Value May be Topping Out For Now
Recent stats suggest the real fun may be coming to an end. It appears the since may CRE values have begun to flatten or even decline slightly. It would seem this is due to a combination of things and may be more than a short term blip. Interest rates are rising over time and are up by around 100 basis points since the bottom several months ago. While rates have seemed to flatten for the moment, there is no question they will be rising over the next few years and the ten year could go back to its more normalized levels or 5% or even 6% eventually. There is no certainty that the fed will unwind QE in a good way, and the flood of capital in the system is very likely to trigger inflation and possibly higher rates in a few years. If Yellin gets the position, then she is likely to be in favor of continued easy money. It is unclear what Summers will do. However, economic theory strongly suggests that such a flood of liquidity in the system will eventually create an inflationary push up. That means more pressure on rates than would occur only form the normal improvement in the economy. As rates rise, cap rates rise accordingly and so there is downward pressure on values. When and how much is the great unknown.
The distress in the system is largely dissipated or moderated, so the number of foreclosures and deeds in lieu are greatly lowered and most owners have lost their assets or done modifications that will likely get resolved in a way that does not dump a lot more assets on the market at distressed pricing. The servicers are working through the pile of assets they did take back, and are not just dumping assets at this stage.
Sellers now are in much better financial shape and are no longer separate to sell or raise rescues capital, and dumping assets into bankruptcy is no longer a common routs for owners. They have now achieved enough cash flow to make debt service, or to at least make their extend and pretend debt service. In fact, things have now reached the point in the recovery that selling at full price is probably a good strategy for many investors.
It is time to reassess your buy or hold position, and in some cases to consider a sale of assets. Blackstone is doing that as are some other large fund firms. They have reaped the bulk of the upside and it is now time to take cash off the table. If you are a long term investor then you should be locking in low cost debt today before it becomes 50 basis points higher or worse. There is no panic to do so but it is unlikely you will save money over time by floating and hoping to catch the timing just right.
Given the fiscal mess in Washington, the continued push by Obama and the Dems to raise taxes on you again, and the tax reform issues now being discussed which, if they ever pass, will eliminate some or all of the sacred deductions we all love, you could find your after tax proceeds greatly inhibited in a few years. There is no way to know. What you do know is Obama is not in favor of you getting all those tax breaks, the EPA has a lot more regulations coming, and the future impact on values is hard to know. Add to that the mess in the world and uncertainty is still the order of the day.
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