by Sponsored Content: Leaders Real Estate
By: Austin Hair, Managing Partners, Leaders Real Estate
Are you sitting on a valuable piece of commercial real estate? With interest rates on the rise, now may actually be the best time to sell your building. The Federal Reserve has made it very clear recently that they are going to fight inflation regardless of the costs of the financial and real estate markets.
There’s a saying in the investment world: “Don’t fight the Fed.” In commercial real estate, it takes a long time for prices to change directions. The fed can announce a rate hike and the stock market will drop the same day because it’s liquid. With commercial real estate, transactions take 90 days as opposed to 90 seconds, which means price changes happen much slower. For example, the stock market bottomed in 2009 but it took two years before real estate bottomed in 2011.
While interest rates are high, prices will only continue to go down over time. Here are a few things to remember in the current market:
1. As the cost of capital goes up, the price buyers can afford goes down
Previously, in a low interest rate environment, the bank would lend 75% to 80% of the purchase price and maintain a debt coverage ratio of 1.15 or 1.25. Now, banks are only lending between 55% and 70%, if at all. Buyers have to put down more money to bridge the gap and their returns go down.
So far, we are seeing surprising price resiliency because most sellers can still afford to wait and absorb the monthly costs. So, asking prices remain elevated while sellers hold off on lowering the price. This is why sales volume has gone down but prices have not. Eventually, maybe in 6 or 12 months, it becomes too painful for many sellers to hold onto an unwanted piece of property – leaving them to lower the price to whatever the market dictates at that time.
Why not sell it now while prices are still elevated?
2. How long is the Fed going to keep interest rates high?
It’s hard to predict how long the high interest rates will last – might be a year, could be longer. Eventually, they will pivot again but the damage will already have been done. Every time the Fed hikes rates, it increases the amount of time it will take to get back to equilibrium.
We will likely never be in a zero-interest rate environment again. Prices were elevated on commercial real estate because of the last low-interest rate environment, which made purchasing assets with leverage very desirable.
Essentially, the longer you wait, the less you will get for your property. Prices will come down, but no one knows how much. If you and your team are thinking of selling anytime in the next three years, it will benefit you to sell sooner rather than later.
How Leaders Real Estate can help
Leaders Real Estate is a commercial real estate brokerage firm that specializes in tenant representation. We can help you sell or we can buy your real estate at an agreed upon valuation in exchange for shares in the fund, giving you equity of your real estate tax-free. This can be a creative solution for practice owners looking to sell their facility. Contact us today to learn more!
