Why you should buy commercial real estate in 2014







Why should you buy commercial real estate in 2014?  The impact of the financial crash of 2008 seems like a distant bad memory.  The broader economy is recovering to a more normal pattern of growth.  Unemployment is steadily ticking down.  The stock market is up significantly this year, the Fed is getting ready to discontinue its historic bond buying binge and the Commercial Mortgage Backed Security (CMBS) industry is back on its feet predicted to issue $65 billion in mortgages by end of year 2013.  With financing becoming a little easier to come by what will 2014 bring for those investors and business seeking financing for their commercial real estate acquisition?  Wall Street participation via the CMBS market is critical to the continued recovery of commercial real estate.  Prerecession CMBS loans totaled $400 billion annually and are expected to eventually match prerecession levels.  This pool of capital will not only increase available credit via direct loans, but created tremendous liquidity for traditional banks.  Being able to sell portions of their loan portfolio enables these front line lenders to free up capital that was previously locked up.  While I do not believe that we will see a return to the “bad old days” credit parameters will continue to become more flexible and loan terms better for borrowers.  Lenders will compete harder to win deals and the winners should be the borrowers seeking more reasonable terms.  We are already seeing some lender’s offer LTV’s of 80% for owner / users in our market.  For those borrowers that will occupy 51% or more of the acquired real estate SBA loans of up to 90% are widely available.  If investing in your business garners returns greater than the rate paid on your real estate loan the addition capital left in the business will create positive leverage, while still permitting the business owner the ability to build equity and long term wealth.

With the general economy continuing to recover, small-business owner’s confidence should grow with improved sales and profitability.  In a previous blog I referenced the low number of construction starts for commercial office and flex space and as a result rental rates are increasing across all types of space.  Investing in hard assets such as commercial real estate now, locking in debt and favorable terms for the next 5-15 years will allow business owners to gain long term control over their occupancy costs.

The window of opportunity to purchase real estate will not get much better than the conditions that we are experiencing today.  Rates are still relatively low by historic standards and acquisition prices are still reasonable.  If some economist are to be believed the enormous amounts of cash that the Federal Reserve has pumped into the economy the last 4 years is likely to lead to higher than normal inflation rates over the next 4-10 years.  Fixing a large portion of their occupancy expenses will give small business owners much greater control over occupancy cost moving forward; and may offer the added benefit of paying back long term loans with inflated dollars.  This scenario played out in the late 70’s and early 80’s.  Are we on the cusp of a repeat of that run up on hard asset prices?

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