There are major cross currents at work as of this week which will strongly impact real estate values. On the positive side is the major change in FIRPTA which allows foreign pension investors to not bear the tax under FIRPTA. It is so far unclear if the new law applies to other than "pension" investors and includes institutional investors that are similar to a pension. In any event it should open a huge potential source of foreign capital to investing.

The much more critical negative is the announcement that regulators are forcing lenders to be much more conservative in their underwriting of commercial real estate loans. That is going to have very major impact on values. There is no bank that is going to do any more reach deals where the value they are asked to accept for underwriting is well above a more realistic value as has been the case lately. This will make many deals even more economically unviable than they already are. There has been such a run up in values lately, even in secondary markets, that for those of us who try to be disciplined, there is little that makes economic sense any more. There have been many who lately have said they cannot find anything to buy because they cannot make sense of the prices to which some bidders were willing to go. I have lost three major deals in the past few months because we could not understand how anyone justified the prices being bid for properties in which we were attempting to buy. Now the regulators have finally jumped in as well and said pricing makes no sense anymore and it had been driven by ultra low rates and too high loan to cost. If these bidders who were over paying can no longer get the excessive loans at super low cast, then prices will be forced to come back down to more reasonable levels. Otherwise the return on equity for these hyped values cannot be justified no matter what stupid projections the buyers have been making.

There has been a growing number of very smart sophisticated real estate owners who have been quiet sellers over the past several months. Then there is Sam Zell who sold his residential portfolio. The top as been reached in 2015, and 2016 will likely see a topping off and maybe a decline in real estate values as the regulatory pressure forces lower loans and rates creep up as the year progresses. A double hit to values. Add to this the crash in the junk market. Junk prices and commercial real estate values are well correlated over time, and while the junk crash does not signal a crash in real estate, it is one more canary falling over dead. If you can't see all of these trends building into an end to the up cycle, I suggest you look around and pay attention. The big ups are over. It is time to sell. The big returns have been made already and unless you are willing to go well out on the risk curve as we are with major brown field development projects, your future returns from here are very limited.

Instant Insights /

Time To Sell Has Just Been Confirmed By The Regulators

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