What, When, Where, Why and How Commercial Real Estate Investing in Fort Bend County by Kelly Ferguson, CCIM March 2011 Copyright 2011 Fort Bend Business Journal For a quick read on the commercial real estate market and ways to invest, consider journalism’s Five W (or, for our purposes, Four Ws and One H) maxim: What - What’s the story? After three years of a depressed market, the real estate industry is on the road of recovery in 2011. Fundamental demand (namely employment and consumer spending) is improving, albeit tepidly. Transaction volume has picked up pace as credit markets have loosened and investor confidence has improved. Pricing has stabilized. These factors indicate that the real estate market is on the upswing. When - When’s the right time to invest? The general recovery, and thus real estate recovery, has been picking up steam. Valuations are low and economic fundamentals are improving. The bottom of the real estate cycle offers the best environment to make acquisitions, and low interest rates magnify return opportunities for investors. Lori Sowa, Vice President of NorthMarq Capital, says, “It has been an exciting start to the new year. The capital sources that we represent have increased commercial real estate allocations for 2011 and are actively competing for quality commercial properties with strong sponsorship. There is plenty of capital out there for commercial real estate projects right now.” Where - Where’s a good place to invest? Fort Bend County, of course. The diversity in growing industries has fueled decades of strong growth. The increase in income levels and employment, even through the recession, has garnered media and corporate attention. According to Ted Jones, Chief Economist for Stewart Title, nearly 1200 jobs were created in Fort Bend County over the past twelve months. According to the Texas State Data Center, population in Fort Bend is expected to increase by over 25% in the next five years. Why - Why real estate over other investment types? With record-high national debt and deficit levels and prolonged low interest rates, the buzz is about when inflation will set in. We are already seeing inflation at the wholesale level and it’s only a matter of time before the broad market feels the effects. Real estate has historically proven to be an excellent hedge against inflation. And with financing (finally) available, investors can take advantage of rates that could be considered outrageously low in the future. How - How can I invest? There are three primary means to invest in real estate: 1) through indirect investment by purchasing shares of publicly (or privately) traded REITs (real estate investment trusts), 2) through direct investment as part of an investment group such as an LLC, and 3) through direct investment individually. REITs tend to invest in institutional properties (i.e. large, quality assets in major markets), which hit bottom in 2009. REITs have experienced a steady increase in values since then, and many investors believe even higher valuations are justified. If you determine that you are better able to achieve your desired returns through direct investment in local properties, whether individually or as part of a group, opportunities await. And as discussed, investors have better chances of obtaining financing. That being said, the lending environment is very conservative with strict underwriting standards. Capital markets have a new reality, requiring recourse and more equity from borrowers. But the bottom line is that savvy, well-capitalized investors should have excellent opportunities to seize market-bottom plays. In addition to market-bottom pricing, there should be opportunities as businesses, over-leveraged investors and banks unload assets: Expect to see more sale lease-back opportunities. As more businesses enter growth mode, they may see a real-estate sale as a simpler, less expensive alternative to a corporate loan with onerous terms. (Again, while lending has improved, terms are more conservative and restrictive than a few years ago.) Expect to continue to see assets hit the market as over-leveraged property owners cannot meet equity requirements to qualify for refinancing. Expect lenders, who have been strengthening their balance sheets, begin to recognize and dispose of troubled assets. Kelly Ferguson, CCIM is a principal of Fort Bend Real Estate Corporation (www.fbre.net), a boutique firm that has offered specialty services in commercial and residential real estate in Fort Bend, Harris and surrounding counties since 1974.