The last two years have been challenging to say the least. Conditions across the commercial real estate market have been shifting as investors battle everything from the uncertainty surrounding 1031 exchanges to a shortage of quality on-market supply. Effects of the COVID-19 pandemic continue to linger, influencing remote versus in-office working, supply chain issues, additional e-commerce growth and reliance, labor shortages, inflation and demand for logistics-related and essential retail investments. In this dynamic environment, one of the most frequent questions investors are asking themselves is, “how do I know if this is the right time to sell or hold?” While there’s no crystal ball to see what 2022 holds, there are a few factors impacting the market today that can help real estate investors make the right decision for their unique situation or long-term strategy.
Enthusiasm of Selling in a Frothy Market
The market is currently seeing very robust levels of investment and demand across multiple sectors, geographies and property asset classes. Pent up demand and lack of supply, paired with the threats of increased interest rates and capital gain taxes, have created an emotionally driven environment. Bidding wars, full price offers and record low cap rates are becoming the new normal, but this has opened the doors for many investors looking to divest of assets. Buyer confidence is on the rise as debt remains cheap, so those investors who have been waiting for the right time to sell may find that now is the perfect opportunity to capitalize on high demand and secure outstanding pricing.
"Pent up demand and lack of supply, paired with the threats of increased interest rates and capital gain taxes, have created an emotionally driven environment."
The Rise of Industrial and Essential Retail
Single-tenant net lease industrial product is high on the wish list for investors right now, due in part to recent changes in retail demand and perception during the pandemic. Consumers were forced to change their habits, and we saw investors gravitate away from retail concepts deemed “non-essential.” In the wake of this shift, many retailers have revised their business models in an attempt to remain relevant and competitive in today’s environment – they’re now offering delivery, curbside pickup and online ordering. Furthermore, we’ve seen retailers rely more heavily on their logistics components. Warehouses, last-mile distribution facilities and fulfillment centers have never been more critical to a retailer’s operation, and this trend is creating significant opportunity for the investor community. Owners of outdated or functionally obsolete industrial space, for example, may be seeing increased demand, especially if their asset is well-located or has an abundance of land. Landlords who’ve resigned themselves to holding on to these assets due to lack of demand or unfavorable offers in the past may wish to take advantage of surging demand levels and trade out or up.
"Warehouses, last-mile distribution facilities and fulfillment centers have never been more critical to a retailer’s operation."
Rental Rates and Interest Rates
While many investors may choose to sell in today’s high-demand market, that strategy won’t be right for every investor or asset. Rental rates are rising in many geographies and asset classes, and landlords might find they have the ability to increase their cash flow by re-tenanting or renegotiating leases. New vacancies caused by pandemic-related conditions give owners the opportunity to secure a new tenant at current market rates. Additionally, with interest rates still so low, owners who are committed to a longer-term hold strategy should consider refinancing.
There will never be a one-sized-fits-all strategy for real estate investing, and owners should be careful to avoid knee-jerk reactions to shifting market conditions. Buyer demand is translating to outstanding opportunities for those investors positioned to sell, but rising rents and inexpensive debt creates a favorable environment for landlords looking to hold. Each investor’s situation should be carefully considered before deciding if now is the time to sell or hold, but opportunities are abundant for investors considering both options.