Industrial property prices have soared to levels that no one thought possible in the last several years.
The entire Southland is nearing full build-out while demand for owner/user buildings keeps ratcheting higher. Vacancy is under 1% in most submarkets and buyer competition is intense. Add low fixed mortgage rates to the mix and you have the perfect conditions for a hyper-priced market.
You’ve probably heard this before, but for those of you who have held onto assets through this bull market, the reasons to finally consider selling have become more compelling. A case in point: our team is in escrow on an 8,000-square-foot building in North Orange County at a price of $450.00 per square foot. No, that’s not a typo. That very same building would have sold in 2019 at approximately $325.00 per square foot, and $125.00 per square foot in 2011. Sound too farfetched to be true? It’s difficult for us to believe, too, but it is provable fact.
As an industrial property owner in Orange County, you could not be in a better position. Good for you. You took the risk to buy your building, paid your mortgage and showed up every day to run your business. You deserve to be in your position. The question now is what do you do about it? The answer is complex and unique to your circumstances.
The good news is that you may have more options than you think you do. Typically, potential sellers look at just two of them: sell and pay taxes or exchange and defer taxes, neither of which makes good sense them. Nobody wants to write checks to the state and federal governments, and many owners have little interest in acquiring someone else’s hyper-priced asset just to delay the writing of those checks. So, most owners take no action at all, kick the decision down the road and focus on running their businesses without considering several other viable exit strategies.
So long as current market dynamics remain in place that may still be okay, but if they don’t, it could spell trouble. This particular up-cycle in the industrial property market has been fueled by cheap money and a lack of new development. In past cycles, development ramped up to satisfy demand, and was followed by an economic shock that caused demand to decline sharply and quickly. The resulting over-supply caused prices fall quickly in response.
This time around it’s a bit different. Scarcity of product and the lowest mortgage rates in history have combined to distort the price rise, which has reached a level more than double the last peak in 2008. While construction activity remains low due to a lack of available sites, mortgages are becoming more expensive as a result of the Fed’s decision to reverse its monetary policy to put the brakes on inflation. The SBA 504 mortgage rate, the primary source of owner-user funding, has risen sharply in the past month to 3.21%, still low, but up from 3.01% in December and 2.26% this time last year. And that has happened in advance of any actual tightening by the Fed, which has made clear it will stop its bond-buying program and raise its benchmark Fed Funds Rate at least 3 times in 2022.
Does that means the sky is falling? We don’t think so, but if rates keep rising it could lead to a leveling off or even a decrease in sales prices sometime in 2022. If that occurs, anyone who sells their property now, would be doing so at this cycle’s market peak, an outcome we all hope for as property owner.
So, this may be a good time to think seriously about your options. Many of you bought your properties decades ago and they are worth as much as 10 times more today. At what point does it makes sense to exit a market that has been in an upcycle for 12 years, the longest in Orange County history? The proceeds of a sale would have life-changing consequences and offer you a quality of life you may have never thought possible. Selling in today’s market guarantees that you will have bought low and sold high, the primary goal in the world of investments.
We are in conversations like this all day every day, and we are confident that we can help you make the most informed decision, whether you decide to sell today or hold for a lifetime. Just give us a call.