It is A Seller’s Market For Commercial Real Estate

I had been through numerous cycles in my 40 years in the commercial real estate business. All of the cycles had vastly different consequences. The current cycle is very long and producing the lowest interest rates that I had ever witnessed. Consequently, low returns from normal investment vehicles for example; stocks, bonds, money markets, and mutual funds are causing many Americans to look elsewhere for a higher return on investment and potentially more risk.

In the past apartments on the West Side of Los Angeles sold for 3-4 caps which I always thought was ludicrous! Now, commercial real estate is selling for 3-5 caps providing there is a value add component in the property. It is a better bet to buy commercial real estate compared to apartments on the West Side, since it is not subject to rent control and there is very little management compared to apartments.

It is a seller’s market indeed, and it will continue to be so until interest rates rise. This seller’s market trend should continue to the next general election at least, since the Federal Reserve announced interest rates will remain fairly stable for the next few years.

My big concerns are two fold in commercial real estate:

1. There is a big debate in Washington, D.C. to extinguish or cap the 1031 deferred tax exchange to $1,000,000. It is my opinion this will cause investors to hold rather than sell their assets. As a result, there will be substantially less sellers which may cause inflation.

2. There are more discussions in California to do a split tax roll and separate commercial real estate from residential real estate. If Sacramento implements this modification to Proposition 13, it will cause a much larger burden on commercial real estate for higher taxes and create lower values.

The safe investment and good liquidity in commercial real estate at this time will continue to cause prices to rise. This is an incredible opportunity for sellers to take their cash off of the table, before the next cycle begins.

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