I have near ground zero commercial real estate knowledge. I have been looking into it for several months, but some things just don't make sense. I know the TA brain trust will be helpful. We are just south of College Station.

Background - run my own business. We are doing well and are now debt free (business and personal). Currently, business runs out of our mudroom. We are in need of more space. A flex space would be perfect for us.

I am also interested in diversifying our cash flow and I have always been interested in real estate investing. (We have solid equity investing already rolling). Getting into commercial real estate just makes sense for us personally and as a part of our business. We could buy a building with multiple flex spaces, use one for our business and rent the others out. I know, not a creative or unique idea. And yes, the real estate would have a separate LLC.

Here are my concerns/questions. Looking around the College Station area, there seems to be a lot of unleased flex space. Further, I see a lot of commercial real estate that just seems to sit for years unoccupied. I know the old Academy building is a favorite example on here. Another, there is a 20,000 sqft space on Hwy 6 near the FM 2154 exit north of Navasota. It was built years ago and only recently did the lease sign go down and evidence of occupation start.

1. How can owners of commercial buildings afford to have their buildings unoccupied for years? Especially if they have debt on said buildings.
2. From the outside, it seems commercial real estate has fewer headaches (read tenet problems) than residential, especially with NNN leases. Is that true?
3. What questions should I be asking that I am not?

reineraggie09 said:

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1. How can owners of commercial buildings afford to have their buildings unoccupied for years? Especially if they have debt on said buildings.

Many can't. But some vacancy is always baked into the underwriting. It really depends on who owns it, what their debt situation is, when they bought it, etc.

2. From the outside, it seems commercial real estate has fewer headaches (read tenet problems) than residential, especially with NNN leases. Is that true?

Headaches are different. Vacancy, bad debt, interest rates, insurance, property taxes, new construction in the same class and location, controllable expenses especially during inflationary periods, etc.

3. What questions should I be asking that I am not?

You should be reaching out to local brokers and asking these same questions. Ask which locations are best for what you want to do.

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Thank you HA!

Stafford Barrett (Sago) is the local player and they have some quality people.

https://www.sagocre.com/meet-the-team

Troglodyte said:

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Heineken-Ashi said:

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reineraggie09 said:

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2. From the outside, it seems commercial real estate has fewer headaches (read tenet problems) than residential, especially with NNN leases. Is that true?

Headaches are different. Vacancy, bad debt, interest rates, insurance, property taxes, new construction in the same class and location, controllable expenses especially during inflationary periods, etc.

Those headaches sound the same as residential. The big difference in commercial is that you can't just lower the rent to get occupancy like you can in residential. The leasing cycle is also very long and VERY expensive. You won't just get a tenant looking to move in the next 15-30 days. Leasing commissions and tenant improvements can eat up the first couple of years cash flow. It seems like you only make money when you sell a multi tenant commercial property.

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It sounds like a good start for the OP is to buy a building that will be 100% (or mostly) occupied by your business. I know several small business owners that have made more money on the sale of their real estate than they have the sale of their business.

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Could be. But you have to remember that most who did that did so during a regime of falling interest rates (so falling cap rates on real estate.. meaning rising valuation premium on income potential). That regime might return, but it isn't here now. The valuation premiums that helped them achieve that are gone and prices now reflect a more modest valuation on flat or slightly increasing income potential. If rates RISE further, that premium will further reduce and prices will shrink more. It's a time of uncertainty at best right now.

We have a couple of commercial properties, neither very large.

I had a half-dozen or so clients that owned decent sized commercial properties, 5 to 15 tenant sort of things. They seemed to have far fewer problems with tenants than my clients with single family homes they rented out. Not to say there were never any problems, but not nearly as many.

Most of these commercial locations were in absolutely prime locations because they had first been built in the 70s or so and they got the land pretty cheaply and got the best locations (prior to the area growing a great deal). Since they were in such prime locations, the demand for leasing a space in the buildings was very good. They could also get the tenant, the prospective tenant, to pay all or part of any reconfigurations (new interior walls or removing all or part of a wall.

I had one client who had some property, two tracts, in Houston. Her deceased husband had gotten the property in the 60s I think. They were vacant for years. Years later, at almost the same time, she was approached by Lowes and Sonic to see if she was interested in selling. The property had almost no basis (the step up wasn't much because he had died not long after acquiring them). She decided not to sell. They persisted and she kept saying no. After some time, both companies agreed to 20 year leases with a 20 year renewal (as I recall) and built on her land. Only time I had ever seen that.

As an CRE insurance broker, one issue we battle constantly is buyers/owners underwriting their deals with insurance at lower rates then what the market is actually offering. This often leads to headaches in the pro-forma because of the additional expense now.

CRE folks please clean this up if needed, but from what I've seen vacant many times doesn't mean no rent is being paid. For flex space in B/CS this likely isn't the case but many times these big box buildings, stand alone restaurants and others sit vacant but there is still some kind of guaranteed lease in place by a solvent lessee/former tenant. They just decided to cut their losses as whatever was operating there was costing them more than the suck lease cost. Now this "look" of empty space isn't good for a landlord especially in a multi-building development but they might very well still be receiving full rent, allocated expenses and the like.