Raub Report July 2014

 

“Where have all the investment deals gone?”   It’s a question that seems to be on investors’ minds these days, as they are looking for places to put their money to work.  Everything they look at seems over-priced and there are not many selections from which to choose.  I believe there are several issues that there are fewer properties on the market at this time, therefore, prices are higher.

• Because of the 2008 financial crisis, very little new construction has occurred in the past 6 years.
• Banks are very reluctant, due to regulators, to finance new construction, especially if there is speculative, non-preleased space involved.
• Owner / occupants are the desired category for banks to finance, not speculative investment properties.  Banks have lots of money but only for very select deals.
• Because so little new inventory has been added, older buildings remain in high demand and thus there is a low inventory of existing properties for investors to analyze.
• Businesses are reluctant to take on the risk of building because of the economic uncertainty, like unemployment, rising interest rate risk, health insurance risk, international chaos, so they stay put.
• Rents remain relatively low, therefore, the cost of new construction doesn’t pencil.
• Rents that justify the costs of new construction are quite a bit higher than businesses are willing to pay, unless they have no choice.
• Investors have been very actively combing the marketplace for “deals” for the past 3 to 4 years, so there are relatively few (no) “deals.”  If someone owns an investment property, they have to know there is another property for them to buy, before they are willing to sell.  A lack of alternatives means a stagnant market.
• Until rents rise, which will happen gradually, the supply of properties will not increase.
• Until lending standards for new construction ease, which will not happen for years, the supply of new properties will not increase.
• Without new building construction, the supply of existing properties on the market remains tight.
• Low interest rates on bonds have driven investors to look for higher yields in other assets, real estate being one of them. Consequently, the drive for income has put more money into the property market, making it more difficult to find good investments.

Nationally, the supply of commercial real estate is expanding at the rate of one percent per year, while the demand is growing at 2%, according to the Manager of American Century Real Estate Fund. So supply will tighten, producing higher rent rates, until there is more capital entering the market to increase the supply. I hope this explanation will help you better understand the market place in which we currently find ourselves.