Featured Listings

Recently Sold & Leased

$529,900 / Industrial

732 Tek Dr.

Crystal Lake

Bruce Kaplan & Heather Schweitzer

$619,000 / Business & RE

11015 US Hwy 12

Richmond

Bruce Kaplan

$375,000 / Office

257 King St.

Crystal Lake

Heather Schweitzer

$165,000 / Industrial

4531 Prime Pkwy.

McHenry

Mike Deacon

$930,000 / Investment

600 Dakota St.

Crystal Lake

Heather Schweitzer

$145,000 / Retail

9113 Trinity Dr.

Lake in the Hills

Bruce Kaplan

$225,000 / Office

820 E Terra Cotta Ave. #216

Crystal Lake

Heather Schweitzer & Bruce Kaplan

1,868 SF / Retail

1685 Rt. 59

Bartlett

Sharon Glasshof

1,000 SF / Office

760 McArdle, Suite E

Crystal Lake

Heather Schweitzer

1,412 SF / Office

1489 Merchant Dr.

Algonquin

Heather Schweitzer

Featured Articles

HOW TO DETERMINE WHAT YOUR COMMERCIAL PROPERTY IS WORTH

In virtually every case, a prospective client with a commercial property to sell or lease seeks my advice on value. Valuation of a commercial/industrial property is not an exact science. It is better described as an ART. I never went to ART school, but I did go to the School of Hard Knocks with 42 years of experience. I want to discuss that process as it pertains to the current commercial real estate market.



Only certain individuals are qualified to render opinions of value on commercial real estate. First, there are LICENSED APPRAISERS who are, at a minimum, required to obtain a certification from the State indicating they have taken a mandated course load and demonstrated competence in the field. The highest level of appraising is the MAI (Master of the Appraisal Institute). These folks have gone way above and beyond the minimum requirements to get the State certification. Banks like the credibility afforded by an MAI appraisal in their file, but they don’t always like to pay for them. They tend to be more expensive than a non-MAI appraisal.

An appraisal done by a certified or MAI appraiser must meet certain minimum standards established by the industry. With that as a backdrop, I will tell you that you could hire five different appraisers to value your property and you would get five different values. In some cases, we see values as much as 20-30% apart! How could this be?

There are 3 generally accepted methods of valuing commercial real estate and most appraisals at least touch on all 3. First, there is the Market Comparison Approach to value. In this approach, the appraiser looks for similar properties that have actually sold in recent months or years and makes subjective dollar adjustments for substantive differences between the “comparable” and the subject. If the subject is 50,000 sq ft. and the comparable is 75000 sq ft., the comparable is “better” than the subject, so dollars must be subtracted from the sale price of the comparable to make it equal to the subject. Building size, land size, age, condition, etc. are all measures of comparison that are used. WHEN the comparable sold is also a frequent measure because the market two years ago may have been worse or better than it is today, so an adjustment for appreciation or depreciation needs to be made.

The second approach is called the Income Approach to Value. This is used when we are comparing income producing properties such as multi-tenant retail strips or apartment buildings. Since investors buy income properties based on yields or returns, appraisers will compare what is called a capitalization rate to arrive at a value. If investors are shown to be requiring a 9% “cap” rate (as an example) for this type of property, that fact will typically put an upper limit of value on it.

The last approach is called the Replacement Cost Approach. The underlying premise of this approach is that no one would pay more for a property than what it would cost to build it new. This approach has fallen into disfavor in recent years as properties routinely sell way below what it would cost to build new.

An appraiser will typically consider all three approaches and make a best guess as to which is most valid. Good appraisers will gather their data by researching the comparable sales in the data bases and calling brokers like us, who are in the trenches daily, to see what is happening currently. When an appraiser from Chicago has an assignment in McHenry County, he needs eyes and ears of someone immersed in that market who can tell him what is really going on. I get calls almost daily from appraisers seeking input for their appraisals and I always make a point to help.

Commercial brokers are not typically certified by the state to do appraisals per se, but we do written Broker Opinions of Value as a routine part of our business. These opinions look at and analyze the same market data that an appraiser looks at. We may not charge as much as an appraiser would have to charge, but the point is, we don’t pull values out of the air. Our opinions are researched, backed up with current market data, and documented.

Don’t hesitate to call or email me if you have a question about which approach might be best for your situation.

By Bruce Kaplan, Senior Broker Associate with Premier Commercial Realty

Cost of Capital is Major Impediment to Investment Sales

In 2022, the majority of money center and regional banks raised interest rates to combat soaring inflation, ending decades of low interest rates. While massive interest rate hikes have been hammering the commercial real estate market, the recent Federal Reserve decision to hold rates unchanged should give give the market a break. This increase in short-term interest rates led to a virtual market-led shutdown and a repricing of commercial real estate. This has led to a repricing of real estate assets in both the public and private sector.

With low interest rate loans maturing at much higher rates, real estate investors face the challenge of transacting, with market participants dealing with negative leverage. There is a gap in pricing – sellers are slow to lower their pricing expectations, and buyers are struggling to place capital at favorable yields. Add to this that lenders have a different perspectives on values, which dictates how much they will lend.

Banks are still basically out of the market, and CMBS and debt funds are an expensive option, so favorable debt capital is in short supply. Small and mid-sized banks who historically provided most commercial real estate loans have implemented tighter lending standards, making financing and refinancing challenging.

The substantial number of maturities in the debt market has added to the slowdown in the transaction market. Lenders have kicked the can down the road, and they will need to deal with those maturities in 2024. That dynamic will have an effect on the industrial market, causing some forced sales, because favorable refinance options will not be available for all borrowers.

Investors usually have two options when a loan matures – refinance and replace the existing loan and possibly get more proceeds, or sell. Both of those options don’t really exist in today’s market, unless an investor is willing to do an equity pay down of an existing loan.

In the commercial real estate world, the office sector seems to be getting all the press and creating the illusion that the whole commercial real estate sector is in trouble. The office sector is only one part of commercial real estate, albeit a large part, but the other sectors are in unusually good shape.

Industrial is truly an essential asset class and will continue to perform well in the foreseeable future. The sector remains robust with strong rent growth, even with demand slipping closer to the pre-pandemic level. Boosted by growing e-commerce demand, a constantly evolving supply chain and reshoring initiatives along with domestic manufacturing, demand for industrial space has led to unparalleled competition for available space.

The pandemic completely changed the warehousing and manufacturing space to historically high rental rates/values. The vacancy rates for distribution and warehouse space are at record lows, and have progressively declined each quarter since the end of 2020. While the sector is still very healthy, it is showing signs of softening.

The investment transaction market is muted, but as interest rates stabilize, we believe transaction activity will pick up with the narrowing of the bid-ask spreads. The current capital-constrained market has reduced new construction, with 15 percent fewer deliveries expected in 2024 and 2025, according to Green Street estimates. The market remains under-supplied, though additional supply is coming to market at the end of 2023 and 2024.

With tough lending criteria, fewer lenders and higher borrowing costs, commercial real estate investors will struggle deploying capital at favorable yields in 2024. Industrial investment sales volumes have dropped well over 50 percent so far through 2023 in the Chicago market. We expect investors to remain cautious in 2024, though eager to transact.

High interest rates, an uncertain economy and tighter credit requirements are the primary obstacles to increased deal flow. Cap rates have continued to rise throughout 2023, though we expect them to stabilize in early 2024 with an increase in transaction activity as the year progresses.

By: Pat Sullivan, Executive Vice President – Capital Markets

9225 S. IL Route 31

Lake in the Hills, IL 60156

 847-854-2300 

www.PremierCommercialRealty.com