Wealth Opportunities in Commercial Real Estate by Gary Grabel

Author:Gary Grabel
Language: eng
Format: epub
Publisher: John Wiley & Sons, Ltd.
Published: 2011-09-03T16:00:00+00:00

Dispositions

One of the most crucial decisions in real estate is the decision to sell or hold. You must recognize that if you elect to do nothing, you are in essence electing to hold. If you sell when the market cap rate is 9 percent, and two years later the cap rate is 6 percent, then, unless you had other overwhelming motivations, you sold too early. Conversely, if the market cap rate is 6 percent and then a year later there is a severe recession resulting in numerous tenant defaults and a market cap rate of 12 percent, the investor who is cash-rich, the investor who liquidated his properties, might have had the best crystal ball.

The problem with this discussion is that it is easy to be a Monday morning quarterback; you can always call the right move after the play. The main task is to call where you are in the cycle. If the cap rate is 9 percent, it could go to 12 percent or fall to 6 percent.

In evaluating where value is going to go, part of your analysis should focus on interest rate/cap rate trends. If the yield curve is going up, it is probably going to go up longer than you anticipate. If the yield curve is going down, it probably will go down longer than you thought it would.

Another factor to focus on is the general economy. Are foreclosures up or down? Has unemployment increased or decreased? What is the outlook on bankruptcy filings? Has there been an increase or decrease in bankruptcy filings from last year? The gloomier the economic outlook, the worse things look, the greater the number of people who will be forced to sell. More sellers mean more inventory, more inventory means that for a seller to consummate a sale he must lower his price. Cap rates increase.

Understand, for every completed transaction, there is always a buyer and a seller. What increases or decreases price is when, at any point in time, there are more buyers than sellers or more sellers than buyers. If there are more buyers, then sellers have a bidding war. Multiple buyers push prices upwards. In contrast, if there is a glut of properties on the market then the oversupply will tend to dampen prices. Sellers, in order to compete, will lower their prices so that their property, rather than their competitor’s real estate, is sought after.

Federal Reserve policy is another key indicator of where the market is going. Policy decisions made at the Open Market meetings are very informative in terms of where the Board views the economy trending and, of course, its policy decisions directly affect the trend. If the Fed increases interest rates, capitalization rates should eventually go up and values will decrease. Interest rates affect the cash-on-cash return an investor can derive from his ownership. Interest rates as reflected in T-bills, commercial paper, or bonds are viewed, essentially, as an alternative investment to real estate. An investor can acquire an ownership interest in

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