Tuesday, August 26, 2008

Commercial World

I spent the last six days in Chicago at a commercial real estate conference. It was a great event, and I got to spend time speaking with people that are currently involved in the business buying and selling buildings. I took away some common themes from the event that most people were discussing:

1. Credit is getting tighter

Most of these people have been in the business for many years and have a significant net worth. Many of them are having credit lines withdrawn on their properties in upwards of $500,000. Banks are cutting back home equity and property lines making it much tougher for borrowers to pull money out of their current properties to buy new ones.

There is very little money for properties that are not stabilized and producing positive cash flow. Land development capital has been shut off for about 10 months, but what is starting to turn off is money for available buildings with higher vacancies. The sellers of these buildings of course understand this and are being much more flexible/creative in negotiations to get deals done. This is presenting opportunities right now for buyers who have significant cash or have the experience to creatively put together deals.

2. Retail and Office are dangerous

We are at the point right now in this country where the consumer is tapped out and business is contracting. Consumers have been shut out of their home equity lines, the cost of living is rising, they have no savings, and they have now turned to the last option: Credit Cards. There has been a surge in new business from the credit card companies the past few months sending their profits temporarily higher. Unfortunately, the borrowers don't have the means to pay back the money they are borrowing and all these temporary profits will turn into massive losses. At that point, just like with housing, the credit limits will be withdrawn and the average American will finally be done spending. Retail sales are going to retract significantly, thus presenting great opportunities down the road to buy buildings dirt cheap.

3. Cap Rates are still too low

This was not as common as the first two, but it is one that I personally believe. Because the Fed continues to keep interest rates artificially low, money has continued to flow into commercial real estate simply because there is no attractive alternative right now. I believe that as interest rates are forced to rise, and credit continues to tighten, money will move out of the sector bringing cap rates up. (When cap rates rise, property values fall) This again, will present tremendous buying opportunities that are on the horizon.

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