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
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