The Price Is Possibly Right

Posted on Jun 1, 2011 :: Industries
Posted by , Insight on Business Staff Writer

The red hot commercial real estate market of the middle of the last decade seems ages ago, but at least the market is starting to improve, say professionals involved in regional deals. But the brighter consensus doesn’t mean values are rising across the board or that selling is any easier than during the trough of the recession.

“Things are looking more optimistic and the fact that fewer developers are building will create demand once companies want to add more space – but it all hinges on hiring,” says Mark Olson, a commercial appraiser with Kargus Appraisals in Oshkosh.

The degree of comeback varies by sector, says Olson. Stronger sectors include higher-end hotels and apartment properties with shorter leases, as well as space for health care businesses. In trying to figure out value, he adds, it comes back to fundamentals such as the extent to which a property has been fully leased. Expect some “bifurcation” of the market in which higher end properties or those in desirable locations rebound more quickly, Olson concludes.

When Inland Real Estate Acquisitions, an Oak Brook, Ill.-based firm that purchases properties for investors, purchased Ashwaubeon’s Village at Bay Park in March, the property wasn’t listed by a broker. That’s because the retail center – which sits across from Bay Square Mall and is anchored by a J.C. Penney store – came to Inland in an “off-market” deal in which the seller approached Inland directly, says Mark Cosenza, vice president with Inland.

Inland bought the property for $16.7 million. “I think it was a favorable price for our firm and for the investors,” says Cosenza. He adds that the price is a “discount” below what this property could have fetched pre-recession, but that remains the case with many properties.

The deal was attractive, in part, says Cosenza, because the center is 97 percent occupied by 17 tenants. The location was also a key. “It’s located in the prime retail corridor in the area,” he notes.
Detlef Weiler, president of Weiler Appraisal of Green Bay, believes smaller sales will lead the way.
“I think a lot of what is selling is the owner-user buildings,” he says. “Their motivations are different than the big investment or property firms. It might be a repair shop that wants to relocate into a larger space, or own rather than lease. Those are the type of sales that are starting to pick up.”
Moving a smaller property can take time to find the right buyer, as was the case with the recent sale of Leathem Smith Lodge in Sturgeon Bay. The lodge was purchased from Baylake Bank by Paul Meleen, a Minnesota businessman and professional walleye angler.

The property had been in foreclosure for three years, according to Baylake President Robert Cera. For privacy reasons, the bank won’t reveal the sales figure, but Cera says it was close to the current holding value of the property. “For today, getting close to the carrying value is good,” he says.

Meleen and his firm are updating the property, which will reopen as The Lodge by Leathem Smith. Meleen also doesn’t want to name the price, saying it doesn’t reflect the extensive remodeling. County records indicate $1.4 million was paid for the property.

Meleen says about $60,000 was needed to get systems up to code and another $300,000 is being spent on remodeling. “It was a fair price, but we bought it as is, and it had sat empty for nearly four years,” he says.

Meleen had kept a boat in the area for years. When a close friend decided to buy the marina, he saw a chance to relocate his family to Sturgeon Bay and revive the lodge business, which dates back to 1922. “This is a historic facility,” Merleen says. “We are resurrecting something that is important to the community.”

Challenges remain for the market. Mark Denis, a commercial real estate advisor with Grubb & Ellis in Green Bay, says more buyers are “out kicking the tires,” but that too many are bargain hunters proposing unrealistic deals.

Cera agrees more businesses are at least searching for properties, and says that credit is available for qualified buyers. Rates have slid upward a bit this spring, he says, but historically, they remain favorable.

“If a business had a need for a property, I think it’s still a very good time right now,” he says. “It’s still a buyers’ market.”