VOL. 119 | NO. 49 | Friday, March 11, 2005
Changing Market Concerns Some Commercial Investors
Commercial Sales Feel Economic Impact
Interest rates, cap rates fueling real estate activity
The Daily News
With interest rates holding steady, commercial real estate activity
also has continued at a steady pace. But some believe fear of rate hikes could
lead more commercial property owners to sell, taking advantage of prices before
the market cools off.
Nationally, sellers are rushing to list commercial
properties before the market softens, according to a recent Wall Street Journal
report. But so far, that scenario doesnt seem to be playing out in Memphis.
I think its impossible to categorize all buyers in one
fell swoop, like sellers are rushing to put their property up, said Steve
Guinn, vice president of Highwoods Properties. I
would say some sellers in some select markets are doing that, but theres no
nationwide stampede of people putting properties on the market.
Memphis market. A
total of 872 sales of improved property took place in 2004, compared with 857
in 2003, according to Chandler Reports, www.chandlerreports.com. But the
increase seen in 2004 has not been reflected thus far in 2005.
February saw 29 sales, down from 57 in January and 65 in
December, according to Chandler Reports, which is owned by The Daily News
I dont think its a mad rush that everybody wants to
sell, said Mark Halperin, executive vice president-office
for Boyle Investment Co. I think certain kinds of sellers are, but a lot
arent. (Capitalization) rates are relatively low, and people that are
interested in possible rearrangement of their assets accurately pick this as a
pretty good time to sell. But people that are in the business for the long haul
are not necessarily selling.
Cap rates. Properties that are listed in coming
months probably will be driven in part by cap rates, the net operating income
divided by the sales price or value of a property expressed as a percentage.
I dont think its people rushing to place their (properties)
on the market because they fear that interest rates are rising so much as it is
that capitalization rates are at a historical low, said Joel Fulmer, senior
vice president-industrial for Boyle and president of the Memphis Area
Association of Realtors Commercial Council. The lower the cap rate, the higher the price, and they have reached some historical
Feeding frenzy. Jim Beaty, senior director of commercial mortgage company L.J.
Melody & Co., agreed, noting that with the low cap rates, borrowers are
getting all-time high prices for their properties.
That is really creating a feeding frenzy in terms of an
investors appetite, he said.
And Beaty said activity being
spurred on by the historically low cap rates is unprecedented.
My business on the financing side is all driven by
transactions, he said. Very little of it is driven by refinances. The pace of
activity in commercial real estate is probably more robust than Ive seen it
since the tax law changes in the early days of the Reagan administration. That
created a huge amount of transactions in commercial real estate and this is, in
my opinion, just as robust but based on more solid real estate fundamentals.
Why sell? While interest rates often play a role in a
property owners decision to sell, Guinn said its only one factor.
Usually a decision to sell a piece of property is a fairly
reasoned decision that involves timing, and part of that timing is where are interest rates, Guinn said. And usually when you sell
a property, you want to put financing on it, so youve got to be cognizant of
whats happening there with financing rates. But you also have the market its
in, how old it is. There are a lot of factors that go into a decision on
selling a building.
Dan Wilkinson, president of Colliers, Wilkinson &
Snowden, said the market has been active for several years now, but in general,
he sees interest picking up among investors looking to sell industrial
There are several other people contemplating bringing
portfolios to the market, he said. So there continues to be a lot of
Not yet a factor. An increase in interest rates could
have an effect on that activity, but probably only if its a major rise.
Most of these buyers are cash buyers looking for a return
on their investment with incredible amounts of cash to spend on investment real
estate, Wilkinson said. So the interest rates spike, if it keeps going up, Im
sure it will become a factor. But it really hasnt become a factor at this
For property owners with plans of selling in the next few
years, it might make sense to go ahead and sell. And fear of cap rates inching upward
is causing retail property owners to take a hard look at the market.
I think in general, most developers believe that rates are
likely to rise here before too long, and it probably makes sense to get out, at
least if they want to get out in the next few years, said Scott Barton, vice
president of retail services for CB Richard Ellis. It is the projected
increase in cap rate, specifically, that is causing people to make the decision
to want to sell now, as opposed to continuing to hold. The perception is that cap
rates are about to rise, and thats caused the real frenzy that exists now.