Would you try to pick out your house by scrolling through endless online listings, trying to guess what the neighborhood is like, whether the price is right and how the home's value might increase over time?
Probably not. But that's how some investors try to buy commercial real estate, and it's a mistake. A broker with hyperlocal knowledge -- that is, deep familiarity with a submarket, the properties within it, and the prices at which those properties have traded -- can help maximize your return on investment while avoiding common oversights that may prove costly down the road.
Even in an era of global buying and selling, online listings, and new tools that use big data and artificial intelligence to identify investment opportunities, real estate remains a relationship-driven industry that relies on boots-on-the-ground expertise. As a broker specializing in multifamily transactions, I do about 90 percent of my business in the Chicago suburbs with a focus on west, northwest and northern suburbs such as Oak Park, Rolling Meadows and Evanston. Today, a growing number of my buyer clients are from coastal markets -- New York, Los Angeles and San Francisco, to name a few -- because they can get a higher return on their investment, often through value-add renovations. We've even seen some international investors as they view the United States as a safer place to invest their capital and diversify their portfolio, usually through larger properties that offer enough economy of scale to justify on-site management.
Whether working with local or out-of-state buyers, my general approach is the same. We start with a conference call to discuss the market at large and various submarkets, highlighting what each has to offer. Once I understand the geographic location and financial metrics they want -- for example, capitalization rate, price per unit, cash-on-cash return and gross rent multiple -- I send the client our internal inventory to review.
Next, we set up showings in different suburbs and neighborhoods that meet the clients' desired criteria, driving from property to property to see what fits. Opinions often change once the client touches and feels the real estate; an online listing or brochure can only provide so much insight.
Of course, that's assuming a listing exists; not all properties have them. Others become "tired," meaning they have been on the market too long and may be perceived negatively. And with so many to scroll through, buyers sometimes get "deal fatigue," which prevents them from properly analyzing the opportunities and, in some cases, makes them overlook great deals.
Listings also don't alert you to rules and regulations pertaining to the sale and operation of commercial property. These vary from one municipality to the next and can lead to additional expenses that may undermine a transaction if discovered too late in the underwriting process. For example, the city of Berwyn requires a certain amount of electrical service into the apartment building and will check for compliance during the sale inspection -- on any building, whether the buyer plans to renovate or not. If the city requires the service to be upgraded, it can cost an additional $40,000-80,000. Other municipalities have other requirements, so experienced investors know to rely on their brokers to not only understand what the rules are, but more importantly, how they will affect value.
Perhaps the biggest benefit of working with a broker with hyperlocal knowledge is to get market context for the investment. A broker will know why there might be dramatic price variances for seemingly comparable properties in the same zip code. In addition, they can speak knowledgably about the local economy and workforce, property taxes, planned infrastructure and development projects, proposed legislation and other matters that might factor into an investment decision.
Brokers can also offer advice on how best to renovate and reposition real estate after a transaction closes. For example, one suburb I work in tends to be a little "sleepier," with many longtime property owners who haven't necessarily brought their properties up to date with current trends. Knowing that, one of my buyers bought a building in that market, completed a gut renovation and, within 45 days, had a waiting list and was exceeding rental expectations.
All of this isn't to say there's no value in data sourced from the internet. It can be a helpful starting point, but only if it's supplemented with hyperlocal insights that allow buyers and sellers to make sense of the numbers.
When all is said and done, boots on the ground still beat fingers on the keyboard -- and can help investors get the most for their money.
• Pat Kennelly is managing partner of Interra Realty.