As you know, cap rates have been at all-time lows, which has benefited net lease investors with high property values. However, market indications are that in the next 6-12 months, values will decline, while interest rates and cap rates will rise.
What is the implication for your net lease investments? Is this the time to consider selling?
The Experts Say…..
Unemployment is at 3.9%, the lowest it’s been since April of 2000, matching the lowest it’s been since 1969. This is spurring Fed concerns of inflation, which is now at the targeted level of 2%. The Fed is communicating more interest rate hikes this year – we predict two more. Consider the impact on cap rates when the cost of financing rises.
“The report reinforced expectations for Federal Reserve policy makers to raise interest rates when they meet June 12-13 (they went up!), and spurred investors to increase bets on two more hikes this year after that, rather than one.” – Bloomberg
“May’s super strong employment report, including a slightly better gain in wages, signals the Fed is on track to raise interest rates in June and could even add another rate hike to its forecast this year.” – CNBC
“Economic projections released after the Fed’s March meeting suggest officials expected to raise rates two more times in the months to come, for a total of three increases this year. Nearly half of the officials indicated they expected one additional increase on top of that, for a total of four in 2018. Many economists continue to forecast a total of four hikes this year, as well.” – The New York Times
My “take” on this…As a single tenant broker for almost 18 years, I urge you to consider whether this is a good time to sell. We are at the top of the market. Do not delay until the cycle turns as interest rates rise further.
What is the tangible Impact of Rising Rates? Answer: Value Deterioration. With a rise in interest rates, cap rates will increase. Here are examples of the impact of a 1% rise in cap rates on the value of net lease properties:
- Single tenant industrial property – $6,154,780 goes from a 6% to a 7% cap rate. Property value drops by $879,255.
- Two tenant credit tenant retail property -$3,560,000 at 6% cap going to a 7% cap rate. Property value drops by $508,571.
- Single Tenant Fast Food property – $2,300,000 at a 6% cap going to a 7%. Property value drops by $223,743
Sell or Stay? – Ask Yourself These Questions?
To proactively maximize and protect the value of your investment assets, ask yourself these questions:
- What is the value of the property today vs. in 3-4 years from now?
- How much lease term is remaining and what is the likelihood of the tenant renewing?
- From a tax perspective, how much depreciation remains?
- If the tenant does not renew, how easy is it to re-purpose the property and do I want to be owning it when “the music stops?”
Is Selling Now vs. Holding a Consideration?
Here are some reasons investors are actively selling:
- Sellers want to maximize and protect their appreciated value, having more money to roll into another investment.
- Sellers want to purchase a replacement property that has a longer lease term or is better quality real estate.
- Sellers want to start a new depreciation schedule and also use cost segregation strategies to depreciate their investment property quicker.
- Sellers use a new, longer lease term as an effective estate planning tool, thereby reducing estate taxes.
- Sellers know that Buyers are more motivated now, prior to further rate increases. This motivation translates into a small window of opportunity for Sellers to continue to aggressively price their investment property higher in the near term.
Again, I ask, “Is this the time to consider selling?” Can you maximize your returns now and protect the appreciated value of your investments? Call me to discuss this further. I am glad to provide you with a no obligation Broker Opinion of Value and discuss future acquisition strategies that make sense. Regardless, keep your eye on the changing market!
Contact Nancy Miller at [email protected] or 404-876-1640 x 118.