Why Your Commercial Property Is Losing Value Without You Realizing It

Jim Resha (00:00)
Some of them just get tired. and over time, they all of a sudden they look and say, “Wow, how come?” You know, I I have one property I’m working with right now that they bought the property for an amount 15 years later. It’s only worth a little bit more than they paid for, and it should probably be worth two hundred percent of what it— it is. And it’s mainly because they’ve made decisions of, “You know, we don’t want to really put a lot of money into it because we’re living off that money.” Yeah. And and so money doesn’t go back into the property—

Cody Crabb (02:14)
Welcome back to the Real Estate Pros podcast by Investor Fuel. I’m your host, Cody Crabb, and today I’ve got Jim Resha with me. Jim leads The Resha Group at Sperry Commercial, where he helps commercial property owners make smarter decisions around retail assets. Whether that’s holding, selling, refinancing, repositioning, or exchanging into something even better. Jim, thanks so much for hanging out with me today. I really appreciate it.

Jim Resha (02:35)
Hey Cody, thank you. I’m good, glad to be here.

Cody Crabb (02:37)
Yeah. So for starters, I’d love it if you could kind of introduce yourself a little more than I did to our audience and for the people that don’t live in the commercial real estate world every day, give us the quick version of what The Resha Group does.

Jim Resha (02:49)
Great. So Cody, I— I would say that The Resha Group is an investment sales team. I’ve been in this business for about forty years now. And in short, what we do is we help folks that either want to get into commercial real estate investments or they’re— they’re in it, whether they have one piece of property or twenty pieces of property. And— and we really like to come alongside and help them strategize. Maybe execute that strategy and how they can build their wealth through the ownership of commercial real estate.

Cody Crabb (03:23)
Hmm. So when an owner comes to you and says, “I’ve got this retail property, I’m getting cash flow, I— I don’t know what to do with it. Like, should I sell it? Should I hold it? Should I improve it or refinance it?” Well, how do you typically help them think through that decision? What factors come into play?

Jim Resha (03:39)
Yeah, I— I— I think the— the— the— not the magic, but we— we do it from a— a place of strategy. And when I was in business school, I learned that, you know, putting together strategy means you understand where you’ve been, you understand where you are, and you’ve got a clear vision for where you’re going. And then you— s— you apply some guiding principles that get you to your— an action plan that makes sense. So what we do is we— we— we sit with the property owner and we say, “Hey, you know, what do you have now? How’d you get here? You know, why’d you buy that property?” So we understand what got them to that point, where they are now, and then we talk about, “Hey, what is your goal? You know, what are you trying to do? Are you trying to make your portfolio as big as you can over the next five years so you can retire? Or, you know, w— what are you looking to do?” And then with that knowledge, we can look at the performance of what they’re doing now. And if, you know, say they have multiple assets, they got— they got five different things. We— we can measure, we can say, “Hey, you know, this one’s doing what you want to do. This one’s lagging behind. It’s not— it’s not performing the way you want.” And so maybe we’ll make a recommendation of, “Hey, with this one, you ought to do these things.” Or maybe it’s sell it, trade it into something that’s got more cash flow, or whatever makes sense for them. And that’s— that’s what’s important is that a lot of times they’ve never really thought about what am I trying to do with my real estate ownership. They— they intuitively know, “Hey, I’m— I’m trying to make more money. I’m trying— ultimately I want to put money in my pocket.” But— but they don’t— they’ve never really thought about it from a— a return, from a metrics perspective, yeah, and therefore they’ve never really looked at how they’re doing.

Cody Crabb (05:18)
Make the line go up. Yeah. Yeah, that’s an interesting way of looking at it because I feel like for some people your goal is massively increase, you know, make sure you have the seven-figure portfolio, eight-figure portfolio. Some people would be totally happy with eight or eight or nine thousand dollars a month in cash flow, and that’s it. And so like I— I think starting with the goal obviously is gonna change— you know, that famous Cheshire Cat quote from Alice in Wonderland. It doesn’t matter if you’re not lost if you— I don’t know what it was. What— do you happen to know off the top of your head?

Jim Resha (06:52)
If you don’t know where you’re going.

Cody Crabb (06:54)
I think it’s something like if you don’t know where you’re going, it doesn’t really matter which way you go. Yeah, yeah. Yeah. Yeah. Yeah, exactly. Yeah. So a lot of owners don’t really make a decision. This is something you said. They— they just hang tight. They just— they stay stagnant. Why is that so common? And what is that actually deciding without people realizing it?

Jim Resha (07:04)
Yeah, I mean no decision is— is clearly a decision, right? Yeah. So y— y— you know, I think there’s a lot of reasons why people stay pat. You know, sometimes they got property inherited. When they got it, it was in this condition. This is how mom and dad rent it. Now I’ve got it. I’m just gonna keep doing the same thing and I don’t know what to do. So, you know, I know I get a check every month and— and that’s fine. Some of them just get tired. And over time, they all of a sudden they look and say, “Wow, how come?” You know, I I have one property I’m working with right now that they bought the property for an amount 15 years later. It’s only worth a little bit more than they paid for, and it should probably be worth two hundred percent of what it— it is. And it’s mainly because they’ve made decisions of, “You know, we don’t want to really put a lot of money into it because we’re living off that money.” Yeah. And and so money doesn’t go back into the— and over time, you know, in order for them to do deals, they’ve had to, you know, reduce the rent or give free rent, which affects their net operating income. And because they don’t make decisions to put money back into the property, they’re continuing to fall behind on what that— the rent ought to be compared to their competition. So they’ve become the— the low-price provider, if you will. And that negatively, you know, it— it seems like if you look at it and say, “Well, instead of charging $2,000 a month rent, I’ll charge $1,800,” doesn’t seem like that big a decision. But When when you multiply that over— you know, that escalates over ten years, and now what that does to your value, you know, becomes a two-million-dollar bad decision.

Cody Crabb (09:11)
Yeah. Yeah, seriously, yeah. And so that’s— I mean, it’s kinda like flying a plane, right? You go point zero one degrees off. If your journey’s only this long, then it’s not a big deal. But if you’re going halfway around the world, you’re gonna end up in a different continent after a while. Yeah. Yeah. So what do you think— what— what are some of the things you see that owners neglect that kind of start eroding that value? Like, you mentioned kind of deferred maintenance or deferred improvements. Is there anything else that goes along with that?

Jim Resha (09:24)
Exactly. Yeah, I— I think there’s— there’s two— there— there’s a couple big things that we always look at when we go look at a property. One, we look at, hey, their vacancies, how are they presenting those? So in other words, you know, what does a prospective tenant see when they come to look at your property? And we— we compare that to the choices that a prospective tenant would have. So we look at it and say, “Hey, they look at this space, they do so— they they make decisions to not put their best foot forward.” So tenant moves out of the space and they leave it in the condition it was, and they figure, “Hey, when they get a new tenant, they’ll— they’ll give some concessions and they’ll do that,” as opposed to, you know, make it ready to go. Make it like the tenant can come in, they can see it, they— they know what they’ve got to do and do it. So that’s— that’s one of the things. And then along that same lines, you know, what do they see? They see the parking lot. They see the condition of the facade, the paint, the dirty windows, the dirty sidewalks. So just the maintenance issues. And then lastly, the decisions that seem to get postponed the most are replacing HVAC units. They— they— they stretch the roof, you know, past the useful life of the roof and they patch it. You know, they— they— they send out, you know, a guy ten times during the year to patch the roof as opposed to, you know, you’ve had that roof for twenty years, you probably should have replaced it.

Cody Crabb (11:52)
Right. So yeah, I mean that’s— it’s— it sounds really dangerous because you kind of probably feel like you’re being frugal at the time. You feel like, “I’m saving money. We’re not— you know, we’re not pouring a bunch of money into it.” But really that value is— it adds up. It sounds like that really adds up.

Jim Resha (12:07)
Yeah, that’s a— that’s a great point because you can— you can fool yourself into thinking, “Hey, I’m making frugal, good management operating decisions. I’m— I’m— I’m being smart with how we’re spending money,” but not really. And I’m not advocating, “Hey, you know, go replace all your HVAC units five years before they— they fall apart.” That’s not what I’m saying. But don’t— you know, I know from experience that especially buyers now, you know, there— where we are in the market is there’s not as many b— deals being done on— on the buy side, on the investment side. So we’re in— in— in Orange County alone, we’re at about 50% of the number of transactions that we have historically on the five-year average.

Cody Crabb (13:21)
Wow.

Jim Resha (13:23)
So you know, so there are not as many transactions going around, but the dollar volume is on par. So what that says is there’s plenty of capital. They’re executing, they’re buying the good properties and the bigger properties, right?

Cody Crabb (13:31)
Yeah.

Jim Resha (13:32)
And so when you dive in a little bit, those buyers are underwriting properties really hard. They’re looking at exactly those things I do. And, you know, if you haven’t done your roof and they look at it and say, “Gosh, I got to put a new roof on this thing,” if that bid for the roof’s a hundred thousand dollars, they’re going to ask for two hundred thousand dollars in concessions. And— and so that’s where it just— all that stuff starts adding up.

Cody Crabb (13:34)
Yeah. Mm. Yeah, totally. So I mean, a— and to your point, if— if that transaction volume is down, buyers can be pickier. So for owners listening, what makes a retail asset attractive right now? Well, now that buyers have kind of more options.

Jim Resha (13:56)
Yeah, I— yeah, I— I think understanding that we’re in as close of a— you know, not very often is the shoe on the buyer or the tenant’s foot, right? But— but it— it’s slightly slanted that way, certainly on the buy side, because hey, financing’s hard, right? Yeah. So everyone knows that, you know, you gotta make sure it’s a really good deal. They gotta underwrite it hard. And you’re not gonna sell your asset if the bank doesn’t like it. So— so the owners are getting that, but it’s hard. So I always say you— you got to be looking at, if you’re looking at from a tenant perspective, put your best foot forward, right? Spend the time, like we try to tell people if— if you want to sell, let’s go do a little bit of an evaluation and say, “Hey, you know, before we sell, we should look at that. We should, we should maybe fix this, clean that. Let’s put a paint job on, make it look better.” You know, because when I buy something, that’s what I do is I— I’m looking at it saying, “Well, I can fix that problem, I can fix that problem, I can fix that problem, and I can take the 10 million that I paid for it and I can turn it into $15 million.” That’s what— that’s what the buyers are looking for right now. So if you do some of that and position it up here, you’re gonna be better off. You’re not gonna get retraded as much.

Cody Crabb (15:19)
Yeah. So tell me a little bit about 1880 Capital. I’m speaking of kind of looking for properties yourself. What— what are you looking for specifically? I mean, you mentioned obviously being able to turn money into more money, but what is it that you’re specifically looking for in retail or industrial right now?

Jim Resha (16:17)
Yeah, so— so our— our acquisition criteria, Cody, is primarily focused on retail and industrial. I— I like multifamily or— I’m sorry, multi-tenant properties as opposed to one single tenant, a larger property. I just like to mitigate risk that way. We’re primarily focused on the southwestern part of the United States. One of our criteria is, you know, we’re looking in markets where we feel like all the demand drivers for real estate are going in the right direction. So not just where population is growing, but why are people mar— migrating to areas? You know, think of like a— a Phoenix. A lot of people moving to Phoenix, a lot of people moving out of California to Phoenix. Yes, that creates demand for housing, but does it create demand for— for commercial? And what we’re seeing is, you know, the— the schools are pumping out a lot of skilled labor. The semiconductor, the— the— the high-tech industry is moving to Phoenix because they can hire people out of the schools, right? So that’s creating demand for industrial real estate. That’s creating demand for retail real estate because people need to go to the grocery store and buy stuff. So the demand is really good. So that’s what we look at is where the both the— the— all the demand for real estate are there and not oversupply. So you can make an argument that— that— that especially on the— the industrial side, Phoenix got a little bit close on the oversupply, but they’re chewing through it and still doing strong. So—

Cody Crabb (18:08)
Yeah. So for a newer investor listening, what’s the— what’s the takeaway there? I mean, it’s don’t just chase population growth, chase what exactly? The job growth, the— the skilled labor? I mean, what— what is it that they should be looking for?

Jim Resha (18:21)
You know, I— I would counsel an investor, new or old, is understand the market dynamics. We— we call it market intelligence. We prepare a— a quarterly market insights report where we’re looking at all the things that both as a seller or a buyer you ought to be concerned with. And we’re looking for changes in the trends. So we’re looking at what are those things that cause it to be a better opportunity for a buyer, a better opportunity for seller, a better opportunity for a tenant. And it’s— it’s usually wrapped around strong real estate fundamentals, right? So we’re looking at— we’re looking at cash return, positive returns on that. you know, it’s easier now to do that because you can’t get financing today for bad deals. So— so the fundamentals have to be there. We like to look for, you know, we’re— we’re a value-add buyer at 1880 Capital. So I’ve got to find a deal story that says, “Hey, here’s some meat on the bone by doing this.” And that might be renting spaces. That might be doing some sort of small remodel and where I can replace tenants with better tenants, maybe yeah. So there’s all those things what we’re looking at. And we like to look at being able to execute that plan in about a three-to-five-year window, right? So— so when I look at it it’s like, “Hey, where— where’s the rent roll if,” you know, a l— a— a lot of times I call it the propaganda, the offering memorandum that the brokers send out, you know. If the propaganda says, “Hey, we’re under-market rents,” I got to get really comfortable with that. I got to look at it and say, “Hey, if I get that space back in nine months, can I take it from the rent it is now and put it conservatively at this number?” And that’s going to raise my value by that amount. And so it’s really trying to get comfortable with what I think I can do and what my business plan is, and then going in and executing.

Cody Crabb (20:41)
So how do you actually verify that there’s upside there before you buy? I mean, what’s your process?

Jim Resha (20:47)
Yeah, yeah. I mean, it’s— it’s one, you know, putting together the— the thesis that says, “Hey, this one, the upside is, you know, maybe, maybe it’s forty percent rented right now.” And the market has a vacancy factor of seven percent. So what do I gotta do to take it from, you know, forty percent vacant to seven percent vacant, right? And— and— and looking at that, what it w— what— what would it take and how are we positioned? Where w— what’s the rent look like? Right. So that— that gets comfortable with what else is going on, right? If, you know, it’s— it’s the proverbial, “Hey, if this is the worst house in the neighborhood, can I fix it up and bring it up to par, right?” So— so I— I like those kind of deals. if it’s, you know, maybe they’ve just been a bad manager and so it needs better operations. Maybe that— that paint and clean it up a little bit, you know, putting a slurry coat on the parking lot, put— putting a face and make it look a little more like, you know, 2026 as opposed to 1997. Maybe, maybe that’ll do it. Maybe that’ll let me, you know, get higher rents and— and get there. So it— it’s whatever that is, Cody. And that— that’s the hard part is figuring out, “Hey, what’s the deal story?” And I’d look at it from a perspective of on how do I mitigate risk and I’m gonna go to my investors and say, “Hey, this is what we’re going to do there.” And the going to do, I like to put a little bit of— of conservative spin in there. So one of the— one of the projects we just bought was an industrial project in Indiana. And basically we looked at it and said, “Hey, we’ve got these four tenants that their leases are going to come due over the next five or six years. And right now we believe market rents is this number, 40% higher than what they’re currently paying.” So looking at it and saying, “Hey, if in five years we take the rents to what it is today, can— can— can we get, you know, is that conservative enough?” So we even said, “Can we make this work at ninety percent of what today’s number is in five years? And can we get comfortable telling our investors that’s the game plan?”

Cody Crabb (23:12)
Yeah. Yeah. I think that’s a— that’s a really smart way to look at it because I think like you said, if you’re beginning with the end in mind, then you’ve— you kind of are prepared. If— if things happen in— in a less than ideal way, you know exactly where kind of jumping ship makes sense— or not jumping ship is probably a bad way to phrase it, but you know what I’m saying. yeah.

Jim Resha (23:31)
Exactly. Yeah, I think it’s important, Cody, along that line is, you know, when we look at it, I’ve got to have, “Hey, here’s what the game plan is,” and I’ve got to have like a fallback exit thing. So, like, “Hey, if that doesn’t work, does it still make sense if if this does?” Yeah. So, you know, because that— it— you know, there’s nothing that— that sucks more is to have to call your investors and say, “Hey, we’re— we’re gonna need a little more cash to get through this,” or, “You know, we’re not doing quite as well as we thought we were gonna do. So, you know, it’s not gonna—” and it’s a mess.

Scott Bursey (23:54)
Absolutely.

Jim Resha (23:56)
So, I don’t ever wanna have to make those calls.

Cody Crabb (24:08)
Yeah, if ever— if anyone could avoid doing that, that’s probably gonna be a good situation. well, thank you so much for all that you’ve given us today. I think this has been a really good episode. before we wrap, I’d love some final advice for newer commercial investors. What’s something that you wish more people understood about commercial or retail before buying in— in those categories?

Jim Resha (24:27)
I think the— for— for a new investor, that probably the biggest mistake I see is especially when it’s a good, frothy market, is they just want in and they want to do what their friend did. They— they just don’t take the time to learn the fundamentals. You know, we make our money in this business when you buy and—

Cody Crabb (24:41)
Whatever that means, yeah.

Jim Resha (24:51)
When the market’s going crazy, there’s a lot of greed out there, people make really bad buy decisions. And so that’s— you know, my thing to a new investor would: find an advisor that you trust that’s gonna tell you the hard stuff. I remember back in 2008, 2009, I had a lot of people come to me, say, “Jim, I’m gonna pull some money out of my house, I’m gonna invest it, I’m gonna make a lot of money, just like all these people did.” And you know, I had people sit— I sit in our office and I talked them out of it and they got mad at me, right?

Cody Crabb (25:25)
They probably weren’t so mad in a couple of years, were they? Yeah.

Jim Resha (25:28)
Exactly. Some of— made decisions that I didn’t help with and they regretted—

Cody Crabb (25:33)
So yeah. Well, that’s a— I think that’s a strong place to land. Fundamentals first, find somebody that can really kind of set you straight, that kind of has been in the— in the industry. if somebody wants to connect with you, learn more about The Resha Group, talk through assets like this, you know, what— who should be reaching out to you and where can they go to find more?

Jim Resha (25:52)
Yeah, I— I think, hey, anybody that’s got some desire to either get into investing in commercial real estate or wants to— wants to build their portfolio bigger than what it is now, ought to give us a call. And thereshagroup.com is our website. They can reach me on LinkedIn, my name, and I’d love to talk to people. I’d love having conversations every day with people just talking about their strategy, what they want to do.

Cody Crabb (26:20)
Love that. Well, that— thank you so much. That’s an excellent offer to our audience there. make sure you take advantage of that if you’re— if you’ve been thinking about commercial or— or retail. And— and once again, Jim, thank you so much for being here. I appreciate all the time and the insight. and everybody listening, if you got some value from this, make sure you’re subscribed. We’re gonna have more conversations coming with operators like Jim and help you— to help you make some smart decisions in this market. once again, I really appreciate it. And you have a good one, Jim.