Well, the 10-year yield finally did something that should be discussed.  We have been stuck in a trading range going back to the last week of June (take a look at the red line in the graph below).  The top end of that range held steady until this past week.  Now the new support line (in green) is around 2.925%; and the upward resistance (blue line) appears to be a bit above 2.975%.  Great, Marty; so, what does this mean?  Okay, I will take a shot at where we are in the commentary below.

Big Picture:  Commercial Real Estate and the Economy

First of all, I tend to look for the obvious when looking at markets.  There are many talking heads out there with advanced degrees that are far more eloquent at making prognostications.  Let’s get back to where we are currently with respect to the economy and CRE.

• GDP just came in rather high
• Foreign money is not flowing into US CRE as fast as last year
• Interest rates are on the upswing with more increases from the FED coming
• We are late in the economic expansion and we are due for a recession.

Since I view commercial real estate on more of a national level, it is easy to argue that the SF Bay Area remains an enigma.  However, step back and see if the logic I present makes sense.

Now, commercial real estate from a long-term perspective typically performs very well with smart acquisitions.  Certainly, one can improve returns by solving problems.  Looking at the bullet points above, then it makes sense to be quite careful now if you have less than a 10-year hold for your new purchases.  Fix and flips just will have a lot more risk unless you really have a formula for turning around an underperforming asset.

Sometimes, for those of us in the Bay Area, we tend to see things only through our own prism.  The Realtors keep saying there are very few properties to exchange into.  And, that is true if one must buy in the local corridor.  But, if you are willing to look to the rest of the US, then there are cash flowing properties in multi-family, industrial, NNN, etc.  And these have good returns with more reasonable capitalization rates.

Assuming interest rates increase and we hit the recession in around two years, then I believe we will see cap rates rise (implies the price of commercial real estate will drop).  Again, this will affect those with shorter term investment objectives.  For clients purchasing now, be open to less leverage.  That way you can be more insulated should your rental income diminish during a downturn.

I share all of this so that you can have informed discussions with your clients.  Some of them will want to rotate out of the Bay Area and into better cash flowing properties.  In effect, they may want ways to protect the equity they have built up through the years in their investment properties.

Others, who have much of their wealth tied up in their personal residences, will want to examine how they can protect that equity growth.  I suggest going back to my old article on “How to turn your home into a 1031 Exchange.”

Every market cycle offers different opportunities.  We still have foreign money seeking properties in the US (just at a lesser amount than before).   Each client has their own unique goals and objectives.  Put the right advisers in front of your clients and you will be seen as an informed and valuable resource.  Take a bit more time to delve deeper with your clients, pay attention to their concerns, and I believe you will prosper in any market.

​Investments Opportunities for Purchase with Strong Cash Flow:

Back on the January 15^th update, I wrote about “Creating Residential Listings Using Commercial Opportunities.”  Each week,  I am presenting some of those investment opportunities to better educate all on what is actually available.  Note that these are all Single Tenant Net Leased properties that have listed in about the last 10 days.  In addition, I assumed a 5.25% loan with 50% down.  This is just a small sample of what is actually available.

If you assume investors in the Bay Area are getting a cash flow of 3.5%, then you can see the potential improvement with these properties above.  This approach is great for the investors desiring increased cash flow, an opportunity to get out of daily property management, and/or taking the challenges of rent control off the table.  Should you wish to discuss any of these or others, then give me a call.