hearing more optimism around town, but my hunch is that this is a little premature. Spring fever typically spurs some activity, but I’m not convinced its the start of the next upswing we’ve all been watching for.

 

I’m hearing some excitement from residential realtors enjoying a seller’s market last week.

I’m hearing some excitement from commercial realtors in this article in the Edmonton Journal by Bill Mah.  A few highlights:

• The deals will slow down, vacancy rates will rise and sublease space spike, but Canada’s commercial real estate will stabilize by mid-year and recover in 2010.
• Canadian markets such as Edmonton benefit from strong fundamentals and a relatively constrained supply.
• In Edmonton’s industrial real estate market, new construction and lower absorption levels bumped up the vacancy rate to a “still sparse” 1.5 per cent in December — the lowest industrial vacancy among Canadian major markets.
• The fundamentals of the Edmonton industrial real estate market remained strong throughout 2008 and Edmonton continues to be the service hub for the megaprojects of northern Alberta.  After years of rising land values, prices began to plateau last year and will correct in 2009 . . . Except for new developments, industrial rental rates will hold steady . . . A wait-and-see attitude will extend into the first half of this year . . . Those developers who are still building on a speculative basis will be rewarded, as the forecast for Edmonton remains positive.

I concur that softening will continue to occur through till at least mid-2009, and stabilization through the end of 2009 is possible.  I believe the situation will continue to deteriorate for our neighbors to the south as they reap the fruits of a hyper-active printing press, and the sooner our businesses can decouple from that situation the sooner we’ll see recovery.  A decoupling from the US economy and increasing oil prices are going to be the key determinants in our next run.  

Unfortunately if you are trying to time the market, these two factors are difficult to predict in the current chaos and you’re not going to have your “Aha!” moment until after its begun.  With Alberta’s incredibly strong fundamentals, a long-term buy and hold strategy (5+ years) is still your most profitable and risk-averse option, with some good deals and motivated vendors almost a sure thing over the next 3-6 months.  Be greedy when others are fearful . . . be investors, not gamblers.

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Where are Edmonton’s Industrial Real Estate Prices Going? Let’s Review 2004-2008.

Curious about where Edmonton industrial real estate prices are headed?  

There are strong fundamentals that point to great long-term positioning – but what the next 6-12 months hold, I couldn’t tell you (I wouldn’t commit to it on paper, anyway.)  Even Warren Buffet doesn’t make short term calls . . . 

However, I can provide you with some insightful numbers of the past 5 years, 2004-2008.   A birds-eye view of where we’ve been and we are now. 

The Network has released their 2008 Commercial Real Estate Overview for Edmonton, and it focuses on three key metrics:

1. Per Unit Price (Square Foot or Acre)
2. Number of Transactions
3. Dollar Value of Transactions

Between 2004 and 2008, Edmonton’s industrial market generally experienced:

• Increasing per unit prices (No drop in 2008 folks, as many have assumed).
• Increasing number of transactions from ’03-’07, a sharp spike upward in ’07, and a sharp drop in ’08.
• Increasing dollar volume of transactions from ’03-’07, a sharp spike upward in ’07, and a return to near normal values in ’08, in spite of the dramatic drop in the number of transactions.

This chart quickly shows the unit price metric over the 5 years, I recommend viewing the full data, including CAP rates, for all the industrial property types in the report (link provided below).

Shows Unit Price & # of Sales

 

Myself, I was curious as to the role of investors and speculators over the five years, so I formatted the numbers into these pie charts below.  Generally speaking, the blue portion will represent activity by user / owners, and the other colors combined make up what is typically investment properties.  Of no big surprise, the red hot year of 2007 witnessed the highest involvement of investors, and 2004 saw strong investor activity as well.  Typically, I see investor activity being a main driver behind the short term ups and downs.  Most industrial owner / users are operating within a longer term business plan, with various obligations making their property less liquid.  In Edmonton, I see the industrial values being more stable than many other market segments due to a pretty consistent 75% – ish involvement from user/owners.  I don’t have the data to support it at my fingertips, but I have seen reports suggesting that the Edmonton residential inventory glut experienced in 07-08 was over 50% investment properties. 

 

The full report from The Network which goes into greater depth, and includes analysis of other segments of Edmonton’s commercial market including CAP rates can be downloaded here.

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Will your Edmonton industrial property weather the economic storm?

 … it’s vital to remember that property markets are not national; they are regional and local, and even vary widely from neighbourhood to neighbourhood in the same city. Looking at national numbers and coming up with an average is like putting your head in an oven and your feet in a freezer, and saying on average that the temperature is fine. There will always be some hot real estate markets and others that will be cold, but national and provincial figures are much too generalized to be used . . .

I would like to point you towards a must-read article by Don R. Campbell, the best-selling author of Real Estate Investing in Canada and President of Canada’s Real Estate Investment Network™.  In the article you will find twelve questions to peer into the future of your property’s value, such as #3:

• Is the area creating jobs faster than the provincial average?

Or #10:

• Is there a major transportation improvement occurring nearby?

Answer the questions honestly with relevant data, and if you don’t know the answer, do the research until you do.  Perhaps you know a realtor who can help you gather the data?

For further insight into the future of Edmonton’s industrial property values, see my previous posts on Edmonton industrial vacancy rates by area, and the 2009 real estate forecast.

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Rose Colored Glasses & Property Valuation

 I came across this interesting experiment while listening to “Difficult Conversations: How to Discuss What Matters Most” by a few authors associated with Harvard Law School and the Harvard Negotiation Project.

Howard Raiffa, the Frank P. Ramsey Professor (Emeritus) of Managerial Economics at Harvard Business School posed this assignment to 3 teams: determine an objective value for a business based on a fact sheet.  One team was informed they would be selling the business, another team informed they would be purchasing it, and the final team informed they were providing an independent appraisal.  All teams were given the same fact sheet about the business, all directed to provide an objective price (not a list price, or purchase price). 

The results?

The team selling the business valued it 30% higher than the independent appraisal team, and the purchasing team valued it 30% less than the independent team.

Different values aren’t surprising, what I found surprising was how far the spread was – considering they were only role playing and theoretically not emotionally involved in the success of the transaction!

Which lenses are you wearing?  Your chances of arriving at an agreement improve drastically when you can put on the lenses of the other party.  However, this doesn’t mean you must keep those glasses on . . . 

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