It’s a great time to Buy- It’s a great time to Sell
As the nation goes through economic cycles over the generation no where are the gyrations to the real estate market so pronounced as in the State of Florida. Its a state known for booms and busts, from the 1920’s and before until the present day. The downturn that began in 2007 is certainly one of the worst ones and most pronounced for decades. This is, of course, nothing new to all of us, but what now? Is this now time to be a buyer of real estate, or is it a perfect time to be a seller (now that the market is finally starting to perk up and demand is strong)? For the purposes of this discussion I am primarily referring to commercial real estate, particularly income producing investments.
This seems to be a unique point in history where you could actually make a strong argument for both sides of the question: for the buyer side as well as the selling side.
From a buyer’s perspective there are several strong points in their corner:
- Interest rates are very low and now is the perfect time to use a disciplined level of leverage. I don’t think there’s ever been a time in our recent history where one could get sub-5% long term interest rates like today.
- The economic cycle is now experiencing a slow but steady emergence from the bottom of the market, so it is reasonable to expect that there will be growing occupancy and rental rates as the economy improves…the worst is certainly behind us.
- Yields on other asset classes are extremely low, making 7-9% yields in the investment real estate seem very attractive. The spread between the bond, CD, and treasury markets compared to income real estate is large and compelling.
From a seller’s perspective now could also be viewed as the opportune time to cash out:
- Cap rates are very low. The probability of them going even lower is fairly remote. Further contraction of cap rates won’t be as a result in further declines in the overall interest market, but as a contraction in the spread between commercial real estate (CRE) and other asset classes.
- There is a relatively strong demand by investors for CRE. There has been a lot of idle cash on the sidelines and much of it is finding it’s way into the CRE market.
- Uncertainty as to the future capital gains tax structure, especially if the U.S. Presidency remains in current hands.
Probably one of the biggest risks to CRE current owners is the state of the refinancing market. If you are the owner of income property that was financed 5-10 years ago odds are that you have a balloon payment coming due within the next couple of years. Getting once conventional 75-80% financing is probably a thing of the past at least for the near term. Lenders who are anxious to clean up their loan portfolios are going to be extending 50-60% financing, leaving you with a sizable capital call. Many owners of CRE simply aren’t in the position to outlay another 20-25% equity into a deal, especially after the rout of the market over the past 5-6 years. Sound scary? It should, as this is really the biggest risk CRE owners are facing today.
Its really an opportune time for owners of CRE to consider their options here, and its equally a great time for buyers to lock in some of the best financing rates in generations. Consult a commercial real estate specialist to help you guide you through these questions.
Dougall McCorkle, MBA
Sales Associate and Commercial Specialist
Premier Commercial, Inc., Licensed Real Estate Brokers
Direct: 239.213.7234
Cell: 239.860.3368
dougall@premiermail.net