The End is Near(ing). Act accordingly.

Real Estate Cycle Quadrants.jpg

Man, do we have short memories.

Overhold - 1 v. t. To hold or value too highly; to estimate at too dear a rate. - Webster’s Dictionary, c.1913

It’s a pain like no other.

It’s the moment you realize the market has started to recede, as it always has at fairly regular points throughout history, and you’ve missed the golden opportunity to sell your commercial property for a substantial profit. Now you’re left holding that “fantastic value-add asset” for another long cycle, until things start looking up again.

Whenever that is.

Or better yet, you just leased-up your killer retail development to 90% occupancy. You were almost going to sell because the market was the best it had been in years, but you figured, “Nah, let’s get to 95% and then we’ll sell.” Except, that next tenant never came. The market started to decline. Your local and regional tenants started to struggle. Then fail. Then leave. Then your occupancy was at 50%. Then then bank reassessed the value of your center relative to rents, and decided they needed to call a few million of that loan they had given.

That’s a true story.

There are thousands like that. Each one uglier and more painful than the next.

“You’re being paranoid, J-P. The market won’t crash again. There are systems in place to prevent it.”

That’s true. I don’t think anyone expects a crash like we saw in the last great recession, but that doesn’t mean there won’t be a recession.

I’m no economist, but current indicators seem to be pointing towards a potential decline within the next year or so. Take, for example,  the U.S. yield curve, which is flattening, and will likely turn negative sometime next year. Or the fact that the current U.S. unemployment rate is at a pre-recession low, which historically tends to coincide with the overall real estate cycle.

So, while it may not be time to start buying canned food, batteries, and boxed water for the zombie apocalypse quite yet, it may be a good time to take a realistic look at your commercial real estate portfolio. If you don’t plan to hold for another 15 to 20 years, you may want to consider selling. (Hint: we’re buying @KineticBridge).