Real Estate 2004 Overview 2005 Forecast

A year ago the expectations for the commercial real estate markets in southern Maine were ‘guardedly optimistic’. In most sectors these expectations were met or exceeded. 2004 was a good year. Here are some highlights.

  • Retail – Vacancy rates dropped to under 2%. Retail lease rates increased in most markets.
  • Office – Vacancies under 7.5% are a half to almost a third of those of other markets in the region.
  • Apartments – The 2 to 4 units market increased 11% to 28% per unit. Apartments from 5 to 10 units remained flat. Rents appear to have reached their peek, and vacancy periods are increasing.
  • Industrial – Given low interest rates, thus a lower carrying cost, a shift from leasing to purchasing continues. The soft manufacturing market is seeing some adaptive use and rehabilitation. The strongest sector is in the industrial land for user owned building.
  • Residential – Properties in Maine Jan. to Jan. increased in values 13.7 %.

Some of the economics contributing to this were: low interest rates, high employment, a growing over all economy, investors still in shell shock from the stock markets investing in tangible real estate, and favorable lending.

So, what is the forecast for 2005? ‘Guardedly optimistic.’

Should the national, regional and local economy remain strong, energy costs not get out of hand, and consumer and business confidence remain, another year of the same is expected.

Landlords are encouraged to focus on keeping existing tenants. Some tenants may be attracted to new space brought on line, so keeping the tenants you have might be a great strategy to avoid vacancies and new fit up costs. Investors are encouraged to obtain fixed interest financing. Whenever possible shifting energy expenses to the user may make sense, even after the capital expenditure that may be required.

Timing is always an interesting topic. With relative stability in the markets, timing on whether to buy, sell, or lease may have more to do with personal/business needs. Needs like the need for more or less space, location, visibility, obsolescence vs. modernizations, financial opportunities, used up or non-optional depreciation schedule, etc.

We at Magnusson Balfour welcome you to call us to discuss your commercial real estate plans. So, how as a buyer do you determine value? How do you avoid paying for Blue Sky? First a business value should be based on what it is worth to you. Are you going to run it as is, merge it with another entity, expand product or service, consolidate it to its most profitable units, or simply tweak it to have it reflect your personality? Secondly, conduct due diligence and verify the numbers. Then given the numbers, determine if the resulting numbers can fulfill your goals.

Can it pay you a fair market salary, pay for the debt, provide you with some growth opportunities, a profit perhaps?

Also consider what skill sets you bring to the business. Adjust the numbers accordingly, and you should have a well-priced business opportunity in front of you. Yes there is risk in buying a business….but for many the reward is far outweighed by the risk. Taking no action could include the risks of: staying in a dead end career, frustration from making someone else all the money, having no opportunity to build equity (retirement) beyond a salary, provide no outlet for your creativity and individual effort. The risks in buying a business can be minimized by adding some talented accountants, lawyers, or other business advisers to your team.

Embrace the American Dream, own your own business.

Don’t pay for blue sky … but don’t sit on the sidelines either.