Historically, what has to happen for Commercial RE Prices to Drop? Recession? Any other indicators?
As a young investor looking into Strip Malls and Office Spaces, I see these low-enough CAP rates that disincentivize purchasing. I figured if prices drop soon, it’s worth waiting. That being said, what are indicators of prices dropping? When would that happen, if ever?
[{"id": "ijqaqfg", "text": "Interest rate hikes. \n\nInvestors won't like a lower spread between interest rates and rental yields. To maintain that spread, yields go up and prices go down. \n\nRental growth slowing or decreasing. \n\nIf you expect lower rents in your business plan, you'll get lower returns. To meet target returns, you'll decrease purchase price.\n\nLiquidity. \n\nLower levels of transactions (by $) often points to a large bid/ask spread. Generally where there are more sellers than buyers. So it becomes a buyer's market as sellers get nervous to sell asap (consider interest hikes and rental growth decrease) and start dropping prices. \n\nI'm simplifying but in a nutshell that's it. You can go into a lot more detail about how each of the three are intertwined.", "replies": [], "depth": 1}, {"id": "ijqdjp7", "text": "Adding: Higher taxes (income, property), lack of availability of financing, zoning changes, PANDEMICS,  demographic changes, overbuilding.", "replies": [], "depth": 1}, {"id": "ijqh5bq", "text": "Real estate is local so prices will not drop everywhere. Cre prices are interest rate sensitive and most large assets such as office buildings and malls have ballon debt payments that are never paid off, just rolled over indefinitely for tax reasons. \n\nWhen you cannot refinance that debt, bad things happen. We have been in a 40 year debt cycle of only decreasing interest rates. \n\nInstead of having negative internet rates, real interest rates (rates minus inflation) are negative since the cpi print that came out was 8.5 percent. So if you have a 5 percent loan your real interest rate is negative 3.5 percent. \n\nSo if inflation decreases and real rates rise, be on the lookout for distress. \n\nEven then we will be unlikely to see plummeting asset values because those assets will enter special servicing and the debt will be restructured off market as opposed to a fire sale.", "replies": [{"id": "ijuurmh", "text": "Sorry to get off topic, but what are the tax advantages of rolling over the balloon indefinitely? I always thought it was for leverage only.", "replies": [{"id": "ijw7cus", "text": "Someone had a good write up on balloon payments. Leverage and \"it's always done this way\" are the more common. \n\nhttps://www.reddit.com/r/CommercialRealEstate/comments/wd66ku/crelenders_that_do_not_require_balloon_payments/iigplmc/\n\nInterest rate risk. Duration risk. Regulatory/compliance risks. The secondary market for commercial loans is much thinner than the residential, so there is capital risk. They want a chance to reassess the property and/or you as a borrower.\n\nBalloons aren't a \"balance due the day after maturity or we begin foreclosure\" situation; they are more of a touch point to reassess, reprice, or potentially exit a loan. The best way to exit a lending relationship is for the borrower to refinance somewhere else.", "replies": [{"id": "ijw9lww", "text": "No, I understand balloons and the reasons why lenders do them for commercial, I was just wondering what the tax advantages of them were? Is it just the interest write-off? Or is there something else I don't know about?", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ijrwj0w", "text": "Supply must exceed demand.", "replies": [], "depth": 1}]