Lipstick on a Pig

I’ve always been a car nut and one of the models that makes my head turn every time is a Chevrolet Corvette. So, many years ago, when I had a chance to buy one as a result of a co-worker looking to sell his, I jumped at the chance. But I was in my early 20s and really didn’t know that much about what I should actually be looking for.

Rather than scratching a check and rolling down the highway, I decided to take it to a friend’s father for a good once-over. He really knew his way around used cars in general and Corvettes specifically. Talk about a buzz-kill; within five minutes, he pointed out several things that I would have never seen. The front gaps on the hood weren’t even and the front fender intake strakes were from the previous year’s model, indicating that the car had probably been involved in an accident. Various pieces of the engine weren’t correct and, in digging further, he discovered the engine was from a Corvette but it wasn’t the original engine. The interior carpet wasn’t original and after pulling it back, he found rust on the floorboards.

My dreams of rolling around in the Sunflower Yellow 1972 Corvette were dashed – but I learned a lesson on the value of due diligence.

This month, we are going to discuss some easy due diligence items that a buyer can do when considering a real estate investment. And, unlike the usual things, like a survey, appraisal and Phase 1, these are easy to perform, often at low to no cost.

FREE LUNCH

Take the maintenance tech and key vendors out for lunch or a cup of coffee. They can offer a wealth of information regarding not only major repairs that have been completed but, more importantly, ones that they believe should be completed but haven’t. Ask them this question: If they get an emergency call at 3 a.m., what is the first thing they think that broke or went wrong?

SWITCH PERSPECTIVES

Visit key tenants as a customer. How does the space look? How are you greeted? If it’s a retail space, is there stock on the shelves, customers in the store and adequate staffing? If it’s an office tenant, is the space actually occupied with employees or are there large portions that are dark? If industrial, is there inventory and activity inside of the space?

GOOGLE IS YOUR FRIEND

Look up the reviews for key tenants using Google reviews, Yelp, Angie’s list, etc. These can offer valuable insight into the business practices and reputation of the companies. Although consumers sometimes will use these review sites as a result of sour grapes, they often provide a good feel for the business practices of the companies. You can also look up social media accounts that the tenants may have established. Are the accounts current or are the entries dated? Do they have a lot of followers? How are the comments?

A-TEAM

Interview the current leasing person/ team. Find out why they were able to make the last few deals completed at the property. And why they were not able to make the last few deals that they lost to competing properties. Ask them for three things they would do if they were to buy the property. Ask to see their current transactions in process.

B-TEAM

Speak to the most active tenant rep agents in the market. Ask them how they feel the property compares to a peer group of competing properties. If they have completed deals at the property, what made the tenant choose this location over the others? If they haven’t completed deals at the property, why not?

MRS. KRAVITZ

Every property has a person that loves to know everything that’s going on at the property. Typically an employee for one of the tenants, a day porter or maintenance person, this individual tends to know everyone and everything – who has already moved out and why, who is planning on moving out and why, what issues have plagued the property, etc. Once you identify that person, a cup of coffee can offer valuable insight.

ROAD LESS TRAVELED

Drive to the property from at least three directions. Often, there is a primary route to the property but by using these less popular routes, you will often be surprised at what you see. Not only will you be able to view the property from different perspectives and angles, but you will also be able to observe changes in the neighborhood, traffic patterns and competition that you may have otherwise missed.

UNPRIME TIME

Visit the property during different times of the day, including early morning and early evening. You will often notice different aspects of the property as a result of how the property is illuminated. And the surroundings can also change, depending on the time of the day. For example, that restaurant across the street that is pretty sleepy during the day may suddenly become very popular, and raucous, in the evening.

Visit the [prospective]property the day, including early morning and early evening. You will often notice different aspects of the property as a result of how the property is illuminated. And the surroundings can also change, depending of the day.

HOT AND COLD

One of the best places to spend money is a thorough inspection of the HVAC units. The interior comfort is largely dependent on the effectiveness of these units and the majority of tenant dissatisfaction is related to space that is either too hot or too cold. Major repairs or replacement of an HVAC unit is not an inexpensive event so the better handle you have on this component, the more likely you are to avoid an unexpected surprise down the road

DEEP DIVE

As part of the financial due diligence, be sure to review the general ledger for the past few years. This report often includes blemishes that aren’t revealed in an aged receivables report or a tenant estoppel. For example, if a tenant is granted forgiveness on past due rent, the only place this will stand out is in the general ledger.

The five minutes spent with my friend’s father not only helped to steer me clear of that specific Corvette but also opened my eyes to what was really important when purchasing a car. By looking past the cool styling and roaring engine, the true character of the car will show through, for better or worse.

The same goes for real estate – investors need to look past the cosmetics and allow the true characteristics to show through. But has anyone seen the ’24 Corvette Stingray?!

WHAT I C @ PVC

TESTING THE MARKET 1100 Superior Ave., formerly known as Oswald Centre, recently hit the market for sale. Plagued by the loss of several key tenants, including Oswald Companies, the asset fell into special serving 18 months ago. It has an asking price of $22.5 million or $39 per square foot.

Alec J. Pacella, CCIM for Properties Magazine, May 2024

(CRE)conomics: The Interest Rate Dilemma – A Rock & A Hard Place

Since early 2021, the topic of interest rates has dominated headlines and conversations in the financial world, especially when it comes to real estate.  Questions like “should the Federal Reserve raise interest rates?” and “should they lower rates or keep rates the same?” are asked almost daily on networks like CNBC and Bloomberg.  This kind of speculation occurs anytime there is economic uncertainty, but there is something unique about the situation we find ourselves in today.  In the past, the raising and lowering of interest rates, which is actually the Overnight Lending rate or “Fed Funds” rate, was seen as a solution to a problem – the Federal Reserve, or “The Fed,” would lower rates to stimulate economic activity and they would raise rates to encourage saving and investment.  Due to some questionable decision-making, we now find ourselves in a much more dangerous scenario – one in which it does not matter if The Fed decides to raise, lower or hold rates the same.  There is going to be severe economic turbulence no matter The Feds decision; in fact, the only decision we really have is whether we would prefer inflation or a recession – a rock or a hard place. 

Inflation – The Rock

The over-arching problem The Fed has been trying to solve since early 2021 has been inflation, and the solution so far has been higher interest rates.  Here is how it works: when The Fed raises rates, it makes it more difficult for consumers to borrow money for big purchases like cars and houses, and more difficult for businesses to borrow to fuel expansion and growth.  The higher rates increase yields from savings accounts, making businesses and consumers more likely to keep their money in the bank, helping reduce asset prices and bring the rate of inflation back on its ideal trajectory of 2% year-over-year.  To this point, the strategy has been moderately successful, with the Consumer Price Index, or CPI, having gone from 9.1% in June of 2022 to 3.2% as of February 2024.  But has the strategy really yielded the intended results?  To answer that, we must dig into the data.

The Data

The first goal of “rate hikes” is to slow consumer spending, but consumer credit card debt is currently at an all-time high of $1.053 TRILLION DOLLARS – over $200 billion dollars higher since January 1^st 2020.  Additionally, household debt reached an all-time high of $17.5 Trillion in Q4 of 2023.  Coupling this information with the jobs data and low unemployment rate reveals a troubling trend of people working more hours, in many cases for multiple jobs, yet spending more money on credit – a clear indication that inflation is still a major problem for the average American, who is struggling to make ends meet and is using credit to bridge the gap.  Inflation is the supply of money AND credit in an economy, not just money.

Consumer Loans: Credit Cards and Other Revolving Plans, All Commercial Banks. (2024, March). FRED Economic Data. https://fred.stlouisfed.org/series/CCLACBW027SBOG

The second goal of rate hikes is to slow corporate spending, but corporate debt is also hovering just below an all-time high at $13.6 trillion dollars, as corporations are continuing to borrow money.  That is a signal that The Fed needs to make monetary policy more restrictive by RAISING rates, not less restrictive by lowering them.  Finally, rate hikes should be increasing the Personal Saving Rate, which sits near it’s all-time low at 3.6% as of February 2024 – a far cry from the 7.2% in January, 2020.  Consumers are spending almost every dollar they earn, yet are still reliant on credit to pay their bills – this is an unsustainable solution.

Personal Saving Rate. (2024, March). FRED Economic Data. ttps://fred.stlouisfed.org/series/PSAVERT

In essence, The Fed has done just enough to bring the headline numbers down significantly, but they have not done enough to fundamentally solve the problem.  If they were to lower rates as currently planned, asset prices would rise significantly in the short term and the CPI would likely exceed the high-water mark of 9.1% it achieved post-pandemic – and could rise much higher from there. 

Recession – The Hard Place

Given the data, one may think The Fed has an easy decision to make: hold or raise rates so as to not experience the wrath of inflation, an economic condition that has destroyed many great civilizations.  Of course, that decision would not be met without consequences of its own – most notably, a recession. 

Easy Money In the aftermath of the Great Financial Crisis in ‘07-’08, The Federal Reserve lowered rates to essentially 0% from December of 2008 to December of 2015, and then again from April of 2020 to January of 2022 as a reaction to the pandemic.  As a result, many businesses and individuals in that period were able to borrow money at a rate they were not necessarily qualified for.

Federal Funds Effective Rate. (2024, March). FRED Economic Data. https://fred.stlouisfed.org/series/FEDFUNDS#

When rates are low, lending institutions are enabled to lend out more money to more speculative borrowers, increasing the likelihood of defaults.  Over time, these institutions and businesses become reliant on this “easy money” – their decisions and business models are developed around the idea that they will be able to borrow money at a particular rate of interest.  Any increase in that interest rate will lead to increased costs, making it less likely for those businesses to succeed and those institutions to get their money back.  That can be an issue when rates have already lowered to 0%. 

The Bubble

The above scenario has created an “asset bubble,” an environment in which prices for goods like real estate, stocks, cars, etc., become much greater than their fundamental values would support, which is a byproduct of the “easy money” policies over the past 20 years.  That bubble was pricked when The Fed began raising rates in early 2022, but they have been able to avoid any capitulation to this point.  However, the higher interest rates go and the longer they are held, the more likely we are to start seeing major cost-saving efforts in the form of layoffs, “rightsizing,” and bankruptcies.   Already this year, Google, UPS, Sony, Nike, Ford and Meta have all announced significant layoffs, just to name a few.  These companies were encouraged to expand their businesses and hire new employees because of the low borrowing costs.  As those costs have risen dramatically, these companies have been forced to pull-back on their plans for growth and are now focused on consolidation in order to reduce costs.  The growing list of companies is also an indication that these problems are not limited to one sector; rather, it is a broad-based problem across all industries.

If interest rates are held at their current range longer than markets anticipate, or in the event rates are raised higher, more air is going to come out of the asset bubble, leading to more layoffs and defaults, pushing our economy into recession.  With interest rates now in a range that is normal by historical standards, a recession may be considered a necessary evil.

Wrap Up

It may not be a decision we want to be faced with, but the choices are certainly clear: The Federal Reserve can lower rates to reignite a struggling economy, or they can hold or raise rates to extinguish the inflation fire once and for all.  As a commercial real estate investor, all you can do is prepare yourself with information and react accordingly.  While these headwinds present problems in the short term, they will also create major opportunities in the CRE market for many years to come. If you’re interested in learning more or would like to discuss your commercial real estate investment, contact me at (440)-708-8578 or Noah.Broadbent@naipvc.com.

Women’s History Month – Celebrating Marissa Rufe

As we continue to honor Women’s History Month, we take pride in spotlighting the women who contribute to the success of NAI Pleasant Valley. Sales Associate Marissa Rufe, embodies the spirit of persistence and continuous improvement in the world of commercial real estate.

Just over a year ago, Rufe joined NAI Pleasant Valley with her team from Pickard Commercial Group (PCG). When asked how she navigated that transition, Rufe said “I was unsure at the beginning what would change with this new environment, but quickly learned that the opportunities for growth, education, and success were abundant. All of the agents here have taught me something, whether they meant to or not, and I am very excited for what the future holds. I can truly say I love what I do and look forward to it each day.”

Rufe also expressed her positive feelings about working with NAI Pleasant Valley as a woman in a historically male dominated industry, “We have wonderful leaders, including two very impressive women I look up to, Barb Faciana and Stacy Tramonte.”

Rufe has received insightful mentorship from industry professionals like NAI Pleasant Valley Executive Vice President, Jim Pickard, and Executive Director, Geoff Coyle. Regarding her mentors she said, “They’re just wonderful. Jim Pickard was my mentor for over three years and taught me the ropes of CRE as well as the importance of relationships. Geoff Coyle has been my mentor now for about a year and I learn something new from him every single day. He challenges me to ask the right questions and seek the truth behind the answers.”

Embracing the fast-paced nature of the industry, Rufe finds fulfillment in the entrepreneurial spirit that drives commercial real estate. “I have always been drawn to fast-paced work environments. I enjoy the entrepreneurial aspects and that each day brings new experiences and exposure to different industries.”

Beyond her professional career, Rufe is involved in her community as a member of the Rotary Club of Akron, OH, allowing her to impact lives locally. Reflecting on her experiences, Rufe offers invaluable advice to aspiring women in the industry. “Be confident in your abilities, strive to make meaningful connections in the industry and your community, and seek out mentors who challenge you to find perspectives that you cannot see on your own.”

As we celebrate Women’s History Month, Marissa Rufe’s journey serves as inspiration for young women in commercial real estate. We take pride in working with women like Rufe, who thrive in their element and strive to pave the way for generations to come.

Women’s History Month – Celebrating Stacy Tramonte

As we continue to commemorate Women’s History Month, it is a fitting time to celebrate the remarkable contributions of the women of Pleasant Valley Corporation / NAI Pleasant Valley. Stacy Tramonte, President of Property Management and daughter of co-CEOs Barbara and Gino Faciana, exemplifies the boundless potential of women in business and leadership.

Stacy’s professional journey began at Baldwin Wallace College, where she earned her Bachelor’s degree in Business Management with a minor in Human Resources. In 1996, she joined the Pleasant Valley Corporation team, starting as the manager of the Accounts Payable Department, becoming the first second-generation leader in the family business.

Over time, Stacy’s dedication and commitment propelled her to new heights, including obtaining her State of Ohio Real Estate License and working alongside her mother, Barbara, in various capacities within the real estate division. Despite her skills and determination, Stacy encountered skepticism due to being a young woman.

“The toughest challenge I faced entering the industry was my age and being a woman,” Stacy said. “I got my real estate license when I was 18, so it was hard for people to take me seriously.”

However, she refused to let these barriers deter her. Stacy’s perseverance in the face of adversity serves as a testament to her resilience and determination to succeed in an industry where age and experience are often considered paramount.

“I feel like I had to work twice as hard to gain the respect of colleagues and clients,” Stacy said.

In 2019, NAI Pleasant Valley partnered with the globally recognized brokerage, NAI Global, to expand its services to include property management. With her expertise and experience, Stacy took the role of President of Property Management.

Stacy’s journey is not just one of personal achievement but also of familial collaboration and support. As a proud mother, she cherishes the opportunity to balance her professional career with the joys of motherhood.

“My mom has taught me you can be a full-time hands-on mom and have a career as well without sacrificing either one,” Stacy said. “It is definitely hard to juggle at times but extremely rewarding.”

She also finds fulfillment in working alongside her parents and husband, Joe Tramonte, who serves as the President of Construction at Pleasant Valley Corporation.

As we honor Women’s History Month, Stacy Tramonte’s story stands as a testament to the limitless possibilities available to women in commercial real estate and property management. Her journey underscores the resilience, determination, and unwavering commitment to excellence that define women leaders across industries.

Women’s History Month – Celebrating Barbara Faciana

As we celebrate Women’s History Month, we at NAI Pleasant Valley want to recognize the contributions of the women within our company. In Northeast Ohio, Barbara Faciana is a beacon of empowerment and achievement. As the co-CEO of Pleasant Valley Corporation (PVC) and NAI Pleasant Valley, Barbara’s journey embodies resilience, entrepreneurship, and a commitment to excellence.

With roots in small beginnings, Barbara obtained a degree in Business Management from Cuyahoga County College. Then, beginning in 1976, with $500 in hand and a hunger to build something great, Barbara and her husband, Gino, started an electrical contracting business. Motivated to continue her education, Barbara earned her degree from Tri-C in Real Estate and her State of Ohio Real Estate License in 1987, opening doors to new opportunities. Today, Pleasant Valley Corporation is a testament to their dedication, emerging as a leading family-owned and women-owned commercial real estate and facilities management company in Northeast Ohio.

Throughout her career, Barbara’s leadership has been instrumental in shaping PVC’s development into an international powerhouse, offering a comprehensive suite of services in facilities management, construction, property management, and real estate. With over 45 years of dedication, PVC employs over 200 associates locally and impacts thousands nationwide.

However, Barbara’s impact extends beyond business success. Her commitment to family values and community engagement emphasizes her profound sense of purpose. As a second-generation family business, PVC embodies the spirit of legacy. Barbara’s vision is to bring in, teach, and guide the third generation, ensuring that the values she holds dear endure for years to come.

Outside her career, Barbara remains deeply invested in philanthropy and community service. She sits on the Huntington Bank, Medina County Economic Development Committee, and Summa Health boards. Barbara also founded and continues to operate several food pantries.

As we honor Women’s History Month, Barbara Faciana’s story serves as a testament to the limitless potential of women in business and leadership. Her journey embodies the spirit of resilience, determination, and the transformative power of vision. In celebrating Barbara’s achievements, we acknowledge the countless women who continue to break barriers and shape the future of industries worldwide.