Affecting Your Real Estate Decision: Interest, Inflation, Inventory

​The year continues to race along, and election headlines can hurry us to the next significant milestone event in the process.  On top of that, turmoil persists with international border discussions abounding and escalating.  Many Americans and small business face monetary hardships as inflationary effects are felt.  At the same time, the ‘corporate financial world’ seems to be adjusting well to the higher interest rate environment, for now, although the once aggressively bullish pursuit of industrial commercial property by various investment groups has now become a more targeted approach with less capital focused on more opportunistic acquisitions. Furthermore, on a local level in the Southern California market, the owner user buyer pool continues to strengthen and fill the void left by these investment groups.  As last month’s article focused generally on some of the drivers for industrial commercial real estate decisions in an election year (hyperlink to article), this month we can focus on some of the considerations those making decisions this elections cycle must face. 

​Interest Rate Fluctuations
As interest rates continue to fluctuate, we have seen some short-term relief off the high levels of Q4 2023.  There are still some expectations that interest rates will continue to drop in the near future, but in the longer term my expectations are that interest rates hover in the high 5% range to low 7% range for traditional conventional real estate financing, depending on credit and nature of the transaction. That could be a healthy level for the overall economy.  Many have benefited greatly over the last 10 years from the lower interest rate environment, but we are now starting to pay for it through inflationary pressure.
Continued Inflationary Pressure
The inflationary pressure we have felt for several years does not show many signs of subsiding soon as the abundance of capital that was injected into the system over the last several years continues to search for yield and placement.  Furthermore, general demand for goods, services and real estate has persisted through these times of significant inflation, although people are feeling the squeeze in their cash flow as a result.  This inflationary pressure will continue to show itself in rental rate increases and overall asset appreciation, which is a positive if you are investing in purchasing real estate.
Low Inventory Persists
Low inventory levels appear to be driven by two significant factors now - taxes and interest rates.  There are many sellers who do not wish to sell because it has a significant adverse effect on their tax situation, whether by way of capital gains taxes or increased property taxes if they complete a 1031 exchange.  Furthermore, now the potential interest rate may double from when they secured financing at some time in the last 7-10 years, impacting cash flow.  With owners reluctant to sell because of these implications, fewer buildings are placed on the market for sale.
Demand is Steady
While demand has subsided from its peaks in early 2022 when vacancy was below 1.25% in many markets, the low inventory levels we are experiencing is keeping a healthy balance of supply and demand, which helps to maintain values in both the rental and sales market. While new construction still occurs in these infill markets, limited developable land helps keep inventory levels balanced.  There are still many businesses looking to expand or relocate into these limited choices.
We remain ready and committed to helping you in your story, with any decisions you are you considering this year.  Please call us to discuss your unique situation and how we can help.