The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
When working in real estate and real estate investing, it’s important to recognize and acknowledge that some properties will never lease, or will never lease for a worthwhile rent. If the rents can’t justify the cost to lease it, it’s property that will drain you rather than bringing a return. Additionally, it’s an important thing to never put your real estate on autopilot; visit your properties, keep up with the management reports, and stay on top of the property and all of it’s goings on.
Richard Wilson: What would you say is the number one thing that you have learned over the past 30 plus years working in real estate and working in real estate investments? What’s the most important thing you’ve learned?
Robert Borris: The most important thing is there are properties that will never lease. I don’t want to say ever sell, but ever lease. I was at an auction, actually it was an office building one day years ago, and I’m dealing with an investor client of mine and he asked the question – it was a nice office building – “Is it possible that you could never lease this?” and I had to think about that for a second. And the answer is well, yeah.
And part two of that, there’s a second part to that, just because you might be able to lease a building it may not be economically feasible to lease a building. Because the cost to lease the building alone will not, the rents you could get would not justify the cost to lease it. A little bit more appropriate in an office building environment than a warehouse environment, but to give you an example I’ll give you an example in an office environment because it’s easier to see. And that is if you have an empty office building and tenant says “I need new improvements.” I’ll give you a 5 year lease, new improvements, and the rent is $20 a square foot. The improvements alone could cost you $70 a square foot to do number one, and at a ten cap that’s $7 a foot, a building to operate could cost $10 a square foot, now you’re at $17, and then you have a brokerage commission that could be $10, so now you’re at $18-19 a square foot just to pay – and you haven’t bought the building yet. So, that is possible. Not as much as in industrial but it is possible in industrial if you have the building or some kind of environmental problem that’s really expensive to fix. So that’s something you really have to pay attention to.
And the last thing is you shouldn’t put your real estate on autopilot. You should watch it. I mean, go visit it once in a while, you never know what you’re going to see, go visit it once in a while. Pay attention to property management reports, you want to know why there are aberrations when things pop up. You know when you have a problem like what we’re just going through with this covid thing, you know the first dozen phone calls I got were about people who said I can’t afford to pay the rent. You still have to pay the mortgage, so you’ve got to deal with that kind of stuff. You can’t be blind to it.