Where We Are In the Economic Cycle Related to Commercial Real Estate
When buying and selling commercial real estate, timing is right up there with location. Much like with stocks, the goal is to buy low and sell high. With real estate though, there is also the consideration of maintenance, management and potential income. These are factors within the market but the economy also affects the return on investment. Considering where we are now in the economic cycle, approaching the peak of the bell curve on the left side, can be a scary thought to many. However, it’s a good idea to look at the factors surrounding that position in the cycle, giving the opportunity to be proactive in strategy.
Unlike where we were ten years ago, we are not in a market where banks are loaning money to those who are not qualified. Since 2012 banks are required to lend only to qualified buyers and have worked to diversify their lending portfolios. These practices will help to ensure the banking industry doesn’t end up in the same position we were during the last two big downturns. Overall, the economy is in a solid position and businesses are doing well. Bend has low vacancy rates, but the surrounding cities in Central Oregon have plenty of opportunity for growth.
We do believe there’s a downturn coming but the question is when and what it will look like? Our brokers at Compass Commercial Real Estate Services have had many conversations with owners of commercial real estate around this topic. We often hear questions like “Where are we in the economic cycle?” or “Are we going to face another economic bubble?” As stated earlier, the banking practices that contributed to the crisis in the previous downturn have changed to minimize the same issues from happening again.
We have many clients come to us with concerns about the best time to buy or sell; from their personal health, the timing of retirement, income from properties they own, income from potential properties, family, taxes and interest rates to list a few. Many of these concerns are specific to the individual, however, they have to be looked at in the context of the overall economy as well as the commercial real estate market.
No matter where the economy is in its cycle, the best plan of action for someone looking to buy or sell is to talk with their team about their specific situation. This team could consist of an attorney, lender, CPA, money manager, commercial real estate broker, partners and family. This team should be consulted and advice considered for a thorough understanding of the economy and any areas of concern that apply.
Options for those currently running a business in an owner/user situation in commercial real estate at this stage in the cycle may include:
• Putting the asset into property management,
• Selling the business and keep the building and leasing it to the business buyer,
• Sell the building and pay taxes,
• Selling on contract,
• Completing a 1031 tax free exchange,
• Not selling or
• Selling some of the assets, but not others.
Each of these options offers benefits and drawbacks. Talking with your team of experts will help to decide what the best plan of action for your situation would be, no matter where we are in the economic cycle. Regardless of being close to the peak of the economic cycle, there are still plenty of ways to optimize your portfolio. Sometimes that means making the choice to sit on the property and wait for a different stage in the cycle, however, seeking the advice of experts is always the best decision.
Pat Kesgard, CCIM is the president and a shareholder of Compass Commercial Real Estate Services. He has been a licensed real estate broker in the state of Oregon since 2004. While serving clients in Central Oregon to find ideal solutions to their real estate objectives, he specializes in commercial and industrial sales and leasing and consulting services.