Is It Safe To Enter the Water?

Allan Woodruff, CCIM

Allan Woodruff, CCIM

We’ve all been hearing  and reading “gloom and doom” from the media.

But we know from history that turning points come while the masses are still moaning about how bad things are.

So are we at a turning point? Are we close enough to jump back into the market?

Here are a few facts investors can consider in refining their commercial real estate investment strategies on either the buy or sell side:

  1. The deleveraging process will take more time as we work through the process of restoring sanity to private and corporate finances. We’ve lived through a period of very high leverage which must be unwound.  Habits and attitudes must change as investors take a more realistic view on risk, increase savings and reduce spending.
  2. Yes, there are economic “green shoots” being seen this spring. Witness the stock market rally and an upturn in existing single-family residential (SFR) real estate sales in February. Consumer Confidence rose slightly from March to April, according to the Conference Board. SFR affordability has reached a multi-year high due to collapsed prices and interest rates at their lowest levels since about 1971. The “transition point” (the inflection point at which prices fall slower than they had been) seems to have occurred in the SFR market, so there is evidence that SFR prices will find a bottom soon.  Prices are typically at early-2004 levels or lower.
  3. In the commercial real estate, cap rates (net operating income divided by sales price) have been moving up. This has increased downward pressure on prices, and is a reflection of the higher vacancy factors and lower rents that many owners have encountered. “Commercial follows rooftops”, and the commercial market still has more workout time.
  4. Multi-family has seen the largest increase in cap rates. This sector had previously held up best, while retail, office and other commercial sectors were impacted by the poor economy. 
  5. Increasing commercial foreclosures will exert additional price pressure on all commercial sectors.
  6. Markets tend to overshoot on the way up, and again on the way down. This provides investors a great opportunity to buy when “there’s blood in the streets” if they watch key metrics and turning points.

See the attached article, “Here Comes the Sun: The Recession May Be Over”, by Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co, Inc.

In summary, commercial owners may still benefit from selling now, and re-entering the market at lower prices later. Buyers should be careful… make sure the project is solid, with conservative assumptions. The great financing now available can help make the project work.

Our REO Service is a great way for investors to buy at very attractive prices. If you are seeking commercial investment advice, please email me or, if you prefer, you may call me at (928) 830-2599.

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