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Three Relatively Random Thoughts

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We live in a world of constant information. Consider this: on average, there are approximately six hundred million opinions shared daily on Facebook and Twitter alone. This is before you take into account traditional media outlets, like television, newspapers, radio stations, and the advertisements scattered throughout all of them. The value of this information ranges widely from first hand accounts of the world’s affairs to tweets like “I dream of a better tomorrow…where chickens can cross roads and not have their motives questioned.” All this to say, if you’re already digesting thousands of opinions daily, I don’t think three more will hurt.

“I purchased a net lease Dollar General at a 6.5% cap rate” is something that will most likely be described as a huge mistake by that same investor in the next 5 years.
Nearly across the board, cap rates are at historically low levels. Despite the extremely low returns, demand for net lease product has not subsided, even for the lower quality product like the dollar stores. It’s not personal, the dollar store concept has thrived in recent years by providing low cost goods in many rural markets larger chain stores won’t and can’t access in a cost effective manner. However, given that most of the lease terms run for 10-15 years with minimal rent escalations, are located in locations with limited appreciation potential, and have very few viable second generation (or replacement) users available when the lease expires—the investment value doesn’t seem to be there for the long-term. And then there’s this–purchasing a net lease dollar store property for $1 million today at a 6.5% cap rate and selling in the future at a more normalized rate of 9.5% would yield only a $710,000 return for your $1 million dollar investment.

If your back of the napkin method for valuing a building includes only the cost of land and a price per square foot for the building—you’re going to be way off.
As a mental valuation shortcut, purchasers often make the comparison to new construction when assigning value to existing buildings. Unfortunately, it’s often the case that only two components are taken into consideration in this exercise—land value and the cost to build the structure. Take for example a 3,000sf office building on .5 acres located on Neff Avenue and priced at $650,000. If it is assumed the land can reasonably be purchased for $300,000 and the cost of construction is $100/sf, totaling another $300,000—you may also assume you would be better off constructing a new building…and you may be, just not for the reasons you thought. Unfortunately, this shortcut ignores many of the actual costs associated with the project like site preparation, water connection fees, storm water management, engineering, permitting fees, paving, and construction interest that adds to the cost of the project. These costs were already built into the price of the existing building but are not being included in the assumption for its replacement. In other words, the shortcut creates a faulty comparison. Comparisons of any kind almost always are flawed. The projects may be similar in nature, but each has its own set of unique benefits and costs.

I love the Harrisonburg metro…because the community is genuinely happy to be here and it shows.

At this point, the fantastic rate of population growth, new business start-ups, and great infrastructure projects has been well covered. What often gets overlooked is how much the community genuinely likes the place they live. It’s something that can be taken for granted but shouldn’t be. There are plenty of places people live and absolutely despise, there are plenty of places people live and tolerate, and others where the great majority are just indifferent. But that is not the feeling I get in the Harrisonburg metro. The community is genuinely excited about the prospects of this area like “we” are on the cusp of something really great. “We” is important, because I don’t get the feeling it is just a few that are driving what is happening. There is no empirical data I have to back this up (at least none that I’m aware of), but I can point to examples of the stakeholders involved in Harrisonburg Downtown Renaissance, Vision2020, various downtown associations, Rotary Clubs, and Shenandoah Valley Technology Council, among others. Nobody really talks about this opportunity, but everyone is seemingly focused on it. We are building something great here. Keep pushing forward.


Tim Reamer provides commercial real estate brokerage and consulting services with Cottonwood Commercial and specializes in retail representation, investment property (multifamily | commercial | NNN), and development projects. Learn more at