News & Updates

A Conversation with Patrick Kelley


President | Falco, Smith & Kelley Ltd.

Patrick Kelley has spent 25 years working for two family firms in Columbus that develop and market commercial real estate, including the Polaris Centers of Commerce. In addition to his role at brokerage and appraisal business Falco Smith & Kelley, he is vice president of the firm his father founded to develop real estate, Donald W. Kelley & Associates. Kelley’s focus is on asset management, commercial appraisals, brokerage and investing. A native of Columbus, Kelley, 49, has a bachelor’s degree with a real estate major and a Master of Arts in Business Administration, both from Ohio State University.

Can you find any silver lining for the commercial real estate market in this recession?

Commercial construction activity has been limited over the past couple years as a result of high labor, energy and commodity prices, and will continue to be muted as a result of a lack of financing for new construction. This is a positive for the supply side of the equation; however demand is declining significantly because of higher unemployment, high energy and health care costs, housing crisis and credit market collapse. Sellers are gradually becoming more realistic in pricing properties to reflect the market which will result in some good opportunities for long-term investors.

How are property owners handling high vacancy rates? How deep are concessions running?

By more intensive management of their properties. Typically, a property owner will minimize expenses as much as possible and defer capital improvement items to offset the decline in revenue from higher vacancies. There also is pressure on subcontractors to provide better pricing. The tenant concessions are typically in the 10 to 20 percent range, but in some instances discounts as much as 50 percent are offered in order to retain tenants. What’s unusual is that these concessions are being asked in some instances for contract rentals as well as rental listings.

What are the opportunities in a down market?

The best investments are those properties that are well located and cater to tenants who provide basic needs. For instance, doctors, dentists, food operations offering good value, grocery stores, and mobile phone and video stores are somewhat recession proof. There is also a flight to quality, so the well located properties with good cash flow will do best. As an asset class, apartments are a decent investment because people need a place to live, and demographics are favorable.

Who’s lending money? For a commercial investor, how different is the lending game played now?

There are not a lot of eager lenders, however the local community banks are probably the best source for commercial loans. Community banks see this time as an opportunity to upgrade their credit quality and grow their loan portfolios. Fannie Mae and Freddie Mac are still active in multifamily lending, and life insurance companies are active in the office and warehouse sectors. The federal Public Private Investment Program is a recent initiative to improve liquidity in the securitization markets. The lending game has changed by requiring substantially more equity and more stringent underwriting. The lenders are also looking at the track records of developers and their ability to perform. Those investors who are over leveraged will have difficulty obtaining financing, particularly for retail.

Are you seeing real estate investors taking advantage of fallen valuations by snapping up property, or are most just standing pat?

Most are not active because of the substantial uncertainty in the market. We are in the middle of the recession for commercial real estate markets and have a ways to go. As the psychology of sellers becomes more realistic and asking prices fall accordingly, and liquidity improves, real estate investors will become active again. Unless there is an exceptional opportunity, it is my experience that most investors are standing pat.

What’s the best way for an investor to position himself for an eventual recovery?

Batten down the hatches as there are no quick fixes considering the breadth and depth of this recession. Focus on retaining tenants and maintaining rent flows. A recovery will be gradual and will benefit from reduced construction and absorption of existing inventory. Maintain cash for opportunities. Keep in mind real estate is an exceptional hedge against inflation. Commercial real estate bought right will provide an excellent investment.

“A Conversation with Patrick Kelley.” Columbus Business First, 4 May 2009, Accessed 2024.