In balance, do most of the people that you deal with feel like the US Commercial Real Estate Market is a) softening to the point that better value opportunities are available, or b) has a long way to go before any real value opportunities are out there - therefore today's value opportunities will look like Fool's Gold when we eventually bottom out?
Anonymous
Dear Anonymous,
In Los Angeles, multifamily investment opportunities in reasonable neighborhoods are priced so high, that prospective buyers putting 35% to 40% down, would not likely enjoy any free cash-flow, and would have to rely solely on capital appreciation for financial gain. The same can be said for other classes of real estate, such as office and industrial properties in the same sub markets.
This market environment implies that buyers, have been willing to forego free cash flow and in some cases, accept negative cash-flow, in order to benefit from the real estate boom.
Admittedly this somewhat risky strategy has worked very well over the last decade, as many speculators successfully maneuvered in and out of the roaring real estate market. However as the market slows and capital appreciation grinds to a halt, investors will likely shift their focus to cash-flow, rather than capital appreciation. This shift will force sellers to lower their expectations, in order to sell their properties as income generating investments, with attractive returns.
Coinciding with this market shift in investor sentiment, interest rates will likely trend up from their current low. Not only will this put additional pressure on free cash-flow, resulting in significant price erosion to the asset class as a whole, but such a scenario will likely slow our economy. This will cause vacancy rates to rise, thus further eroding the attractiveness of real estate, relative to other asset classes.
Having said all this, the long term prospects for well located real estate, is very promising due to population growth. This will be especially true in areas with large employment opportunities. Because of this, there will be tremendous investment opportunities in real estate, when prices finally realign with fundamentals.
The value opportunities will occur, when investors are adequately rewarded with healthy positive cash flow, for holding real estate in a volatile market. However this will not likely mark the bottom of the real estate cycle, as the market will likely over correct.
It is impossible to know how close we are to the bottom of this real estate cycle, however, all the 'flip this house' style television shows will likely have to be canceled, due to a declining interest in real estate, before the market can bottom out.
Alexander Bermudez
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