In the past few weeks, mortgage interest rates have fallen to new lows. Yes, you read that right. Lowest ever. Here’s what that means to you.
In numerous blog posts over the past few years, we have highlighted the role that low mortgage interest rates play relative to industrial market trends in Southern California. Without a doubt, the low cost of capital has been the key driver not just in terms of real estate, but in the broader economy, as well.
We won’t go into all the reasons why we got to where we are today in this post because we want to focus in on mortgage rates, as they are the big story out there today.
We are now officially in the longest real estate upcycle in history and while we are seeing some warning signs of a shift in direction, sales prices and lease rates continue to climb and ongoing demand for industrial space has kept vacancy at an historic low point. If you follow the market at all, that probably comes as no surprise, but you may also be wondering when this bull run is going to run out of gas and what the consequences of a market correction will be to you and your business.
What we can say with some level of confidence is that higher interest rates are not likely to be the precipitating event, at least for the near term. Just this week we sat down with a couple of our favorite bankers to discuss recent changes in the world of SBA financing for industrial properties. They reminded us that mortgage interest rates, just in the past few weeks, have fallen to new lows. Yes, you read that right. Lowest ever.
We got a quote from them today on an SBA 504 loan package at a rate of just 3.4% for a fully amortized 25 year loan.
No 5 year call.
No 10 year call.
No call at all. Imagine fixing your occupancy cost until the year 2044! That is about a safe a bet as bets get in our book, and it means one less big thing to worry about in terms of running your business.
While your competitors lease space at today’s high lease rates with annual increases of 3.5% to 4%, you could pay the same amount every month for 300 months. By the way, that same 504 loan a year ago had an interest rate of 5.3%.
This is not to say that buying an industrial building doesn’t come with other risks. It does. But, the cost of your monthly mortgage payment is one of the biggest variables in the owner/user equation. So, if you can acquire a property that will suit your business needs for the next 5 to 10 years, a purchase, even at today’s price point, might be just what the doctor ordered. Finding that building is the hard part, as availability is also at an all-time low. Yet that scarcity also provides a level of safety for you over time.
Construction of new inventory is at a standstill and land is just not available at a price that makes development even feasible. So, the building that you buy is essentially irreplaceable. That fact alone will go a long way to preserving your invested capital.
In a typical real estate up-cycle, developers aggressively bring new inventory to the market as prices rise and the potential for strong returns is at a high point. When the market gets disrupted by one or more factors that send it into correction there is usually an excess of new inventory in the pipeline right as demand begins to fade. That is not the case this time around. Vacancy is at 2% and construction activity is nominal. So, the usual spike in vacancy that drives down sales prices and lease rates in a correction is just not in the cards. That simple fact increases the likelihood of a less drastic correction phase when one finally does arrive.
A shallower down cycle is easier to recover from and shorter in duration before a new up-cycle begins.
Our next upcycle will begin with virtually no new available inventory. So, the market would logically return to tight conditions like we have today in relatively short order. For those seeking space in today’s current market, they have little to look forward to. But, if you can find a building that works for you now and you believe you can function efficiently in it over the long term, buying that property with 3.4% loan at 90% of the purchase price starts looking like a pretty smart play.
That said, it is still important to plan for the correction and have confidence that your business can withstand a rough patch without putting yourself at unnecessary risk.
It all really comes down to timing. If you own a building today and you are approaching a point in your life where you are thinking about your exit strategy, then today’s low interest rates will help you as much as a potential buyer for your property. Low interest rates support a higher price point and coupled with today’s high level of demand, you can likely sell your property at a record price before the next correction.
If your buyer has a long term perspective on the acquisition, he or she will pay that price because they will have decided that your building will help them become more efficient and competitive. That creates a potential win-win for both parties.
So, as counter-intuitive as it might sound, this is a great time to sell and a great time to buy at the same time. If you are interested in hearing more, just give us a call. We are here to help.