Realtec’s advice to office, retail, multifamily owners: Consider selling now

FORT COLLINS — Industrial real estate constitutes one of the best current opportunities for real estate investors and developers, but owners of other types of properties might consider selling now due to strong demand, still-low interest rates, low vacancies and market maturation.

Those were among the takeaways from Realtec Commercial Real Estate Services Inc.’s 2018 Market Opportunities update at the Block One event space in Fort Collins, attended by about 80 people.

Realtec brokers first described major recent or ongoing development projects in Fort Collins, Greeley, Johnstown and Loveland. But they quickly shifted to descriptions of market cycles for industrial, office, retail and multifamily, with industrial remaining in an expansion mode, while office is shifting from expansion to maturation. Retail and multifamily have reached maturation, meaning that the next phase likely would be contraction.

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Industrial space is especially strong, with new projects leasing up quickly. Demand is particularly acute in Greeley, where vacancies remain extremely low.

Steve Stansfield, broker/partner with Realtec, said investors should understand where their properties — or prospective properties — are in relation to the cycle. Those with office, retail or multifamily projects might consider selling, rather than weathering the next down-cycle.

“if you’re a property owner, you need to understand where your property is positioned in the real estate cycle,” Stansfield said. “And if you’re particularly a multifamily owner, a retail owner or to some extent, an office-building owner, it may be an opportune time to sell by virtue of low interest rates, low vacancies and low cap rates.”

Realtec broker Bruce Campbell agreed.

“I think it’s a really great time if you’re a seller of investment properties,”  Campbell said. “Prices for investment properties are driven by supply, demand, interest rates, lease rates and also the risk-return of other potential investments. Right now, demand is extremely high. All of us have several investors looking for investment properties. Supply is very low. Interest rates are still very low. Lease rates are stable, and quite frankly, investors are a little bit nervous about the stock and bond markets.”

He noted that capitalization rates — the rate of return expected on a real estate investment — have fallen in recent years.

“However, given that interest rates are supposed to go up — most people are predicting about three hikes this year alone — that’s going to drive cap rates up higher, which in turn potentially will drive prices for investment properties lower,” Campbell said. Historically, I think it’s a good time to sell.”

The cyclical nature of real estate was further reinforced by Realtec broker Ron Kuehl.

“The most important thing to keep in mind is that real estate is cyclical,” he said. “We are at a peak time right now.”

Although some investors might look at existing returns and expect those returns to continue in the future, a market downturn can change things, he noted.

“That can change very quickly, as shown by, if you get in to a downturn, [that] can have a significant effect on the value of commercial real estate,” he said.

He said current and prospective investors should exercise “very thorough due diligence” to understand tenants and their financials, lease termination options, and other factors. Investors in office properties also should not expect to see annual increases in lease rates.

“In our opinion, we are not going to see any meaningful increases in office rents over the next 24 months,” Kuehl said.