Big Deals in Small Markets
prices climb ever higher in primary markets, commercial real estate investors
are making their way to non-core markets in search of better returns. While
second-tier cities such as Austin, Texas, and Pittsburgh predictably dominate, even
small towns such as La Crosse, Wis., are generating interest. Casey Weiss,
CCIM, principal with Access Commercial Real Estate in La Crosse, discussed his
market’s appeal with Commercial
Investment Real Estate.
: What types of investors are active
in your market?
Weiss: I mainly
see two types: bargain hunters and single-tenant net-leased buyers.Most
of the local buyers are bargain hunters, and they oftentimes have expectations
that are beyond what the market can provide.Smaller markets have not
suffered as much as many larger metros, but the bargain hunters apply the doom
and gloom from national headlines to their property search.They often
miss out on good opportunities because their expectations are not in line with
the local market.
net-leased buyers are usually from out of town and larger metros.These
are well-funded buyers looking for higher returns in the smaller markets.Smaller
markets are also appealing to them because they are easy to learn.For
example, most of these markets have only one or two primary retail areas,
making it easy to evaluate property location, access, and visibility.
addition to the bargain hunters and net-leased buyers, we see owner-users and
1031 buyers.The owner-users typically are those businesses that are
beginning to see economic improvement. They are growing and either need more
space or want to take advantage of favorable pricing and upgrade their
facilities. The 1031 buyers are usually in search of higher-quality properties
that offer stability and good cash flow.
: What factors are attracting them
to your market?
returns, as well as barriers to entry created by the smaller trade
area.For example, I have a Petco investment property for sale.My
market also has a PetSmart property.Both can survive, but it’s safe to
assume no other large pet retailer will join the market because the demand is
fully supplied.These types of trends are much easier to forecast in
: What property sectors are seeing
the most interest?
properties are the most active. These are mostly retail, but industrial
buildings fully leased to a regional or national tenant are also attracting
attention. Strip centers are generating interest as well, but only fully
stabilized centers in great locations.
: How are transactions being
financing from community banks and credit unions were typically used for the
deals I’ve done in the past two years.These banks are heavily regulated,
but not to the degree of the larger regional and national banks.
also heard that some of the rural community banks are being more aggressive in
their lending because they are flush with cash from farmers who have had
success with rising crop prices.Credit unions are becoming a more common
option for businesses and investors as well.
: What non-real estate asset types
are competing for investor dollars?
Weiss: It seems
that investors with the capability to buy real estate are taking some chances
on small businesses.I’ve seen investment in trucking companies, frac-sand
mining operations, and other “angel investor” opportunities.Stocks and
mutual funds continue to have their typical presence as well.
: Is it too early for most buyers in
Weiss: I believe
that if buyers are not looking now, they are too late.The problem in
smaller markets is a lack of supply of good deals.Prices are low and may
go slightly lower, but it is not worth waiting for a perfect opportunity when
you can pursue a “close-to” perfect one in a smaller market.It is
important to buy based on solid fundamentals, not simply a bargain price. The
cheapest availabilities struggled from the beginning of the recession and will
continue to struggle well after it.
For more on investments in non-core markets,
read “Small(er) Markets, Big Opportunities” in the March/April 2012 issue of CIRE.