Robert Kiyosaki (one of my all-time favorite authors) recommends that you look at all three sides of the coin. The front, the back and the edge. 2020 the year which is not yet done, but already infamous, has many such sides and angles. Along with all the turmoil and all that is unsettling about 2020, there are silver linings, literally (as the current spot price of this precious metal is currently up 44% this year).
We are seeing the “Covid Migration” hitting the local residential market for better or worse. Economically it is for the better, as residential real estate and construction is such a huge part of our Southern Utah economy. This population growth and residential activity has been spilling over like a waterfall into the commercial markets including the office market.
On top of that, many small businesses received thousands or even hundreds of thousands of dollars in cash, PPP loans, 100% forgiveable loans. It’s like monopoly money, yet easier to create than even paper itself. Someone at the Federal Reserve just pushes a button, or clicks mouse, and *poof* there it is, counted in the trillions.
Borrowing this fiat money seems to make more sense than hoarding it for some. Interest rates are lower than they have ever been. Low rates are a huge opportunity for those in a position to buy (or sell) commercial real estate. In an unexpected turn, however, owner-users seem to be benefitting more than investors by the precipitous drop in rates. Combine super-low rates, and 25-year fixed loans on the SBA side, with some tightening of lending standards on the investor side and the net result is that owner-users have, more often than not, been the highest bidder on commercial property this year.
We’ve seen two prominent office buildings sell this year to owner-users at a 12-20% premium over last year’s prices (with a third building under contract at the same price level). The trading range in 2019 was $130-160 psf. Travis and I have a building listed now at $200 psf (Tonaquint Building C, pictured above) and we think it will sell close to that price.
In the past 30 days, I have represented two different office users who needed bigger space, preferably their own buildings. With a scarcity of options listed on the market, we put in offers on two buildings not listed for sale. One of those is under contract now and the other is still in negotiations (fingers crossed). Both buyers are tickled pink with the financing options, which look something like this:
Down Payment: 10%
SBA loan: 40% @ 2.26% 25-year fixed
Bank loan: 50% @ 4.50% 25-year amortization
Blended rate: 3.16%
Amazing isn’t it? Albert Einstein once said that compound interest was the “eighth wonder of the world.” Financial leverage is certainly a remarkable tool. Taking advantage of the power of other people’s money borrowed at ridiculously low rates is a good strategy for growing businesses who can find the right property. And yet with asset prices fairly high, including stocks, real estate and precious metals, what do the rest of us, who don’t qualify for an SBA loan, do with our cash? That is the million (or maybe trillion) dollar question. I don’t know for sure, and I’m not sure if anyone does. But I do have some ideas that are beyond the scope of this update. We are constantly looking for and finding new opportunities in this market. And I would be happy to share some those with you.
As always, please feel free to reach out to me if you would like to explore some of the current opportunities in commercial and investment real estate. And specifically, if you are looking to own an office building for your business or looking to buy or sell commercial property, please don’t hesitate to reach out. You can reach me at [email protected] or 435-359-4903.