Time to Talk Commercial


 August 08, 2013
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As we learn from some of the top practitioners featured in this edition of Wisconsin Real Estate Magazine, the commercial real estate market is making a steady recovery in Wisconsin, a positive indicator for our overall economy. Commercial real estate practitioners are the state’s foremost economic development professionals, often managing a great deal more than just a real estate transaction. By facilitating new workspaces for their clients, REALTORS® help businesses grow, create jobs, and grow the community. 

Wisconsin continues to be a place where businesses and investors look to when seeking a stable, productive place for their investment. The cost of real estate, the expansive and qualified labor pool, excellent infrastructure, and the improving tax and regulatory climate has put our state back on the map for commercial real estate investors. 

While the trend lines are moving in the right direction here in Wisconsin, national and global economic and political unrest continue to give pause to businesses and investors driving the segment. Public policy advocacy and political involvement, perhaps once a luxury, are now essential tools for any successful commercial real estate professional. Policy decisions made hundreds, or even thousands of miles away, are now more than ever steering the economy and ultimately our members’ bottom lines. 

Like its residential counterpart, commercial real estate is complex and requires a unique set of skills and knowledge to provide clients with superior service. The Commercial Association of REALTORS® Wisconsin (CARW), along with other local boards under the leadership of the WRA, works to provide the tools and training our members need to advance their careers, serve their clients and, ultimately, boost our economy. In November 2012, CARW was recognized by NAR Commercial with the ACE Award for providing Accredited Commercial Excellence for our members and the industry. Learn more about us at www.CARW.com, and enjoy this edition’s focus on commercial real estate!

Forward by Jim Villa, CAE; President and CE, Commercial Association of REALTORS® Wisconsin

Article contributors

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Jim Barry is the President of Cassidy Turley Barry, a commercial real estate firm servicing the Wisconsin market. Cassidy Turley Barry specializes in office, industrial and commercial sales and leasing, sale/leaseback and investment brokerage and real estate consulting projects.

 

 



KampsHeadshot.jpgRalph Kamps graduated from UW-Madison with a BA in Communications with studies focused on marketing, economics and real estate, and has been a REALTOR® since 1980. Kamps has served as the commercial chairman for the REALTORS® Association of South-Central Wisconsin since 2005. Kamps is the managing partner of the Commercial Investment Real Estate Exchange (CIREX) as well as an investor and partner of M&M Real Estate Investments Inc. in Madison.




RedmanHeadshot.jpgAdam Redman, ABR, e-PRO, CDPE, is Broker/Owner of Redman Realty Group, LLC. Adam is a full-time agent who is energetic and passionate about what he is doing. Born and raised in Minocqua, he loves the Northwoods, and he enjoys selling properties with the Northwoods' unique lakes, trees and superb towns. Adam specializes in waterfront recreational property and is also experienced selling vacant land and commercial properties.




ShepherdHeadshot.jpgTom Shepherd is a partner at Colliers International–Wisconsin and leads the firm’s Wisconsin investment sales and private client group. Shepherd’s areas of expertise include investment sales, buyer and seller representation, ARGUS DCF valuation analysis, feasibility analysis, lease renegotiation, and contract consulting and underwriting. His closing library includes properties in all commercial asset classes — office, industrial, retail and multi-family. 

 

How has government regulation impacted your practice? 

Jim Barry: Government regulation has a strong impact on the commercial real estate (CRE) industry. While some regulation is of course necessary, the costs and benefits of such regulations should be weighed carefully before they are imposed. For a long time, Wisconsin had overly burdensome environmental regulations that, without question, stifled reasonable development. Numerous projects were scrapped or never even considered because of very restrictive rules governing wetlands or protected species such as the Butler garter snake, which is no longer deemed protected. Recently, these regulations were given another look, and more sensible rules that allow for reasonable development projects have been put in force. This regulatory overhaul is long overdue and should continue on an ongoing basis at all levels of government.

Ralph Kamps: Very colloquial question. Nationally, the Health Care Act, when and if it does get hammered out, will affect corporations’ bottom lines as well as brokerage houses with 50 or more employees. Do independent contractors (IC) — which most sales people are — become exempt? Will everyone become an IC? But if the act does affect bottom lines of corporations, that means that corporations may be looking at occupancy costs, ownership, downsizing instead of expansion, and other revisions. This could definitely impact the lease and sales transactions of the commercial agent. It will be interesting to see how this plays out and if it is a good or bad thing … probably will be both.

State and local, especially local, governing bodies always seem to delay the process with development. In Madison, for example, a sign ordinance almost ignited a minor riot until our association intervened and had both sides and the Mayor resolve the issue. Still a bit of a hassle. We also had a rewrite of zoning laws with input from our Commercial Committee of RASCW and a host of others. This seems to be playing out well with city administrators trying to get projects through rather than having them snuffed out. It is all about the people in these positions and their attitude. We shall see.

As an aside, we have a very active Political Affairs Committee headed by WRA Government Affairs Director Phil Salkin. Nothing escapes Phil, yet he does not make mountains out of rubbish piles either. Phil picks the battles we as CRE professionals feel are important. Overall, I think Wisconsin CRE REALTORS® are ahead of the game and can serve as a model for NAR.

Tom Shepherd: Recently I have seen local and regional government economic development groups play a larger role in attracting companies to their communities. Sometimes, the economic developer is the second call on a broker’s checklist after the preferred site or building is located. There is a perception, real or not, that there are large government pools or incentives available for development in every community.

What is the biggest obstacle (or obstacles) that you face in a commercial transaction? 

Jim Barry: The largest obstacle we currently face in completing commercial transactions is the lack of economic and political predictability. Many business owners, real estate developers and investors are concerned about what the future holds regarding taxes, health care costs and regulatory impositions. The role of the government should be to set these rules definitively and then get out of the way — not create the perpetual dramas and crises that are all too common right now.

Ralph Kamps: The answer depends on the type of transaction. Again, this is a misunderstanding of CRE agents deriving commissions. We have “for sale” transactions, but a large percentage of commission is also derived from “for lease” transactions. Each transaction has a unique set of circumstances. Sale transactions seem to have the appraisal problem or loan to value (LTV) of a property. Also, buyers are having a heck of a time qualifying as individuals and companies — it seems as though appraisers are beholding to the bank that orders the appraisal. For owners, refinancing is still a murky and oftentimes disappointing road. Great rates, but LTV doesn’t work.

In leasing transactions, we have gone through a massive market shift where the tenant seems to hold all the cards with little risk. They are asking for low rates, free rent, build-outs, shorter terms and so forth. This has been hard on landlords, as often times they give great concessions only to have the tenant skip out on the lease. I see that starting to shift the other way.

Adam Redman: With relatively low vacant land prices and abundant inventory, many business owners want to build new facilities rather than invest in existing structures. With few restrictions on where businesses can be located, commercial sprawl can dilute a central-business district, although with the low density of people in the Northwoods, many people have their business close to home and a business hub is diluted anyway. 

Tom Shepherd: This biggest obstacle or challenge is closing the pricing/expectation gap between buyers and sellers in a changing market. Values and rents are now stabilizing, so each quarter, this gap is becoming less of a concern as our market continues to recover. Transactional activity is picking up, so there are more data points in the market for brokers and appraisers to point to when it comes to advising clients on market value. 

What changes do you think could be made to solve the problems you face in your business?

Jim Barry: If one consults history, it is not too hard to determine how the CRE market can be improved:

  • Lower taxes and other governmental costs so that more capital can be directed into real estate investment.
  • Improve business confidence so that those who use real estate will be willing to use more of it.
  • And keep interest rates and inflation at predictable levels so that real estate investors can make informed long-term decisions. 

In other words, create a business-friendly environment that will “lift all boats”; an improved commercial market will follow.

Ralph Kamps: Not sure on the leasing end of things. I think the answer just may be the economy perking up and waiting for the market and adapting to it. Rather than bucking the trend, just ride it out. It too will swing as other markets do. But no question that leasing has shot up dramatically, and as vacancy declines, rates increase.

In sales transactions, I already see a small trend starting called “outside financing” in which small groups of investors pool money to make mortgages without all the banking red tape. They want to make the deals work. Also “crowd funding” or “crowd sourcing” is emerging as another financing tool. Local or community banks must get more involved as well or they will be left behind like the national ones and create a sour taste in the investors’ or buyers’ minds. Some of the fed’s requirements may need to be revisited in order to give the banks more leeway in lending.

Adam Redman: Many businesses are investing in an exterior “facelift,” which helps with the first impression people are having whether they are buying a product or being provided a service from a business. Minocqua and many other towns are moving in the right direction by investing in infrastructure, which creates a small-town feel/experience for consumers. We need to remember that tourism is still the backbone of the Wisconsin economy, and to keep our environment relatively pristine and attractive will set us apart in the long run — and is key to commercial success.

Where do you feel that commercial real estate is headed in your market? 

Jim Barry: We see slow but steady improvement in most CRE sectors. Right now, the multifamily market is very strong with a great deal of current and planned projects. The industrial market is also gaining strength, with positive space absorption for 13 consecutive quarters and a vacancy rate hovering around 6.5 percent. We are cautiously optimistic that the market will continue to improve, though this may happen in fits and spurts.

Ralph Kamps: Well, the market could not have become more flat than it did. The bottom was hit a few months ago and there is cautious optimism. Residential apartment buildings are sprouting like dandelions in Madison — commercial follows. With pockets of increased density, retail comes along to serve the needs of all the people. It also brings companies in to relocate or expand to greater Madison and tap into this highly educated pool of talent. Vacant, overbuilt office space is being absorbed at a steady but slow rate. As the economy slowly improves, so will commercial real estate. I believe the apartment boom has peaked as there are several large projects that are or will be starting development soon. Overall, this is a wait-and-see situation with cautious optimism here in South-Central Wisconsin and greater Madison/Dane County. My advice would be to go out and make hay while the sun is shining.

Adam Redman: There are lots of opportunities in the Northwoods! Businesses thrive when they meet consumers’ needs or when they create an experience that people can’t get anywhere else. The Northwoods is truly a beautiful place, and as long as we protect and promote that fact, there will always be business opportunities here.

Tom Shepherd: We are realizing the early stages of a market upswing. Both debt and equity capital are readily available for good, core “A” projects and acquisitions. There is still a glut of what we call “F,” or distressed real estate, on the market. That is selling too. Note that REO buyers continue to remain very active as they see an opportunity window closing — that is to buy real estate at the bottom. Marginal and functionally obsolete space and/or investment properties remain very challenging to move. They must be priced appropriately and of course marketed appropriately. Vacancy rates for industrial, retail and Class “A” office space have tightened dramatically over the last eight quarters. My prediction is that we will begin to see significant new development in these sectors in 2014. 

Complied by Lauren Bizorik, Editor, Wisconsin Real Estate Magazine

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