COMMERCIAL REAL ESTATE INVESTING
THE PERFECT STORM
The Commercial Real Estate Cycle
RECESSION
INCREASED
DEMAND
Best to time BUY
Market fundamentals at lowest point:
High vacancies, negative or flat
rental growth, high cap rates
n
o
ssi
Good to time BUY
Rec
o
Improving market fundamentals:
Reduced vacancy rates, more
balanced rental growth and
stabilized cap rates.
Financing more available
y
ver
Rec
e
Financing becomes scarce
CRE out of favor as an
investment alternative
RECOVERY
RECOVERY
TRIGGER
More optimism for CRE
E X PA N S I O N T R I G G E R
HIGH DEMAND
Co
n
t
r
Decreased property values
Exp
Overbuilding causes
increasing vacancy rates,
slowing rental growth and
rising cap rates
ion
ans
H I G H S U P P LY
ion
t
c
a
RECESSION TRIGGER
Obtaining financing is more difficult
and/or expensive
CONTRACTION
Strong
market
f u n d a m e nt a l s :
low
vacancies, high rental
rates, high property values,
decreasing cap rates
Financing readily available
New development
CONTRACTION
TRIGGER
EXPANSION
INCREASED
S U P P LY
Good time to SELL
Levy Strange Bef fort
Best time to SELL
OKLAHOMA CITY
405-840-1500
TULSA
918-481-3200
ONLINE
ngkfok.com
Commercial Real Estate Investing
THE PERFECT STORM
Three Reasons to Divest your Commercial Real Estate Holdings
1
Expectations of Rising Fundamentals. People are willing to pay top dollar because they expect values to continue to rise. Buyers
are willing to purchase properties at a lower cap rate because they believe that the high demand will allow them to increase a property’s existing rental rates. Higher rental rates will increase the property’s annual revenue and by doing so, raise its value. Buyers
believe that demand will continue to outpace supply (despite new product added to the market) due to Oklahoma’s strong economy. The
challenge for the owner is identifying the optimal time to sell that will achieve top dollar.
Do you sell now while demand is high or do you wait to see if property values continue to increase in the future? Will the new development outpace demand and cause an over-building in the marketplace and decrease property values? Or do you hold because you’re not
confident about reinvesting funds into an equal asset? Does it make more sense to refinance and take advantage of low interest rates?
(Refinanced proceeds aren’t taxed as income.)
2
Compressing Cap Rates. Cap rates reached high levels during
2009 and have slowly been decreasing over the past five years. As
the Federal Reserve prepares for its eventual winding-down of the
Quantitative Easing program, increased interest rates may lower CRE property values. Capital market factors as well as local real estate drivers will also
be extremely important in determining the impact to cap rates.
3
US Compressing Cap Rates
9.00%
8.50%
8.00%
Increased interest from local and out of state buyers (individuals,
funds and REITs) who have lower return targets. Recent examples
include:
7.50%
7.00%
6.50%
6.00%
'08
'09
'10
'11
'12
'13
'14
• Industrial. Out of state companies such as Becknell and Orton
Office
Industrial
Retail
Apartment
Development have entered Oklahoma’s booming industrial market. GVC
Source: Real Capital Analytics
LLC purchased the Green Valley Center in Tulsa and is planning substantial improvements to the property to decrease vacancy. Many local developers are also expanding their portfolio; speculative construction is often leased prior to completion and several developed land-lot
industrial parks were entirely sold in less than a year. Hobby Lobby recently announced plans to build an $88 million, 1.9 million square
foot warehouse near its corporate campus in Oklahoma City.
• Apartments. In 2013, Greystar Real Estate Partners purchased four former Legacy apartment complexes in Oklahoma City for
more than $151 million. Trilogy Real Estate group has acquired three apartment complexes in Oklahoma since 2011. Development
continues in Tulsa with completions including 284-unit 98 Apartments in Owasso and 24-unit Enclave at Brookside.
• Retail. An Ohio-based REIT recently purchased the Classen Curve retail center, Nichols Hills Plaza and neighboring properties from
Chesapeake. Chicago-based Inland American REIT purchased Bryant Square Shopping Center for $38.1 million. TKG, a Missouribased investment team recently purchased the 345,000-square foot Smith Farm Marketplace in Owasso. Wheeler Interests, a Virginiabased real estate firm completed two sale and leasebacks with Reasor’s in Jenks and Bixby.
• Office. While many players in OKC and Tulsa’s office market are locals, interest is increasing from out-of-state investors. In OKC David
LeNorman recently purchased two more properties at Gaillardia and several build-to-suit projects are underway including OG&E and
Linn Energy. Tulsa developer, John Bumgarner, is working on a 51,000 SF office addition at the Utica Place complex.
Levy Strange Bef fort
OKLAHOMA CITY
405-840-1500
TULSA
918-481-3200
ONLINE
ngkfok.com