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7 Concerns for Commercial Real Estate Investors In a Volatile Market
It appears that the CRE industry is entering a period of high volatility with the Fed promising to raise interest rates, soaring inflation, the war in Ukraine, and a possible recession occurring later this year due to this high inflation, especially in food and gas prices.
The CRE investment process is a multifaceted procedure to analyze, acquire, finance, manage, lease, and sell a commercial property. There are many steps in the process from evaluating a broker sales package, to analyzing the market in which the property is located, touring the property, raising the appropriate amount of debt and equity capital, closing the acquisition, and managing and leasing the property. Each of these steps is critical to a successful CRE property investment. CRE investment is subject to many risks that were ignored during the last six or seven years due to the buoyant market. However, in this tumultuous environment, there are several concerns that investors should reevaluate to assure a successful investment.
1. Acquiring Properties at Low Cap Rates
Acquiring CRE at low cap rates is one of the biggest sins that an investor can commit. Today, many apartment and industrial properties are trading at sub 4.0% cap rates. This is due to artificially low interest rates, an abundance of capital looking for CRE investments as an inflation hedge and strong fundamentals. In acquiring commercial real estate assets, it is more important to buy a good asset at a great value than a great asset at a good value. The most important criteria in a successful real estate acquisition are to buy the asset below its intrinsic value. Buying a CRE asset above its value or at a low cap rate, is rarely, in the long term, a route to a successful transaction.
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