In 2016 commercial real estate deal volume fell by 11% for the first time since 2009! According to a recent Wall Street Journal report, some prominent real estate investors are reducing their holdings and taking money off the table. Who is pulling back? What are the 4 reasons investors are selling now and what can you learn from them? Has the bull market finally run its course?
Asset managers at pension funds, hedge funds, private equity firms and other big investors are selling more assets and shifting to less risky strategies to protect against losses before the next downturn. This has driven the volume of closed real estate loans down by 11% in 2016 and signifies the first drop since 2009.
Why are the big dogs pulling back?
Many asset classes have gotten ahead of themselves, here are 4 reasons larger investors are selling:
- Cap rates: Certain sectors have gotten very lofty in value with extremely low cap rates. In Colorado I have seen apartments trade as low as a 3 cap. This is insane and well below historical norms for cap rates. Many institutional and larger investors are taking money of the table to reduce risk since it is unlikely cap rates will continue declining
- Rising Interest rates: As rates rise commercial property in many cases doesn’t look as attractive. With the recent spike in rates other less risky assets can now provide good returns. Many institutional are using this as an opportunity to reposition themselves into less risky assets with comparable returns
- Supply coming online: Commercial building is radically different than residential building. It can take years for commercial buildings to come online. The new supply coming online now was planned 3-5 years ago. This new supply will put pressure on existing properties lease and vacancy rates. This will ultimately put downward pressure on the prices
- Near the end of the cycle? The rapid increase in commercial properties could be showing its age. For example, according to a REIS report, retail space showed “signs of a correction” with 30 metro areas showing signs of increases in vacancy. In the office market, the absorption rate has also dropped from 2015.
What should you do?
It depends on the particulars of your situation. We all know that real estate is local and what happens in one market might not be occurring as much (or at all) in another market. The first question to ask, are the above 4 items Based on your market, it could be a good time to think about taking profits off the table as cap res are at historic lows.
Don’t worry we are still lending?
Although many lenders are pulling back, Fairview is still going strong. We are privately funded and hold and service our own loans. Since we are unleveraged we have ample flexibility to continue to make loans that make sense. As the next cycle begins, at Fairview we will be there for your financing needs on residential investment properties and commercial properties. Fortunately, we have been through cycles before and we have a strong team that will continue making loans even through this cycle.
Resources:
- https://www.wsj.com/articles/big-investors-cut-back-on-commercial-property-as-bull-market-loses-steam-1486463401
- https://www.reis.com/first-glance-report-downloads
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).