Investment Real Estate - December 2005
by Bill Gladstone, CCIM, SIOR

The investment real estate market still seems to be turning out quite a bit of buyers looking for any kind of a deal and sellers looking to cash in on the high prices that are now commonplace in the market. Prior to this latest buying spree of people looking to place 1031 money, it appears that the cap rates have somewhat stabilized between 7.5 percent and 9.5 percent for stable to more risky investments, respectfully. Over the past several years, so many buyers have shown up on the scene (primarily due to low interest rates) competing against each other for the deals that are out there. This has driven the cap rates lower than ever. Drug stores in our market, when sold, are selling in the 7 percent cap range. Someone approached me on a deal the other day regarding a restaurant that somebody was buying on a 5 cap. You might think that at this number, they would prefer to put their money in long term treasury notes, and although the rate might be slightly less, the risk would be much reduced. However, the need to not pay capital gains tax was obviously there, otherwise there would be no reason to do this deal. The return on that deal is minimal for the risk involved - however, no capital gains tax would be due on the relinquished property.

It continues unabated as more people clamor for more deals and the cap rates are pushed further down, forcing the push in value of investment properties higher. 

I have one now that is approximately 130,000 SF of flex space that I am pricing for someone. It might be better to sell after we have a couple of tenants to fill the vacant spaces. But with those tenants and new five year leases (as long as those tenants are credit rated) my recommendation to the owners was to price it so that will sell in the 7 percent cap rate range. That is still a good return, and certainly one and a half to two points what it would sell at two years ago if everything else was comparable to the way it is today. Thus perhaps a new market trend has been established as people hunt for investment properties. 

As interest rates rise, and the demand is not as great, the supply will increase and the cap rates will be pushed higher. When will that happen? I really don’t know, but the market is cyclical and I would expect that within the next two to three years we will at the top of that cycle.

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**Featured in the December 2005 edition of the "New Properties" email.

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