Archive for March 14th, 2010

Why Buyers Should Buy Today

Two weeks ago, the title of my Streetwise column was, “Why Would a Seller Sell Today if They Didn’t Have to?” This prompted several emails from readers asking me to address the flip side of that coin which is why buyers should buy today.

The general perception is that prices have either hit bottom or may only slide further by another 5 or 10%. As we’ve discussed in several other columns, the timing of the market approaching bottom will likely coincide with the time that unemployment peaks and reverses its trend. Job creation will have a positive impact on our fundamentals and will exert upward pressure on pricing.

There are several reasons why buyers should want to be active today.

Low Supply: The supply of available for sale, particularly in New York City, is never very high. The average holding period here is about 40 years as the average turnover rate, over 26 years, has been only 2.6% of our building stock. This average declined to 0.87% citywide in 2009.

As supply is always low, there is never an abundance of properties to look at. So, if a property is available for sale today, a buyer may want to take the opportunity to act if it is an asset that they consider “core” (for them which differs from investor to investor) as that asset is not likely to be available in the future when the buyer has perceived the market to have bottomed out.

It is Nearly Impossible to Call the Bottom: After all, we only know that we have hit bottom after we are past the bottom. Some investors feel optimistic about the market moving forward, and believe we have already hit bottom. Fearing that they may miss the buying opportunity, they are deciding to jump in today to take advantage of market conditions.

Inflation: With the U.S. Government having doubled the money supply of the country in 2009 (the increase was greater than the aggregate increases over the last 50 years), many investors feel that inflation is likely to follow. During an inflationary period, hard assets are assets of choice as their value will rise in conjunction with inflation. Commercial real estate is a particularly attractive hard asset under these circumstances. The key would be to buy the hard asset before inflation kicks in, locking in long-term, low-interest, fixed-rate debt. As inflation kicks in, it would drive up the value of the asset and the advantageous debt terms create an even better performing investment.

If we are not at the Bottom, we are Very Close: Another reason to buy today is because if we are not at the bottom, we are certainly close to the bottom. Nationally, investment property prices are down 30% to 40% depending upon the marketplace. In New York City, average prices are down 31% from the peak. Whether prices go down another 5% or up another 5%, will it really matter to the long-term investor whether we are slightly above the bottom or not?

It is impossible to accurately time the bottom of the marketplace. If we use an equity market analogy, when Citigroup stock hit $1 per share, if an investor was only willing to pay 95 cents and decided not to purchase because they thought the stock would fall farther, would that investor really care if they had purchased at a $1 with today’s price of $3.92?

One of my very good clients, who has been investing in commercial real estate for over 20 years, told me that his biggest regret is that he did not buy more aggressively. He said he should have offered more for the properties he bid on because, as a long-term investor, it really didn’t matter if he paid a little more.

Values are Likely to Hit Record Highs in a New Peak:  A secret to success in commercial real estate investing is to simply be able to hold-on until the next cycle kicks in. In every new cycle we have seen a new peak in value significantly in excess of the prior peak. The overwhelming majority of participants in the marketplace believe it will be no different this time, particularly in the real estate sector.

The Savings & Loan Crisis in the early 90’s was precipitated mainly by over-speculation and over-building in commercial real estate. When the market rebounded, it rebounded significantly higher than the value levels we saw in the mid to late 80’s.

We entered this cycle without the massive speculative construction that we had before the S&L crisis. Our present crisis was not caused by the real estate industry although commercial real estate has been a casualty of this crisis. Therefore, our fundamentals were in much better shape going into this crisis than it was as we entered previous downturns and it is expected that, when the market does recover, it is going to skyrocket to new heights not seen in the past.

There is still uncertainty in the marketplace, but, after all, that is what makes a market. If everyone knew everything and everyone agreed on everything, the market would be a fairly boring place. Commercial real estate investing has risks associated with it, but, for those who want to be in the game, buying today should prove to be very lucrative over the long-term.

Mr. Knakal is the Chairman and Founding Partner of Massey Knakal Realty Services in New York City and has brokered the sale of over 1,050 properties in his career.

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