We are all experiencing some sort of heartburn with the current trying financial times, I know I am. Whether it's a depleted stock portfolio, diminished 401k or your tenants not paying their rent (or all the above), things will get better. Let me say that again, things will get better. Now is the time to start thinking about how to best capitalize on future prosperity in this dark economic environment. Alliteration aside, let's talk about the unique real estate situation we find ourselves in.
The Fed has taken several monetary policy actions to buoy the financial markets and the federal government is in the process of figuring out the best way to help those most impacted by the sweeping unemployment effect of COVID-19. These measures will take time. Most CRE investors are in 'wait and see' mode, concerned about the now. The savvy investors view this period of uncertainty as a wealth creator. The question I've been getting over the last couple weeks is, 'where's the arbitrage'? The answer... capital.
With the above mentioned monetary policy moves, the Fed has continued to ratchet down the Fed Funds rate to historic lows making debt capital insanely cheap (yes, debt has been cheap for a while, but we're looking at 'free' money right now). When this occurs, usually we see tightening of cap rates across all asset classes given the increased buying power and ability to lock in long-term, dirt-cheap debt. Since COVID-19 and the oil crisis hit our shores a few, long weeks ago, assets have been taking longer to trade given the decreased liquidity resulting in an uptick in cap rates as sellers are willing to take a discount to move on from legacy properties.
While cap rates are stable/increasing, it is relatively nominal at this point which leads me to the other side, equity capital. The amount of equity in most commercial assets is still substantial and being able to tap into that equity to acquire more assets gives investors great flexibility. Combining these two capital plays will be one of the greatest wealth generators we will see out of this downturn.
To quote my favorite president (Abraham Lincoln), "The best way to predict the future is to create it." How will you take this opportunity in front of you and create the future you want? If any of the above resonates with you, let us help outline your road map to success.
