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VOL. 119 | NO. 49 | Friday, March 11, 2005

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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 Publishing Co.

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 lows.

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 properties.

There are several other people contemplating bringing portfolios to the market, he said. So there continues to be a lot of activity.

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 point.

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.


PROPERTY SALES 32 176 2,507
MORTGAGES 26 101 1,687