From GDP to inflation to more local metrics, everyone in real estate has something keeping them up at night – here’s what’s on our minds.
That might seem like an odd question, but we all have our own ideas on issues that grab our attention and make us cover the brake pedal, just in case there is a hazard ahead.
Those issues that give each of us ‘pause’ are different and they are based on our own life experience and current business posture.
Some follow macro-economic factors like GDP, inflation and the unemployment rate, while others look more to local metrics that can immediately impact their bottom lines. Then there’s everything in between. Whatever it is that gives you pause, it will shape your overall view and impact your decision making going forward, and that makes it important.
We are especially focused on a couple of things right now that are specific to the commercial real estate business; mortgage interest rates and the split tax roll proposition that Californians will be voting on in November of 2020.
As far as mortgage rates are concerned, the near future looks better than it did just a few months ago. The yield on the US 10-year treasury note shot up to 3.23% last year before deteriorating global economic metrics sent investors running for the cover of US sovereign debt, which drove that same yield down over 75 basis points in short order.
That is important because the 10-year yield is the benchmark for setting commercial property mortgage rates. What worries us is how quickly yields are moving, which makes locking in a new mortgage a riskier proposition. Now that the Fed has signaled a pause of their own in terms of further hikes in its Fed Funds rate, we are hoping that this recent volatility settles down. It’s no secret that the low cost of capital has been a key driver of this bull market that is now in its tenth year. So, we fall asleep each night wondering if mortgage rates will be higher by the time we fire up the coffee pot in the morning.
You may have seen our posts on the latest attempt to split the property tax rolls and remove Proposition 13 protection for commercial properties. The upcoming proposition, which has been approved for the 2020 General Election ballot, could be devastating for owners and occupiers of commercial properties if it passes.
The proposed law would allow the annual reassessment to full market value in lieu of the current 2% increase on the base levy established at the point of acquisition. For those who bought their properties more than 5 years ago, that could tax increases measured in orders of magnitude. If passed, this law is likely to increase cap rates to accommodate additional risk to investors, and the owner-user market would also be impacted, as those owners are also occupiers.
So, there is no one pass additional costs along to. For more on the potential ramifications of this ill-conceived proposition, see here.
So, that’s what keeps us up some nights. How about you? Whatever it is, it will make a difference, whether your predictions about your important issues come true or not. The collective concerns of business owners large and small shape the psychology of decision making and we think it’s a good idea for all of us to keep our eyes and ears on high alert at all times.
We are here to listen, learn and help you make good decisions about your real estate. We look forward to hearing from you.