Bill Norton, Norton Asset Management

April brings Q-2-16. We have found the first quarter to be robust this year. Lots of activity, both in brokerage and advisory services. But while activity is good, it does not always translate to a sale or a lease.  Yet, more activity is always better than less activity in the commercial real estate sector.

In the background are Donald Trump, Bernie Sanders and Hillary Clinton (along with Ted Cruz). It certainly is a curious and entertaining time. It prompts one to ponder what the election may do to confidence and how it may impact the overall economy. But that is in the future and largely out of our hands, so we at Norton Asset Management and Harrington & Reeves focus on the business at hand, which means setting up showings, working on deal terms, coaching folks on what is in their best interest, which is not just about money, as other deal terms can be as important, or even more important, than the final money terms. Like so many things in the 21^st Century, financial terms are important, but flexibility is critical, and thus is worth paying for. We hear and read about young Millennials who are choosing not to buy homes because they don’t want to be tied down (or feel they can’t afford to be). In the go-go days when home prices just kept rising, a home was almost a liquid asset but not so much anymore. In one region, smaller, cheaper homes under $275,000 sell very quickly, so they could be considered to be somewhat liquid. But bigger more expensive homes are much less so. On a recent trip to Alabama, I met a gentleman who was tickled pink to be selling his house in Oklahoma for $300,000 - after seven years and for nearly $100,000 less than his asking price! He would pay off his mortgage and have slightly more than $100,000 cash left over, hence his move to a lower-cost state.

During the heydays of the eighties and early 2000s, commercial buildings were in demand with prices rising and they too could be traded quickly. But then the recessions came and it was very difficult to sell, and then only with a steep discount. Since the Great Recession of 2009, there has been very little new construction or new development. While office demand is still sluggish due mostly to technology efficiencies and firms simply choosing to do more with fewer employees, high-bay manufacturing space is suddenly in demand. About 20% of leases roll each year, so there is always some turn in each sector (high-bay, office, retail, etc.).

A tenant can extend and stay in place or look at other options - better space, more space, less expensive space or perhaps choosing to become a buyer. But looking for space and finding what you want, or need, at a location and price you are willing or able to pay can be challenging. Currently, appraisals are lagging the rise in high-bay building prices. Thus, some buyers cannot borrow as much as they want and they have to put more equity into the deal or realize they are not able to purchase with current market conditions, so they often renew in their current space for a year or two hoping to be able to qualify to buy at that point in time. Another observation is that long-term holders of commercial properties are beginning to sell certain properties. Empty buildings are expensive to hold, so if there is demand, sometimes it is a good time to sell.  Many of these sellers are getting older and they feel this is a good time in the real estate cycle to sell.

Bill Norton, CRE, FMA, Hon. NH AIA, Norton Asset Management, Inc., Manchester, NH