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Posted by2 months ago

Historically, what has to happen for Commercial RE Prices to Drop? Recession? Any other indicators?

As a young investor looking into Strip Malls and Office Spaces, I see these low-enough CAP rates that disincentivize purchasing. I figured if prices drop soon, it’s worth waiting. That being said, what are indicators of prices dropping? When would that happen, if ever?

91% Upvoted
level 1

Interest rate hikes.

Investors won't like a lower spread between interest rates and rental yields. To maintain that spread, yields go up and prices go down.

Rental growth slowing or decreasing.

If you expect lower rents in your business plan, you'll get lower returns. To meet target returns, you'll decrease purchase price.


Lower levels of transactions (by $) often points to a large bid/ask spread. Generally where there are more sellers than buyers. So it becomes a buyer's market as sellers get nervous to sell asap (consider interest hikes and rental growth decrease) and start dropping prices.

I'm simplifying but in a nutshell that's it. You can go into a lot more detail about how each of the three are intertwined.

level 1

Adding: Higher taxes (income, property), lack of availability of financing, zoning changes, PANDEMICS, demographic changes, overbuilding.

level 1

Real estate is local so prices will not drop everywhere. Cre prices are interest rate sensitive and most large assets such as office buildings and malls have ballon debt payments that are never paid off, just rolled over indefinitely for tax reasons.

When you cannot refinance that debt, bad things happen. We have been in a 40 year debt cycle of only decreasing interest rates.

Instead of having negative internet rates, real interest rates (rates minus inflation) are negative since the cpi print that came out was 8.5 percent. So if you have a 5 percent loan your real interest rate is negative 3.5 percent.

So if inflation decreases and real rates rise, be on the lookout for distress.

Even then we will be unlikely to see plummeting asset values because those assets will enter special servicing and the debt will be restructured off market as opposed to a fire sale.

level 2

Sorry to get off topic, but what are the tax advantages of rolling over the balloon indefinitely? I always thought it was for leverage only.

level 1

Supply must exceed demand.


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/r/CommercialRealEstate - Place to discuss Office, Retail, Multifamily, Industrial, Hotel, Land, and special purpose commercial real estate
Created Jun 30, 2009





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