We admit to spending more time than we should wringing our hands over what might happen if interest rates keep moving higher.
Mortgage rates have doubled in a year and the Fed has been clear that it has more tightening to do before it gets off the brakes. Since it was low rates that fueled the run-up in prices over the past 12 years, it does make sense to be concerned over the possibility that prices will head in the other direction as rates move higher.
So far, the higher cost of capital has hastened a move to the sidelines by some buyers, especially the institutional players. But, solid performing, less speculative assets are still selling at premium prices. Put another way, the yellow flags are out, but the cars are still out on the track at race pace waiting for another green to go all out again. Right now, higher capital costs are like rain on the track. With the right tires, it’s still a race, just a slower one.
So how do buyers, sellers and advisors like us proceed? We look at it this way: we can’t control the track conditions, but we do know how to drive in the wet. It’s back to fundamentals. First, stay on the track and keep circulating because anything can happen and it can happen fast. To us that means gathering as much information as we can and making the extra effort to share it with our clients. Our job is to help them make informed decisions. To do that, we have to be informed ourselves.
Second, is to look as far up the track as possible, so we are able to help others adjust to hazards and opportunities that lie ahead. We have been talking to a lot of investors lately who are making big adjustments to their investment strategies. Even owners who planned to hold assets for life are giving serious thought to repositioning or liquidating their portfolios while prices are at or near the peak of the longest up-cycle in commercial real estate history. Some are looking to deploy capital to more business-friendly markets, while others have just had enough and realize that their net proceeds from a sale will be a multiple of even their wildest expectations. As the old saying goes; nobody has ever lost money taking a profit.
Whatever the reason, the shift in market dynamics is changing minds that were all but made up for over a decade. This seems to be the case especially with owner/users who have owned their properties for a long time. Some of them own properties that are now worth five to ten times what they paid for them, and their businesses are struggling to remain profitable in increasingly turbulent economic conditions. The idea of cashing out with unexpected millions in profit and taking their lives in a new direction is compelling.
Whether you are a big investor with a multi-property portfolio or the owner/user of a single building, your situation is unique. You control your own destiny as far as your property is concerned, but you don’t control the market. You can only make the effort to understand it and have that understanding guide your decision to hold, sell or exchange your property.
We are here to assist you in that process, to keep you on the track, wet or dry, until the checkered flag is out.