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There’s Still Time to Capitalize on High Commercial Property Prices and Low Cap Rates

April 8, 2020

Coronavirus-covid-19-impact-on-the-chicago-real-estate-market

The disruptions from COVID-19 [CRE, Post-COVID] continue to impact the financial and commercial real estate markets, with plenty of unknowns in the coming weeks and months. As a result, it can seem daunting to even think about making a move. If you have been considering selling your commercial property or properties, however, there are several reasons that you might take action now rather than waiting for the shock from the pandemic to wear off.

Factors in Favor of Selling a Commercial Property Now

There’s a limited window of opportunity before the market digests the full impact of the pandemic. Here are five reasons why now might be the time to sell:

• Comparable sales over the last year are high, and these will drive valuation, short term. Prices in commercial real estate have been steadily rising in the past several years. Buyers are going to buy, and lenders are going to underwrite, for the most part, on that historical basis.

• Cap rates are still very low. The higher pricing over the past several years translates to low cap rates, which are an indicator of lower risk. We expect cap rates to steadily rise, and pricing to decrease, accordingly, in the near term. Selling now enables a seller to get ahead of the market.

• Tenant renegotiation requests will be coming soon. With COVID-19 hitting everyone’s bottom line, you can expect that tenants will be seeking ways to decrease their expenses, across most asset classes—and they will have significant leverage. Rent roll adjustments will decrease your NOI, resulting in lower pricing down the road. Selling now enables a seller to work off of historical financials, with higher NOI.

• Being a commercial property owner wasn’t what you expected. It’s quite possible that, when you bought, the market was great and you had a cash-flowing asset. COVID-19 is a game-changer. You may have lost tenants or you may be seeing some delinquency.

• Owner occupied and single tenant net lease properties are still in high demand, particularly with 1031 (tax-deferred) exchange buyers. There are plenty of opportunities to structure sale leaseback and net lease deals where there is a single tenant or occupant on site.

What Should You Do If You Want to Sell a Commercial Property?

As with all property transactions, there is no perfect time to buy or sell commercial property—nor is there any single metric that can determine when it’s right to make a move. Having a strategic plan in place can help you guide your decision making, for now and into the future, in any type of market.

The first key step is to get a valuation. If you are interested in getting a broker’s price opinion on your property, along with some strategic advice, contact R.O.I. Properties at 602-296-7655.

Looking to purchase a commercial property? We will address that topic in an upcoming blog. Stay tuned!

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