low interest rates make real-estate more affordable but then at the same time inflation makes real-estate an effective hedge Wow, the miracle asset.
let me give you a better perspective....
low interest rates DO make a project easier to build, handle construction financing, and overall management....
inflation, (which it is NOT what the government tell you it is) WILL kill you if you do not own land in reserve, or your materials get out of hand.... (which for the most part are commodities, i.e. steel, copper, nickel, etc. all components of a building, and you have to watch the sub-contractors like a hawk or else they will gauge you good *particularly with the proverbial change orders* so timing of contracts for your materials and/or sub-contract work is crucial... (as well as supervision)
so without going into details.... i can give you proof that it worked EXACTLY in such a way, (i.e. low interest rates creating a favorable environment to build, and a hedge, because land, steel, and other components were bought/or contracted at the right time.... this is what makes home runs -ggg)... will i be able to repeat year over year ... probably not in the magnitude of 2004/05 but in general that is exactly how it works....
you DO have to have a viable product, namely an income producing building, not a bunch of overpriced condos or sfr's, in additon, you have to have a reliable market for what you are offering; demand for specific space, (users) or demand for the overall building (investors). clearly, low rates help them as well...
Your statement of real-estate being a hedge would ring truer if real-estate was at its true fundamental value rather than something inflated based on easy credit.
agreed.
i believe that i have been speaking a different language as it seems the general consensus of this thread when they say 'real estate' they mean residential real estate (and more specifically, single family units).
commercial, (more specifically in my case industrial) real estate is bought and sold based strictly on cap rates. period. if the property makes money, and it is priced at a reasonable cap, then you sell it (or buy it as the case may be). you may have a situation in nevada, which possibly due to the specific advantages of being a non-taxing state where the cap rates are far too low for my taste, but so is the market.
in addition, there HAS to be a demand for the space you build/invest in. specifically, multi-tenant industrial space ranging in the 2,000 sf to 20,000 sf suites/buildings
within the analysis, and making cash flow projections, there are other elements that will be considered, namely: lessees, term of leases, general vacancy factors based on the specific markets, and local economic outlooks, this mix will affect up or down the final agreed upon value.
historically, industrial properties used to have cap rates -on average of about 10%. premium or discount would apply based on how the many variables were for better or for worse.
as interest rates were coming down, owners of these solid properties had a windfall in profits (assuming one sold) because it was accepted that "market cap rates" were 'acceptable' in the 8% to 9% so... to illustrate an example, if your net operating income was say... 250,000.00 the value of this asset at the old 10% cap rate would be $2'500,000.00. as cap rates dropped to 8%, the exact same property was now valued at $ 3'125,000.00 *thank you very much*
the general consensus of many brokers was that as interest rates would begin to rise (as they have), cap rates would return to their historical averages....
well, not so fast. and indeed they have not, sellers have said hat it is a premium now accepted due to increased risk of ownership.
to make matters worse, some investors who have finally 'seen the light' who used to invest in flea infested multi-family units, begun to join the not so glamorous
(but oh man, cash cow [near]hassle free industrial market).
as this happened, stronger demand (which has really not stopped in certain markets), made sellers successful in obtaining the lower cap rates.
indeed, in some markets, 7% is not uncommon to at least ask for, and in vegas and such places.... 5 % and 6 % are possible.... This is insane, as the margin for error (due to increased vacancy, or softening of the leasing market) will leave you greatly exposed.
yet, insane as it is, insane as it goes...
however... in more normal markets, said 8% to 9% is relatively stable. in addition, if your NNN escalators are in place and you have a reasonable leasing market, you will have additional appreciation based on said escalators (which typically follows the CPI, with some established floors (possibly 3% p.a. based on three year leases on average) if the company is a national tenant there may be larger increases.
two variables on the above, are the large boxes warehouse-manufacturing, which given the manufacturing environment i would not be too enthusiastic about. the above applies to the incubator multi-tenant buildings (flex apace 2,000 to 10,000 sf and perhaps the medium sized tenant (10,000 - 20,0000 sf)
the other one is self-storage.... now... there is a cash cow with relatively little management and almost a guaranteed cash flow recession or not... in fact in some locations this jewels will perform better in a recession....
so tell me again...
real estate is not a hedge ? -g
Real-estate's value will be based on entirely the growth of income and employment and secondarily on interest rate/yield curve movements.
agreed... read above... there are real estate projects, and then again, there are real estate projects .....
understand that 'growth of income' i refer to the project's income, and as for interest rates.... i keep an eye on the 10 year notes
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