Week 2 Case Study

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Ohio State University *

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3400

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Economics

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Feb 20, 2024

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Uploaded by ColonelRain4790

1. A reason to invest in real estate is because there are two potential sources of value for investors: capital appreciation and cash flows from lease revenue. In the long term, land often increases in value, which gives the investor a capital gain on their investment. Throughout the time, the investor holds that real estate, land, and any attached buildings bring in paying tenants, which is a source of rent or lease income. 2. The factors that need to be considered with the timing of a real estate investment are interest rates and the economic condition of a country. Low interest rates are generally favorable for real estate investments as they make financing more affordable. When interest rates are low, investors can secure loans at more favorable terms, which can increase their returns. Also, during a country's difficult economic times, property values may be lower, presenting buying opportunities for investors. However, be sure to carefully analyze economic indicators to make sure that the market is poised for recovery, minimizing the risks associated with a downturn. Lastly, be wary of potential housing bubbles during periods of low interest rates and economic difficulties, as rapid price increases driven by speculation can pose risks to real estate investors. 3. When choosing an ideal location for a potential purchase, several factors should be considered. First, vacancy rates play an important role in assessing the market's demand. Low vacancy rates suggest a healthy demand for the property, which can show it to be a good investment. Also, it's important to evaluate the market type: core, secondary, or tertiary markets. Core markets are typically more stable, while secondary and tertiary markets may offer higher returns but come with increased risk. Last, proximity and access to a skilled workforce. A location with a readily available pool of qualified workers can positively impact business operations, ensuring an efficient workforce. This consideration is very important for industries that heavily rely on skilled professionals. 4. Industrial properties provide a high and stable income return. Industrial real estate is diverse, providing returns that generally track the overall economy, resulting in predictable income and consistent cash flow. Light industrial properties such as warehousing, storage, shipping, call centers, and other facilities that do not perform heavy manufacturing activities have high and stable income returns. The consistent performance is due to lower maintenance costs, capital improvement costs, tenant inducement expenses, and a more diversified base of tenants. Other types of real estate investment are Investment Pools, Real Estate Operating Company (REOC), and Real Estate Investment Trust (REIT). 5. The acquisition of Building A in Montreal looks to be the right building. The property has LEED certification, demonstrating a commitment to sustainability that aligns with modern day business practices. Its modern features, such as excellent ceiling heights and efficient shipping facilities, gives it more appeal to potential tenants in the competitive industrial market. With 80% of the space already leased to quality tenants with an average term-to-lease expiry of 8.5 years, the investment offers stability and a predictable income stream. The strategic move by Pinnacle to head lease the remaining 40,000 sq. ft. for two years at $6.75 per sq. ft. further contributes to the income potential. The property's location in the Saint Laurent sub-market, its proximity to major transportation routes, and limited competition from new entrants add significant value to the investment. Overall, after looking at the quality of the property, long-term lease commitments, and strategic location, acquiring Building A seems to be the right building.

6. The purchase price of $19.7 million for Building A looks reasonable based on several factors. The blended going-in cap rate, calculated at 6.88%, falls within the expected range of 6.8% to 7.0%, indicating a potentially favorable return on investment. Also, the property is 80% leased to five quality tenants with an average term to lease expiry of 8.5 years. Long-term leases contribute to a stable income stream, and the quality of tenants enhances the overall desirability of the investment. The location of the property in the Saint Laurent sub-market, with easy access to major transportation routes and proximity to Trudeau International Airport, adds value to the investment. Considering these factors, along with the property's LEED certification and strategic position in a tight sub-market, the acquisition price seems to be right.

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