Investment sales slow dramatically…
My current line when people ask me “how is the commercial real estate business?” is “It’s fine but I get to sell properties 4 or 5 times before they actually close”. This is because buyers are pickier, sellers are confronted with a changing market and lenders are tougher when it comes to underwriting real estate loans. The indicators are clear and we feel it as active brokers in the business--Investment sales have slowed down considerably. The National Association of Realtors reports that “Investment in commercial real estate during the first 4 months of 2008 was $48.2 billion, down 69.5% from the $157.8 billion for the same period in 2007. More at http://www.realtor.org/press_room/news_releases/2008/commercial_index_contracts
And here in the Sacramento Region, the Sacramento Business Journal reported “Real Estate investment tumbles; sales happening, but at a slower pace.” The Business Journal reports that investment sales are off 2.1 billion or 58% drop for the past 12 months. More at http://sacramento.bizjournals.com/sacramento/stories/2008/08/04/story5.html
Clearly volume is down, but deals are still getting done. For the first 6 months of 2008 14 office investment properties have been sold and that contrasts to 56 transactions for the same period in 2007.
The slowdown is attributed to the overall decline in the economy, to a tighter credit market with stricter underwriting in which lenders are requiring higher down payments plus higher interest rates and personal guarantees from buyers. A number of lenders have left the market all together. Also a number of prospective buyers are waiting and assessing what is happening to operating expenses, rental rate growth/decline, and to potentially higher cap rates.
We agree that this market is slowing, but we believe it is not going to be like the savings and loan collapse of the late 80’s. There has not been that much over-building , and most properties are still generating positive income and cash flows for the current owners. Sure, there will be some investors who will get into trouble and will need to dispose of properties that were bought at the top—that haven’t hit their proformas and likely have short term debt or adjustable rate debt who will have a higher sense of urgency. Sellers who want or need to sell will need to be realistic about their price and their deals will attract buyers with more cash seeking higher yields – 7% to 8.5% cap rates on actual Net Operating Income – and underwriting and conditions of financing will make transactions harder to get funded and to actually close.
If you would like to discuss this blog post with us or if we can help you with a commercial or investment real estate transaction please call or email us at Jim Gray (916) 617-4255 jgray@naibt.com or Nahz Anvary (916) 617-4257 nanvary@naibt.com.
