Dec

In Commercial Real Estate, Cap Rates Are Up – Is It Any Real Surprise?

By Emily

You’re hearing about it when you talk to your real estate agent, you’re painfully aware of it if you’ve thought of selling a property, and maybe you’re excited about it if you’re out hunting for a deal. The big news is (drum roll…) cap rates are up!

(Don’t know what a cap rate is? Check out my diatribe about cap rates and how to use them and when to ignore them!)

Does This Mean My Real Estate Agent Won’t Laugh At Me Anymore?

If you’ve been following commercial real estate for any length of time, you’ve probably been discouraged by the one-two punch of (1) gurus telling you to get out there and look for high cap rate properties that will cash flow, and (2) your real estate agent chuckling about whether you’ve been to a seminar lately and thinking, “Yeah… sure! If that type of property comes along, I’ll just buy it myself.”

I will digress again to say that real estate agents are actually NOT usually your big competition in finding good deals. In my experience most of them do not invest themselves, don’t have the cash on hand to buy big deals when they see them, are more interested in the “quick hit” of getting their commission, and (best!) didn’t know the seller would take that low offer you just made!

Real Estate Agents don’t have the cash on hand to buy big deals when they see them, are more interested in the “quick hit” of getting their commission, and (best!) didn’t know the seller would take that low offer you just made!

The fact is, you can always snatch up great, below-market real estate deals if you’re willing to be persistent and take the time to look for really good properties.

Does This Mean I Can Find Great Commercial Properties To Buy Now?

So what’s happening now… suddenly you don’t have to be persistent to find the good deals? Good properties that meet your “guru’s” buying guidelines are starting to pop up all over the place, aren’t they? High cap rate properties abound! What’s going on?

Even in the Seattle commercial real estate market, one of the strongest in the country, we are seeing cap rates go up. Agents are telling investors who are considering selling any time within the next few years – “Sell now, this is as good as it’s going to get, it’s going down from here (or running flat, at best).”

People Are Paying Less For Property Because There is Greater Risk In the Marketplace

The higher cap rates are simply a reflection of the declining expectations for property values. No one wants to buy a property that’s going to be WORTH LESS in a few years time, that’s why seller’s are having to discount their prices TODAY to entice buyers to come on board.

Pay Less Attention to Cap Rates, and Greater Attention to Market Cycles!

One broker told me he thought there was a 25% disparity between what sellers thought their properties were worth and what buyers thought the properties were worth.

Novice investors beware – there are lots of great-looking properties flooding the market right now, if you only look at cap rates. This is an important time not to be blinded by the short term or historical performance of the property. Look at how the property is situated to ride out the still-declining market cycle.

If you’re in it for the long haul and plan to be buying through-out the dip, then yes, by all means, go for the good deals (negotiate hard though, buyers with cash or financing in place are especially in demand right now).

If the deal is right, it’s always a good time to buy. If the market is right, it’s easier to find a good deal.

But if you can only buy one property in the next few years and you want to make sure it’s a winner. Keep looking for motivated sellers and CREATING (through offers and negotiation) good buying opportunities. Buyers are king in this marketplace.

Also, when you’re running your figures, throw in a big grain of salt to account for the risk you’re taking. There’s a reason cap rates are rising!

- When somebody’s down, someone else is up! -

Emily

P.S. We haven’t hit the bottom yet, in most real estate markets. To find out where we are in the market cycle for the real estate markets you’re in – check out this service!

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