As an avid real estate investor, I’m obviously curious as to what’s happening with property prices. Often you’ll find me writing about real estate because my belief is that the cap rates of today will rise, pushing property prices lower. Because the U.S. is so dependent on the construction industry for growth and jobs, even a 10% swing in property prices could have profound repercussions on the U.S. economy.
Anyhow, I find myself driving around town last week with one of the best connected commercial real estate brokers I know. To keep his name in confidence, I’ll just call him Bob.
“So, what kind of listings are you working on right now Bob,” I ask? The answer comes: “I’m trying to sell a portfolio of buildings in the $280 million range, but I’m having trouble moving them. The buyers want to sell at a 6% cap, but interest has been very weak. Buyers are looking for closer to 7%. Last year, I could have moved this baby at 6%, but it doesn’t look like it this year.”
My next question went to land for development. “Are the big boys still buying land for development like it’s a scare resource?” Bob replies: “I sold three different tracks of land in the past ninety days–but none closed. All three buyers got cold feet and walked away. Last year, these deals would have closed. But not this year.”
The news reports have been telling us that demand for new homes has been weak (U.S. new home sales down 10% alone last month). I believed the demand for luxury condos, second, and third homes were also weakening because of higher interest rates. What Bob told me confirmed my beliefs. Big money is getting a little shy on real estate–maybe it’s because they know they can’t develop and build at today’s high prices because they see their own orders from consumers as being soft. One major U.S. home builder announced last week that its cancellation rate, being consumers who changed their minds or didn’t qualify for financing, jumped to 24% of new home purchases in the company’s most recent quarter.
Bob didn’t sell me anything that day. And, after what he told me, I probably won’t be buying investment property for a while. I would have paid him money for his insight because I can’t find that kind of information in any of the statistics the government releases. But if the real estate market continues to be soft, people like Bob might need to start charging for their insight because big real estate commissions might become a scare commodity.
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