RU² / December 18, 2018
Property Values
There are three distinct periods of commercial real estate ownership:
- Acquisition
- Operational
- Disposition
Each stage is equally important and requires planning & execution. Acquisition is dependent of quality underwriting and operational is dependent on quality management. Disposition on the other hand is more dependent on the overall market than anything ownership can directly control. No matter how well a specific property is positioned in terms of its performance & property desirability its true value at disposition will be based on what buyers are willing to pay in the current market. As a rule buyers pay more in a low interest rate environment vs a high interest rate environment due to the simple fact that they benefit from lower debt service which in turn produces a higher cash-on-cash return. In a low interest rate environment cap rates are compressed and valuations are elevated. The inverse is true when interest rates rise.
Over the past 24 months sellers have benefited from the historically low cap rates that are associated with the historically low interest rates courtesy of the Fed’s stimulus plan. When the Fed begins to taper back their bond buying then interest rates will rise and cap rates will follow suit. As a by-product in this cycle, property values will fall.
There are certainly ways to help prepare a property for sale such as:
- Making a thorough property inspection and any necessary repairs
- Working hard to maximize occupancy & rental rates
- Cleaning up receivables
The above are prerequisites to putting your facility on the market but they don’t have nearly the economic impact that interest rate & cap rate changes do. Even the greatest economists can’t predict exactly when and to what level that interest rates will change. But what everyone can agree on is that given the historically low interest rates over the past 24 – 36 months and with the Fed making statements that they will begin to taper their stimulus plan sooner than later that interest rates will go up at some point. So if your disposition strategy calls for you to sell in the next several years you may want to obtain a current valuation of your property and take a strategic look at accelerating your disposition date in order to capitalize in on the current market which has pushed property values to all-time highs.
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