Jon Rizzo / September 30, 2021
Jon Rizzo, Partner
As we stand today, investment properties are in high demand, which is a result of low interest rates and pent-up demand from the investment community. With prime investment opportunities moving quickly, staying aware of what product is available, knowing how to get creative to find deals, and keeping ahead of the market’s trajectory can all make the difference between procuring your next project or missing out on it entirely.
It’s all about finding product. By that, I mean the right properties for your clients looking for investment deals. Solid investment properties are extremely hard to come by in the New England market at this time. Even if a property hits the market at a low capitalization rate (“cap rate”), money is still cheap to borrow and investors can live with the spread between money borrowed and income received from the property. It isn’t uncommon to see properties trade consistently at a sub-7% cap rate. We are seeing solid industrial and multi-family deals trade in the sub-6% cap rate range. There are clearly exceptions to this, but supply is tight and demand is high. For these competitive situations, looking at value add to “juice the yield” is what can be a tipping point for an investor to pursue a property or pass on it.
Property owners who know they are sitting on a great property are also shooting for record high sale prices. If a buyer is willing to pay the asking price, the issue for the seller now becomes one of where to exchange the proceeds. With the potential of 1031 tax-deferred exchanges being eliminated, this may accelerate the decision to sell the property now – but the challenge remains in finding an appropriate exchange property. That is where getting creative can help.
So what can we do as advisors to help our clients find the right opportunities? It’s about being creative. We are seeing properties sell in certain sectors at record pricing (think industrial and multi-family). With rents being pushed to record numbers as well, these sale prices seem justifiable. Understanding building and market fundamentals is extremely important to ensure that the investment is still sound if we were to see a dip in the market or activity.
Can an underutilized building be prime for a conversion into a different product type? Think office to industrial or office to multi-family. The property may check off all of the boxes as it relates to location, access, construction type, etc., but because we are seeing limited office demand, can we reposition this building to meet the demand in these two sectors. Having a grasp on construction costs, zoning, permitting, approval timeframes, and demographic information is what The Boulos Company can advise on and assist with during this process.
Additionally, if a property is currently rented at an under-market price point, is there a chance to mark-to-market once the lease expires? Can a property that has a short lease term remaining be overlooked by most buyers and be a diamond-in-the-rough type opportunity?
Understanding inventory that is coming available, market rents, tenants in the market, and competitive buildings is key to taking advantage of an underutilized or under-rented opportunity in the market. Working with an advisor can give clients a leg up, as this is the space we live in daily.
Where are we going?
It seems as though we have been singing the same tune for the last few years. “Interest rates have to go up soon.” “The market can’t keep pushing record highs for this long.” However, unless interest rates increase fairly significantly or property owners start feeling some pressure in underperforming sectors, we will likely continue on this trend of limited supply with increased demand. We, as advisors, will need to continue to get creative to find those solutions for our clients. Our clients will likely have to take on a bit more risk than they’d like to take on in order to win deals. Again, it falls back to having a strategy in place to “check the boxes” for their investment criteria and sticking to that plan.