The landscape of real estate investing has done a dramatic about face. Investment real estate goes through normal cycles of expansion and contraction like the rest of the economy but the cycle we are currently in has swung as far to one side of the equation as I have ever seen the market shift. Just a couple of years ago, a study by one the nation’s largest Commercial Real Estate companies determined that there were about twenty buyers for each investment property for sale in the United States. Today I am going to guess that there are twenty investment properties for sale for each investor in the market place!
So where have all the buyers gone? The first part of that answer is that many former buyers are out of the market due to tough new lending requirements by the banks, or in some cases a lack of any financing options for investment real estate purchases. If you are fortunate enough to meet the today’s credit requirements of the lenders, you need to be prepared to put 30% to 40% cash down to secure financing for investment real estate. These requirements have greatly reduced the pool of buyers active in the market place.
Secondly, investors’ return requirements have gone up. From talking with appraisers and real estate brokers, the consensus is that cap rates have gone up one hundred basis points or more over the last year and that number is still rising. I was in Seattle last week and what I heard was that cap rates for quality commercial investment properties are around 8%. Usually Spokane cap rates run one percent or more higher than those seen in the Seattle market. This would suggest cap rates here need to be 9% or more to attract buyers. Therefore, sellers, unless they are highly motivated to sell, will need to adjust their expectations and corresponding asking prices downward to attract buyers. It will probably take some time for most sellers to adjust to these new economics.
One segment of the real estate market that is quickly adjusting to the slow down in our economy is developers and investors who hold land with underlying debt. A lot of land has come on the market in the last six months and there is more coming. We are starting to see dramatic price adjustments from very motivated sellers who need to get relief from the debt on their land holdings. For those investors with cash and patience there will be some great land buying opportunities available this year.
I believe we are headed toward a new and healthier real estate investing paradigm. The shift will be slow and for some very painful but in the long run we are going to be ahead. So research the new financing options and sharpen your pencils. Real estate will continue to be a great investment for those of us who adjust to the changes before us.
Jeff K. Johnson SIOR CCIM
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