Both brokers and investors tout the strengths of investing in markets with a vibrant harbor and airport. This has been a pronounced strategy from at least 1997 when container imports began increasing beyond incremental growth. Many institutional investors have dubbed this the Gateway Strategy. But grand proclamations like these normally lead to increased competition amongst buyers and lower returns. If history is any lesson, the money was made by the first round Buyers who purchased these distribution buildings at distress. It was the following group who used port dynamics to justify their high purchases and are now sitting with vacant and poorly leased properties at rents vastly below proforma. In retrospect, it was the deal strategy that made investors money. Being located by the port was secondary.
Likewise, students of current history will look to this period as the day of the individual deal. Finding property in these deep recessionary conditions takes place one property and one user at a time. Investors will count heavily on brokers because of the hard work and relative scarcity of opportunities. Many searchers are armed with sophisticated database and web tools to weed through broad swaths of the greater Los Angeles market. This year there have been a couple creative deals where large investors have purchased hulking, junky buildings at land value. They are able to enjoy a fair current return with bottom-of-market rents, while land banking for future development. Another example is a breakup of a large manufacturing plant that had its component parts sold off in pieces at a profit. Mostly however, until lender forbearance wanes and bankruptcies wind their way through court, most investors will need to dig harder or look for another profession.
In the “B” market where I find myself most of the time, $.35 NNN rents conservatively equates to an investment purchase price in the high $40’s and so far those types of deals are not available. If someone has a higher value estimation, we may be able to do some business together. Conversely, Users can find some opportunities in the low $60 level. I’ve seen a few building examples where the mortgage payment is not much higher than rent. Plus a business can establish a permanent home with all the ancillary benefits of creating a Place. There are some excellent properties on the market that Buyers would have fought over in better times. Needless to say, the lease deals are great.
If you like the hunt and are not burdened with excessive debt this is an excellent time to look for property deals. But be careful of any stories that go with the offering. We are in a period of extreme fundamental analysis in a market that can easily decline further.