Perhaps one of the biggest questions today is whether market conditions warrant participants in the market being buyers or sellers. From my perspective, a college debating team could have a field day with that question as excellent arguments can be made for both strategies.
With the benefit of hindsight, we see notable periods over the past 30 years when it would have been prudent to take one course or the other (this argument is appropriate for investors who are traders and not generational holders). Clearly, in 1983 and 1984, you wanted to be a buyer of properties in the city and would have wanted to sell those assets by 1989.
Another tremendous buying opportunity was in 1992 and 1993, which was the only period in the past 30 years in which supply exceeded demand (thanks to the RTC) and prices plummeted. Anytime during the extended run-up in values from 1994 to 2005 was a great buying opportunity, and 2006 and 2007 were fantastic seller’s markets.
Years 2008-10 were an obvious buyer’s market, and that leads us to today, trying to figure out whether we will look back at 2013 and 2014 and see that they were obvious opportunities to be a buyer or traders should have been selling.
Today, all product types, in all submarkets, have exceeded their 2007 peak values on a price-per-square-foot basis. For some product types, like land, for instance, values have greatly exceeded their peak. How high will these values go and how long will they continue to rise?
On the “buy” side of the argument is the notion that this cycle’s expansion will last longer than a typical up-cycle because of the sluggishness of the broader economic recovery. Some observers believe that pent-up demand will push underlying fundamentals to elevated levels and we will continue to see unprecedented price levels achieved for the next several years.
Low supply, caused by meager levels of new construction of all property types, will also exert tremendous upward pressure on fundamentals and values, as demand struggles to be addressed.
Lastly, given the relatively weak economy, with no signs of significant traction on the horizon, some participants believe that interest rates will stay low for an extended period of time, making cheap money irresistible to investors.
If these conditions come to fruition, the market will continue to improve, and the commercial real estate recovery will last for an extended period of time.
The argument to “sell” revolves mainly around interest-rate policy. Traders who are bearish on the future of interest rates are net sellers today. To them, it appears that the Fed is going to start tapering its “easy money” policy, which will have a negative impact on interest rates. The higher interest rates go, the higher mortgage rates will go, and the higher lending rates go, the higher cap rates will go. As cap rates rise, negative pressure is exerted on value.
The “sell” argument is also supported by the condition of municipal budgets, even in, and around, New York City. Some current sellers believe that Detroit is just the tip of the iceberg with regard to municipal bankruptcies and defaults. The magnitude of unfunded liabilities and budget deficits will, undoubtedly, create added pressure on municipalities to continue to increase real estate taxes to plug financial holes. This will create pressure on property owners to find ways to increase net operating incomes. Real estate taxes in NYC are exploding, and these conditions are likely to get worse.
Additionally, while nothing is expected on a national level legislatively to negatively impact the market prior to the midterm elections, some participants believe that significant tax reform will come early in 2015. Combined with the true impact of Obamacare and Dodd-Frank regulation, bears believe the economy will regress back into recession sooner than later.
Both arguments are very strong, and the market really could go either way. To a great degree, the decision to buy or sell today should be predicated on the duration of the investors projected holding period. If it is for the very long-term, it is probably a good time to buy, but if the hold period is relatively short, property owners should consider current market conditions as a great opportunity to cash in some chips.