Is it time to invest in commercial real estate again? Put simply, it depends.
Investors waiting for the "blood-in-the-streets" pricing of the Resolution Trust Corp. days of the early 1990s will likely be disappointed by a different type of investment environment. Indeed, this environment is unprecedented in the US and must be analyzed on its own merits.
One, if not the most important, difference is the government’s actions. In the 1990s the response for commercial real estate was to foreclose and dispose. This approach cost tax payers billions of dollars and created havoc in the market. While there is distress in today’s market the governments methods are much different and thus creating new and different buy signals.
An example would be the new revised FDIC policy that allows banks to retain loans on their books that are worth less than their debt provided that borrowers continue to service the debt. This change in policy places a governor on further drastic price declines for healthy cash flowing properties.
This new FDIC policy further differentiates the economic vulnerability and strengths of different types of commercial real estate. For example the short term nature of Hospitality tenancy creates a disproportionate amount of risk when compared to the long term tenant commitments found in NNN net lease properties.
To date poor market conditions and distressed properties have colored investor’s views and market values of all property types creating a potential buying opportunity for well performing assets.
While other commercial real estate assets continue to struggle; activity for credit tenant NNN properties has increased due to their consistent, predictable performance. Attractive asking capitalization rates caused by overall negative market sentiment, a narrowing of the bid/ask ratio, more realistic investor risk premium requirements and plentiful cash appear to be bringing the NNN property market back to life.
The timing for the recovery in the commercial real estate market will vary by property type, future economic/employment shifts and government actions.
By carefully watching the signs for the bottom of the market for any particular property type and acting accordingly astute investors will be able to live the old adage of “buying their straw hats in winter.”
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