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Why Now Is The Best Time To Buy Commercial Real Estate

March 17th, 2011

For the past year or so, there has been a tremendous build up of capital by hedge funds, opportunity funds and other vulture investors who looked into their crystal ball and saw blood in the streets for the commercial property markets. Today, most of that capital is either still on the sidelines, being returned to investors or revising investment criteria to lower investors yield expectations. Just as values for commercial property overheated from 2005 through 2007, buyer expectations for picking up “fire sale” bargains when the distress hit in 2008 were unrealistic. Of course, all tumultuous economic events create opportunities and this market is no different. The “smart money” is now re-entering the commercial real estate market and seeing buying opportunities based on historical fundamentals with a (relatively) long term view. While “get rich quick” scenarios such as buying a distressed asset and “flipping it for a quick profit” always attract mass appeal, the most successful real estate entrepreneurs in history view income producing real estate as an investment, not a speculative hit and run.

Consensus is growing that the market value for commercial real estate assets is at or near a “bottom” and prices have begun to stabilize. In major markets across the United States such as New York and Washington DC, rents and property values have actually begun to appreciate again. Seasoned investors are beginning to deploy investment capital back into quality commercial properties based on improving fundamentals and long term prospects for economic recovery. A few key points that must be considered:

  1. The most important factor to consider when investing in commercial real estate is the length and durability of the revenue stream it provides. The physical attributes, while important to consider, are secondary to the return you can expect to receive on your investment. Cap rates and cash on cash returns for investors have improved significantly through this downturn and all indications are that these yield metrics are stabilizing. The current 10 year Treasury yield is hovering around 3.2%; Certificates of Deposit  are paying less than 2% and Money Market Savings accounts are paying fractions of 1%. A high single digit or even double digit return on investment, with real prospects for equity growth, is very attainable in commercial income producing property depending upon the risk tolerance of the investor.
  2. As the credit markets begin to loosen, banks, credit unions and life insurance companies are beginning to cautiously fund loans on commercial real estate. While high leverage deals remain taboo in the market place, 60% -70% loans to value at historically low interest rates certainly bolster the attractiveness of many commercial real estate investments. There is a growing sentiment that interest rates have no where to go but up and when they do, it will be more difficult to make deals work. Prudent use of leverage is a key to maximizing the returns on commercial real estate investments and now is the best time to take advantage of these very attractive rates.
  3. Investors who utilize 5 to 10 year hold strategies should experience significant equity growth as the economy improves. As people get back to work, business expands and consumers begin spending again, commercial real estate fundamentals will improve as well. In addition, with lower borrowing costs as stated above, loans will amortize more quickly and cash flows will be more abundant.

There are many other factors that make now one of the best times in recent history to be an investor in commercial real estate. With a focus on true fundamentals and long term prospects for growth, opportunities can be found across all property types and market segments.

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