We have all seen an extraordinary hike in rates over the past 24+ months – historically low interest rates fueled the robust market where demand for property was at considerably an all time high. This coupled with continued low inventory resulted in higher prices on top of the inflation we have all been dealing with.
So what is one to do? The good news is there is always a path. In fact, the hikes in rates have naturally slowed demand and activity across the marketplace. This is one of the effects when using rates to combat inflation. Sellers are slowly beginning to realize that pricing is simply not where it was 24+ months ago which has and is continuing to put more and more leverage in the hands of Buyers. Though there is still a gap in some cases.
More times than not owning property (that is intended for one’s own occupancy) is still relatively the most cost effective route, rather than leasing space. Of course, this boils down to whether or not one can identify and secure a property that fits their needs. Why is this? Financing is more favorable for that of an owner/occupant than of a third-party investor (i.e. banks are more likely to provide more favorable financing terms related to LTV and rates). In this case as well one has the ability to roll the improvements for renovations or retrofits into the overall loan – meaning the ability to amortize those dollars over a longer period of time as opposed to leasehold improvements (in the case of leasing space the amortized improvements typically align with the lease term whereas in a purchase the amortization could be stretched out 20-years +).
How else are folks getting creative? Aside from simply putting more money down and lowering your loan there are some other options because frankly not every business is in a position and cash rich to do so.
• Seller Credits / Post Closing Escrows: The softened market has put some Sellers in a position to offer concessions to get deals across the finish line. Rather than reducing the price of the property (which may only result in a nominal difference in the monthly mortgage) we have seen and put together seller credits that could otherwise be used for improvements or to go toward the cash needed to close in some cases. We too have seen similar instances where rather than having a credit at closing a post-closing escrow account is established (the money still comes from the seller) along with the parameters of how that money can be used i.e. to assist with operating expenses for the property.
• Shorter Term Loans: While it’s a speculation, the whispers in the marketplace are that rates will begin to go down (this though has some worried that prices will adjust relatively so, i.e. stabilize and perhaps go back up) – we have experienced at least a stabilization of rates throughout the 2023 calendar year. Consider a fixed rate loan at a lessor term. The amortization of the loan would not change though the actual loan would be shorter and while there may be some perceived risks there is always the ability to refinance. Shorter loan terms typically means a lower rate.
• Using Other People’s Money: Market conditions continue to limit opportunities for investment. It is all about who you know and if you are in this “game” of commercial real estate there are likely folks eager to jump into a deal especially if you already have a tenant in tow (i.e. yourself/business). Structuring a lease with the business prior to closing on the property would enable the ability to underwrite and put together a pro-forma which would be used to solicit the opportunity for outside investment.
Just remember, economic conditions are cyclical and while the timing of the market may not seem “ideal” you must always approach your commercial real estate investment with forward mindset. Make decisions that will benefit the business years from now – even if it means in the short term cashflows are not as attractive. If the location is right it can be hard to replace!