Time to sell or time to buy? Flip a coin!
If you read my commentary of February 19,2012 , I had made the assertion that this is a somewhat unique time in the business and economic cycle where one could make strong arguments why its a great time to be BOTH a buyer and a seller of commercial real estate. The arguments for both sides are many, but as a recap read on:
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.
To provide some historical background to this issue, please email me and I’ll be glad to send you some charts: dougall@premiermail.net
This graph shows the historical trends in CRE cap rates compared to 10 year Treasuries and BBA bonds. It should be noted that these cap rates are based upon REITS. The key take-away is not necessarily the absolute number, but the trend and relative level itself. The trend has been largely down and the absolute number is relatively low. This obviously bodes well for sellers, as low cap rates mean prices of properties are relatively high.
Email me and I’ll send you a good chart showing this important information. dougall@premiermail.net
What this shows is that CRE provides a relatively high return to the investor compared to 10 year Treasuries. In other words, an investor’s yield in low risk Treasuries (or CD’s and other low risk investments) is quite a bit lower in comparison to what his investment yield in CRE may be.
Real estate is far from being a riskless investment, but if you make sound decisions and consider the long term benefits real estate can be a valuable addition to your overall investment strategy. Please contact me to discuss your persoanl strategies and needs in regards to commercial real estate income properties.
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