We have been experiencing an unprecedented buyers market with a steady flow of new developments which were all made possible by a period of historically low interest rates. Although that time may be nearing an end, that doesn't necessarily mean that sales, developments, and opportunities must temper along the way. While the Fed recently announced its third-straight increase of 75 basis points, comparatively, buyers are still in a strong position to leverage their assets once market pricing inevitably corrects itself. (see graph)

While rates are slated to continue increasing over the next six to twelve months, this will put heavy downward pressure on pricing. In recent years, the seller has become accustomed to record high prices and it is not uncommon to see properties trading at sub-4 Cap Rates. Pending a brief adjustment period, I believe we are entering a much more evenly balanced market as commercial investments will no longer pencil with double (or even triple) the debt service. The debt coverage ratio will play an integral role for several reasons. Banks may have the authority to call a loan should the ratio fall below a preset threshold, which is why leasing and occupancy is very important right now. Likewise, property owners with loans coming due looking to refinance may find themselves in a position with negative cashflow given current interest rates, low occupancy, and inflated op.ex.

These conditions set the stage for more properties coming on the market for sale at more balanced pricing. There is just as much, if not considerably more, opportunity in transitory markets such as this. As properties begin to trade at a lower value, this opens up room for future appreciation, but it may also require some adjustment on the buyers-side. The outmoded strategy of highly leveraging assets and SBA loans with 10% down will likely be replaced with higher down payments to achieve the same effect. Buyers must also be more defensive in their buying efforts - taking into consideration conservative projections of each individual market, occupancy, debt coverage, etc. As a long-term strategy, buying during these 'swing' markets may be the smartest time to buy and there will be plenty of opportunity to do so. I would encourage anybody interested in having a more in-depth discussion regarding real estate and interest rates to contact me.