Warren Buffett once said that it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.”
Right now, institutional investors are gobbling up multifamily and industrial properties. They’re also running from commercial office real estate. So, what would Warren Buffet do?
He’d pick the brain of a commercial office real estate expert to find hidden opportunities! That’s why we brought Oliver Barakat back to the Not Your Average Investor Show!
He will share his 20 years of Jacksonville office real estate experience with you, including:
- Trends are happening in the office space market (it’s changing rapidly!)
- What kind of investor is a good fit for investing in offices (maybe it’s you!)
- How to find stability in a commercial office deal (the key to success!)
Oliver was one of the FIRST guests on the NYAI Show that gave some great predictions about downtown Jacksonville. In today’s episode of the JWB Not Your Average Investor Show, he has some golden nuggets to offer on a topic few people understand well.
What Is The Buzz Around Commercial Real Estate Investing?
Most of us know that businesses of all types were significantly affected by the global pandemic. In every neighborhood of every state in the Union, residents have seen changes in retail space, office space, the stock market, and residential real estate. If you look at different track records of the United States economy, the asset class of commercial real estate has its ups and downs.
Commercial real estate investing is a giant nut to crack, but there are plenty of Jacksonville, Florida passive income investment opportunities with proper due diligence. At JWB, our focus is single-family turnkey rental properties. However, in our ongoing desire to bring different perspectives to our show, we like to discuss other topics, like the Jacksonville office space market.
Oliver Barakat shares his wisdom about how to invest in commercial real estate without having to panic over vacancy rates and long-term cash flow.
What Is The State Of The Commercial Real Estate Market?
Oliver said the commercial real estate world, especially the Jacksonville office space market, is a little crazy right now. We are seeing crazy valuations in retail, multifamily, and it’s tough to find good opportunities in this sector. In every investment class, we see substantial price increases due to the monetary and fiscal supplements coming from the Federal government.
What Is The Purpose Of Office Spaces Today?
A couple of hundred years ago, professionals worked from home, like lawyers and blacksmiths. About 100 years ago, the workforce started moving into office buildings. So the work from home concept is not new.
Today, there is a real opportunity to invest in office space, but you need to consult with trusted brokers and research to find good deals. The JWB Not Your Average Investor community took a downtown Jacksonville commercial building tour in December, and we saw a lot of positive opportunities with the VyStar building.
In today’s economy, employers are trying to get their employees to return to the office. Some jobs are likely to work from office space, and others work from home. The more repetitive jobs are likely to stay at home because you can monitor their activity through technology, like call centers.
If you own an office building with a lease coming up and the business occupying that space has more employees working from home, you may lose that tenant. But for those office building owners that have tenants who need to show up to the workplace, the owner will have fewer lease turnovers when they have those types of companies.
Jacksonville is known as a supernova city, which means that it’s a market that has a large population and is excellent for corporations too. You will find value in cities with a bright future, and you’ll find micro value in understanding who occupies the commercial building.
Companies that thrive on building company culture are the businesses more likely to occupy and stay in Jacksonville office space. Higher-paid employees tend to be part of jobs with high corporate culture. The intelligent building owner needs to help those companies create an attractive corporate space that will make the businesses want to stay within that space.
How Can A Building Owner Help Companies Stay For Another Lease Term?
Office building investors need to make the necessary improvements to attract employees back to the buildings. Make the space cozy, inviting, and collaborative. Offer a coffee shop within the building, or install attractive, light, and bright areas that draw employees together.
If the work-from-home trend is overplayed, it means cities will need more office spaces. As we come out of Covid, things will change, and office space investors need to be ready.
What Are The Rents For Office Space?
There is an upside. The office has more risks, but there is significant potential upside for office space owners. We see industrial lease rates within a 30% shot of office lease rates.
What Is A Cap Rate, and What Are The Key Performance Indicators?
Cap Rate is a snapshot of what the property produces for income. Take the revenue minus the property expenses, divided by the purchase price, and you get the Cap Rate. When you buy at a 9% Cap Rate, there is less pressure than buying at a 2% Cap Rate.
Most buyers are looking for low risks and high returns. It’s important to know when the lease expires and what it will cost you to keep that tenant. When you take the potential revenue and subtract all those costs of maintaining or replacing tenants, you get a sufficient understanding of the KPIs for this commercial property.
There is an office space in Downtown JAX that costs $400 per square foot, but it may have cost $200 per square foot to build it. It is a good investment if the value is higher than the replacement cost.
But before you invest in commercial real estate, you need to look under the hood and ask questions like:
- Is the office building well maintained?
- Are the tenants happy there?
- Is there good lighting?
- Is the office building in an ideal location?
- Is the surrounding neighborhood deemed safe?
- Is the office building fully occupied?
At JWB, they bought commercial buildings at a 9% Cap Rate, which was a great time to buy. In Downtown Jacksonville, the Cap Rates were much lower in 2021, so JWB’s early investment has been a win.
There are discussions across the country that demand for office space is down. In other areas of the country where populations are declining, the office buildings are more vacant. But in Jacksonville, we see the opposite. Many corporations are moving into Jacksonville and building commercial buildings.
How Can You Get Ahold Of Oliver Barakat To Learn More About This Asset Class?
Call Oliver Barakat at 904-630-6346, or email him at Oliver.Barakat@CBRE.com. CBRE offers reports, insights, and services that will allow you to invest in property types like office space, retail, hotels, industrial, and multifamily properties.
How Does The Average Investor Get Involved In Commercial Real Estate Investing?
Oliver recommended that you consider your options and talk to the experts to ensure it’s a good buy. Be sure to watch the full episode to hear what he shared because he poured a lot of advice and wisdom regarding this question. Start with smaller buildings and work your way up as you have success.
What Is Financing Like For A Commercial Deal?
About 20 – 30 years ago, commercial real estate got 80% – 90% loans. But the Great Recession made many lenders extra cautious, so the current loan rates are closer to 60% – 65%. To add, you are required to have reserves to handle maintenance, repairs, and modifying the spaces for your commercial tenants. Therefore, if it’s a $2M purchase price, you need to have 35% down, plus reserves to cover all the recurring expenses.
Buying commercial real estate is very different from investing in residential properties. The good news is that businesses tend to sign up for longer-term leases, and you don’t have to worry as much about frequent lease turns. If you want to purchase commercial real estate but cannot do it yourself, you can always join a REIT or gather with partners that will allow you to invest with less risk than you would on your own.
How Is The Amazon Butterfly Effect Impacting Office Space Demand?
Amazon and e-commerce have impacted the retail and industrial spaces. However, it’s not affecting the office space market as much. There is no direct correlation between Amazon’s growth and the demand for office space.
If You Own A Business That Leases A Commercial Space, How Can You Benefit?
If you analyze your challenges and approach your landlord, you can ask them to provide what you need to reinvent your space. Think about asking a commercial interior designer to help with improvements for guidance as you seek cooperation with the landlord. In today’s market, you’ll have a good audience with landlords who are motivated to keep you in their building.
If you believe your company culture is the source of your business value, making your office space inviting to employees is crucial. Talk to your landlord to see what’s possible to invest in your staff that will pay for itself over many years to come.
Does It Make Sense To Offer Amenities To Attract Employees, Like A High-End Fitness Center Or A Lounge Zone?
It would be best if you exercise caution when building out amenities. If your commercial property is large enough and the investment in these amenities makes sense for your Return On Investment, then yes. But if your office building is too small, those amenities may take up too much space within your building, eroding the amount of office space you can rent out and creating positive cash flow.
Is Being In The Office A Requirement By Employers?
Employers have seen a lot of changes during the pandemic. There is a FOMO effect and an energy effect when many employees report to work. If too few people occupy the building, it’s an energy drain and not as attractive to the employees.
The company within that building needs to create a positive environment if they require attendance by employees. Otherwise, they risk those employees quitting and going to other jobs. It’s a delicate balance at this time since working from home remains a viable option.
How Do I Find Out More About Investing In Turnkey Rentals With JWB?
If you want to invest in Jacksonville real estate, you are in the right place.
Go to www.ChatWithJWB.com and find out how we can help you reach your financial goals through turnkey single-family rental homes. Contact the JWB team to begin the discussion.
If you want to become part of the JWB online community, join us in the JWB Facebook Group at https://www.facebook.com/CashFlowProperties.
You can also go to www.JWBInventory.com to see what properties are currently available. We encourage you to contact the JWB team for a consultation to determine how our turnkey rental properties can deliver positive passive cash flow.
Adam Eiseman and the entire JWB Real Estate Companies team are confident that the real estate market outlook will remain strong. Jacksonville rentals continue to be an excellent return for anyone interested in real estate investments. Join us every Tuesday for our Not Your Average Investor Show and our Property Of The Week Show every Thursday.
When you join our Not Your Average Investors community and learn from these weekly shows, you will see why learning about commercial real estate investing updates are equally vital to Jacksonville rental home investors. The Jacksonville office space market grows as the residential rental properties attract investors seeking financial freedom, and JWB is pleased to serve our growing community.
To Your Success,