Few would challenge the wisdom of getting regular medical checkups to preserve your health or servicing your car to make sure it is properly lubricated and functioning normally. Well, we think the same logic also applies to your role as industrial property owner.
Now, we are not medical doctors or master mechanics, but we do know a thing or two about commercial real estate, and we believe we are well qualified to assist you in making sure that your investment strategy is in alignment with rapidly changing market conditions.
For over a decade, industrial properties owners have seen the value of their assets skyrocket in value. All they had to do to build equity was nothing at all. Every day was a good day since the market cycle bottomed out in 2011. Many owner users have built more wealth as property owners than they have as business owners. Even the owners of typical 10,000-square-foot buildings in Anaheim or Orange are multi-millionaires just based on the increase in their property values. A building that sold for $100 per square foot in 2010 topped $400 per square foot this year, and even though we deal with industrial properties every day, we still have trouble believing our own eyes sometimes. It has been an extraordinary run of good fortune for anyone who owns industrial property in Southern California.
But, as we have been telling you on these pages for the past several months, there has been a seismic shift in the other direction due to a slowing economy and a new monetary policy put in place by our central bank to tame the worst inflation we’ve seen since the early 1980’s. Simply put, we are heading in the other direction in terms of property values and that means your current investment strategy may now be obsolete. Are we trying to scare you? No, we are trying to warn you that we may be in the midst of what could be a substantial correction in property values.
In just the past two months, institutional buyers have lost interest in new deals and are either walking away from or re-trading the deals they have in escrow. Some are even forfeiting 7-figure deposits because the cost of capital has risen so fast that they are losing their equity partners or the interest rate on their new mortgages is so high that their deals no longer make sense.
Owner/user buyers are in the same boat. The interest rate on an SBA mortgage has doubled this year to 6.4%. At today’s prices, the monthly mortgage payment is equal to more than $2 per square foot. Add operating expenses to that and they have to pay more for a simple warehouse than they would for the top floor of a Class A office building. It just doesn’t make sense any more.
If you have been a property owner during a real estate down cycle, you know how painful it can be if you are caught off-guard. We remember that feeling like it was yesterday. We also remember how important it is to be prepared for different outcomes and that’s where your check-up comes in. We can help bring you up to speed on what are rapidly changing conditions and assist you in reshaping your strategy to minimize your risk and help you make informed decisions about your commercial real estate.
For some it will be stay the course. Their properties are leased up at favorable rates and they have fixed rate loans at rock-bottom rates. Good for them. For others, they may have leases that are expiring soon and a loan at 3% that will soon need refinancing at more than double that rate. Whatever your situation is, we can help you evaluate your options and pick the one that is best for you under the circumstances.
We cannot emphasize enough how important this is. Time is of the essence.
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