3 Things I’d Want to Know if I Owned or Were Investing in CRE Right Now

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  1. Market Velocity & Liquidity is at an all-time high!
    1. Know that from period of time market to close – all-time high
    2. Including challenging environmental issues, currently 91-day average from list to close – cash in Sellers’ pockets
  2. Liquidity
    1. Important to know about because assets that historically were not sellable, or would sell for discounted price in relation to risk associated with that property
    2. Right now we have the ability to sell assets that historically would not sell, and we’re getting pricing out of them that is tremendous
    3. Drafting the expensive low-yield pricing of quality deals (Class-A projects in Retail, Office, Industrial, Multifamily, etc.) as well as A locations & tenants vs. actually being priced for the risk they should be priced for
    4. If owned right now, want to know that now is a good time to sell less-than-quality assets or stuff that might not have pride-of-ownership – might see most challenging periods of time with occupancy and capital improvements
    5. During downturn – shadow market of CAPEX – owners & syndicators chasing yield would push cash towards returns vs. put that money back into properties
    6. Certainly when heading into longer-term hold periods because of where we are in the market, it’s important to pack money away for rainy day and future capital improvements
    7. If you own properties over next 5-10 years that will eat a lot of your cash flow because you’re gonna have to put money into the improvements of the property, perhaps we should sell those assets to somebody who’s willing to take a lower yield than you are, and put you into another, higher quality asset
  3. Buyers’ Holding Periods are Longer Right Now
    1. Historically, would underwrite to a 3-5 year hold, and now people are underwriting to a 7-12 year hold, and putting longer-term debt in place – anticipating that the market is going to slow and that pricing will be affected
    2. That won’t affect cash flow, per se, because the economy is strong, occupancies are high, job growth is positive, but if interest rates go up, pricing & liquidity will come down, and velocity will certainly decrease
    3. So that is what everybody is preparing for right now, so if you own an asset and you haven’t refinance, it’s a fantastic time to do that, and reposition your equity and debt for a longer-term hold

 

Also would want to know that there are fantastic opportunities for arbitrage because pricing is so high, we are finally seeing clients sell and pay taxes (historically never done), but that’s an indication of how high we are in this cycle

 

We’re in 2016, and the rebound started in 2010, so we’re literally seven years into this cycle, when historically, cycles are about seven years, so this is the year we will see more buyers and sellers come together in Q3 and Q4 than we have

 

Volumes are at all-time high, even though we have seen some decrease, only because we don’t have product available that we wish we did,  but now is the time to look at your assets and make decision for the long-term

 

We have clients that are paying the taxes and putting the money into larger REITs to essentially lower their risk moving forward and also spread their risk around several markets and several asset classes and asset locations. We have clients that are getting out of MF at 5 Caps and into Retail at 6 & 7 cap deals – retail/office/industrial – the other food groups – fantastic opportunity to look for higher yield in other food groups

 

Because there is the expectation of interest rates rising at some point, and with construction costs & occupancy costs continuing to go up, that will drive NOIs and yield down, which will put downward pressure on the values of properties – so imagine if you are looking for the highest IRR over the next 5-10 years, right now is the time to sell and move into higher cash flowing opportunities

 

For example, let’s say you buy a $5MM asset that’s kicking off $100,000/year for over 5 years, and then you sell it for $6MM, you’ll have made $500,000 plus $1MM – $1.5MM on $5MM – 7.5% (annual amount?)

 

Alternatively, say you bought an asset for $5MM, there’s a chance you’re only gonna sell it for $5MM in a couple of years, so you would want to have gone after higher cash-flowing assets

 

Thought process: People are selling at peak, getting into higher cash-flowing assets, and cashing up moving forward

 

For example, if you own $1MM apartment complex and you’re making $40,000/year, you have a 4% return on equity, and we can take that $1MM and make you 8-10%, so we can make you $80,000-$100,000 – which would you rather have moving forward? That’s the question!

 

Conclusion:

 

The market is extremely robust right now! Our team has 14 deals under contract with a total value of over $150MM. That is incredible! We want to strike while the iron is hot. We feel like this market is a gift to us to provide to our clients to position them better for the next cycle. If you have any questions, or goals, or want to chat about what opportunities exist in the marketplace, there are opportunities that we like, and that’s why we’re under contract on so many deals!

 

 

 

 

 

 

 

 

 

 

 

Jared Whipple

Executive Assistant

jwhipple@ngacres.com

801-746-4769

 

376 East 400 South, Suite 120

Salt Lake City, UT 84111

 

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