Hi, Reader!

As a real estate professional, do you ever get asked the question: So, how's the real estate market?

It's basically impossible to answer succinctly. The answer is always it depends. What asset class? Are you a buyer or a seller? Are you looking for cash flow or appreciation? What's your debt like? What else is your money doing if not in this deal? Smaller deals or institutional-size deals?

I'm making offers in various parts of the country and trying to sell another property. I have regular conversations with real estate professionals on the podcast. From this experience, I will make a few generalizations that encompass the commercial real estate market right now.

First, a few caveats.

1) Real estate is always local. What's true in one market may not necessarily be true in another;

2) There are always outlier situations that the generalizations below don't apply to; and

3) These generalizations apply to smaller, non-institutional size investment deals, generally owned by a one or two person LLC and not syndicated.

Let's get into it.

Sellers are not having fire sales.

With interest rates being at a 15 year high, there was considerable hype from all over the real estate world that the rising interest rates would result in massive distress and deals galore. It hasn't happened. Turns out, property owners don't like losing money so most are still not willing to give significant discounts.

Sellers are displaying remarkable patience. Buyers were hoping that Sellers would react to the rising interest rates by lowering their asking prices. It's happened a little, but nowhere near where it needs to. On many commercial deals, there is still a pretty wide gap between what Sellers are asking and what Buyers are willing to pay.

In situations where a property owner's interest rate has impacted the borrower's ability to make payments, banks are turning out to have some flexibility and are providing some work-outs for distressed borrowers. I believe a major lesson that banks learned from the Great Financial Crisis is that nobody wins when a bank takes back a property. So, banks are trying to avoid that scenario whenever possible.

Earlier this month, I offered on a distressed property that had been taken back by the lender. I believe I made a reasonable (albeit, low) offer but never received a counter-offer from the Seller. Even in situations where it seems like a Seller would want to sell ASAP, they are continuing to show patience to get a number that works for them.

There is always some distress.

In the more than 30 deals I've bought over the last 6 years, almost every one of them has been the result of there being some type of distress with the Seller. Medical issues, financial issues, property condition, retirement, death, divorce, the list goes on. Distress does not care where interest rates are, what the market is doing, what the comps are, who the president is, or any of that stuff. I've closed three deals in the last 12 months, and there was some type of distress in all of them. Regardless of the state of the market, there will always be some people experiencing distress and people looking to sell. These are where the serious value-add opportunities lie and where I will continue to focus my attention. Distress = Motivation.

Interest rates hold the key.

For the real estate market to get "unstuck", there has to be some interest rate relief. On the residential side, the historically low interest rates of two years ago have created a "lock-in effect", where homeowners are extremely reluctant to give up a ~3% interest rate and exchange it for a ~7% interest rate on another property. On the investment side, interest rates at 7%+ or even 8%+ make it really difficult to find any cash flow in an investment property. With sellers unwilling to relent too much on pricing, the relief will have to come from interest rates.

Charlie Munger, of Berkshire Hathaway fame, used to talk about the unpredictable nature of the markets because of the consequences of consequences. They're impossible to predict. Two years ago, we were soaking in the historically low interest rates. They were great while they lasted. But now, we are experiencing the consequences of those low interest rates: the "lock-in effect" and sellers unwilling to budge much on pricing. And these consequences? They'll have consequences that we can't possibly predict. Combine this with low supply and the sky-high cost of construction, we could be feeling the effects of those historically low interest rates for many years to come.

THIS WEEK ON THE PODCAST

I talk with Laith Hermez of Ironside Realty. Laith focuses on buying single tenant net lease deals in great locations with great tenants. In this conversation, we discuss the opportunities in STNL right now, buying all cash, developing a competitive advantage, and the future of STNL.​
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Listen here on Apple Podcasts.

Listen here on Spotify.

Watch on Youtube.

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Curious about commercial real estate? Read The Top 6 Reasons to Invest in Non-Residential Commercial Real Estate. ​