“So, why don’t you guys do commercial deals?”
I get asked that question a lot, so I figured I’d answer it here.
The first thing to say is that we absolutely would do a commercial deal given the right balance between risk and reward (and investors who wanted to follow us into it).
But I generally find that the yields available from commercial (office, retail, etc.) deals in areas I like are right around what we would expect from apartment deals… and they’re far riskier.
Why?
Well, in LA, even in the depths of the worst recession since the 1930s, we were always able to keep our units full. Sure, we sometimes had to lower rents or offer concessions. But we never had real vacancy.
That’s definitely not the case in the commercial world. You can EASILY have a retail space sit vacant for six months or a year, particularly in a bad economy.
And that’s not all: Tenants often demand you provide them with funds to renovate their space or, at the very least, free rent while they renovate.
Does that mean people shouldn’t do commercial deals? Not at all. It just means you want to be well-capitalized, use very conservative amounts of debt, and be certain to buy in the down-cycles.
And that’s exactly how we’ll do our first commercial deal!