Kenny Roger’s smash hit The Gambler not only had a catchy tune, it had a thought-provoking message to go along with it.
All the economic goings-on these days must have that tune stuck in a lot of heads because we are hearing from more of our long-term-hold clients asking us whether current circumstances call for a change in their disposition strategies.
To say the least, it’s been an awfully good run of cards for industrial property owners, especially for those who’ve been at the table for a while. Until just a few months ago, property values were still appreciating at a double-digit pace and buildings that were selling for around $100 per square foot in 2011 were trading at $400 in 2022. But, when the Fed’s attempt to tame inflation sent mortgage rates from 3% to over 6% in a matter of months, buyers started heading to the sidelines to wait for pricing to adjust accordingly. Active owner/user purchase requirements slowed noticeably and institutional investors either re-traded deals in the works or walked away from non-refundable deposits.
Now, with fewer players at the table, pricing is getting more and more difficult to peg, and the word on the street is that prices have a better chance of moving lower than higher in the near term. The cost of servicing debt is a key value driver and despite the recent banking scare, the Fed is tipping its hand that more rate hikes are forthcoming. So, for now, we all have to get used to mortgage rates being at least where they are now, if not a bit higher.
How much more that will erode buyer demand becomes the bigger question. For the moment, there is still enough of it to absorb what few properties do come to market, but if we see a substantial increase in available inventory as the year progresses, bets for a soft landing are off. $400 per square foot and a 6% mortgage just doesn’t make sense to most buyers. Owner/user buyers will remain as tenants and keep their powder dry. Institutional players will remain cautious, as well, only pulling the trigger on quality product with strong in-place income.
So, which is best for you as an industrial property owner: hold ‘em or fold ‘em? As we have said many times in these pages, your decision to hold, exchange or sell is unique to you, your place in life, your situation on the ground and your tolerance for risk. The good news is that you will win either way, it’s just a matter of how much in winnings you walk away from the table with and when. This market up-cycle took us into the stratosphere. Sell today, you win big. Hold long-term, you win, especially if your debt load is low. Let us explain.
If you sold your property today, you would walk away with a profit you never dreamed of when you bought it, even after paying taxes. Your realized profit would be completely liquid and you could stash the cash in US Treasurys and kick back with your feet up, cold one in hand. If you are close to retirement and your property is a key component of your retirement plan, that might sound pretty good right about now. You could walk away from the table a big winner near a market peak.
If you still have a longer view of things and plan to stay in the game for a while, you’ll probably be fine. Most Southern California markets (the IE being a big exception) are pretty much built out, and chances are another building in your size range will never be built again. Holding an irreplaceable asset can be a good and very profitable investment over time. If mortgage rates remain high in the coming years, leasing demand should stay strong enough for you to keep your property leased up on favorable terms if you decided to wind down your business. Not a bad way to go if you are willing to carry some leasing risk.
Of course, there are many other factors to take into account that reflect your own individual circumstances, but no matter what you decide, now is the time to learn what you need to know to make the most informed decision. You are most likely sitting on a virtual pile of cash that could change your life in a profoundly positive way. But whether you hold ‘em or fold ‘em is up to you. If we can help you make the right decision, let us know.