It’s STILL a great time to be a Buyer OR Seller
The economic downturn that began in 2007 was certainly one of the worst and most pronounced ones for decades. Despite our declared emergence from the Great Recession, some folks rightfully so didn’t get that proclamation. On the other hand, the economy has solidified and seems to be running at a ‘new normal’. So what does this mean for the commercial real estate market, and particularly for the investment community? Is now the time to be a buyer of real estate, or is it a perfect time to be a seller?
As I had said in an earlier blog post, this seems to be a unique time 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 at historically low levels 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…and in some cases sub 4% levels. Lending underwriting and approvals are more predictable and achievable and lenders have plenty of funds to place.
- The economic cycle is now experiencing a slow and 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. Accordingly rent rolls will be less subjected to roll-downs and may actually have some upside.
- 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. Investors are sitting on ‘dead’ money when their yields are providing 1-2% returns. With a prudent level of leverage, a properly structured real estate investment can boost a 6-7% all cash yield to 9-11%.
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. You really can’t expect further contraction of cap rates as a result in further declines in the overall interest market because it there’s little room for interest rates to fall in further.
- There is a strong demand by yield starved investors for commercial real estate. 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 has prompted some to also reconsider 1031 exchanges.
Probably one of the biggest risks to CRE current owners is still the state of the refinancing market. If you are the owner of income property that was financed 5-10 years ago, there’s a good chance that you have a balloon payment coming due within the next couple of years. Getting once conventional 75-80% financing might be problematic, especially when you factor in new appraisals and lower rent rolls. Lenders who are anxious to clean up their loan portfolios are going to be extending 50-60% financing, perhaps 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 many 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