October 13, 2008

Barry Silver will be featured in November's RED News Magazine
(a Texas commercial real estate magazine)

San Rafael, CA, October 13, 2008 – Real Estate in a Down Economy

Economists say we are either entering or have been in an economic recession. Is anyone really surprised, after years of living off credit cards and debt? Our Nation is operating on a TRILLION dollar deficit with no significant strategy to reverse it. Unemployment has jumped to over 6%, financial institutions have failed, inflation is on the rise, & personal bankruptcy is soaring. Where is a safe place to keep money? Some have suggested withdrawing deposits and keeping your money under your bed (or in other safe places).  In the days of the Great Depression, people held hard assets, like gold, silver or diamonds.  The stock market has retracted about 30% so far this year, and many predict we could be in an extended bear market.  Lay-offs are just beginning to be announced.

During times of great economic volatility and uncertainty, there is a mass flight to safety (bonds andtreasuries). I would like to suggest that some commercial real estate offers investors a tangible asset, with safety and a reasonable return.  Investing in a triple net property, leased to a credit tenant provides security in turbulent times, along with the benefits of real estate ownership (leverage, asset depreciation, appreciation).  A Single Tenant Triple Net Property is leased to one tenant for a long term, generally 10 - 25 years.  The tenant is responsible for all expenses associated with the property including property taxes, insurance, and all repairs and maintenance. 

Triple net property ownership is like owning a corporate bond, in the form of bricks and mortar. Yields for “investment grade” (above Standard and Poors: BBB-) rated commercial property have risen to around 7%.  With depreciation, based on a 39-year schedule, and interest write-off, an investor is able to shelter a significant amount of cash flow.

I am not suggesting that all commercial property is safe in this market.  In fact,it is my opinion that we will continue to experience decreasing property value in certain sectors.  With the lack of available credit, more investors who will be forced to sell investment property due to negative cash flow or inability to refinance debt that becomes due.  The difference between general real estate and a triple net property is that much of this real estate will require management (apartments, multi-tenant commercial) or an extended hold period before it pays off (land).  Ownership in a triple net property is a passive investment.

Who can predict how long or how deep this downturn will be.  Maybe its now time to diversify into single tenant, triple net property leased to a credit tenant.

Barry Silver is a 19-year industry veteran operating The Silver Group, a commercial real estate brokerage assisting buyers and sellers of single tenant investment property.

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