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THE WORLD IS FLAT– With over 30 years of real estate experience, clients are always asking me “What is the future for the market?” For the last several years some of the Real Estate pundits have been saying “When interest rates go up values will come down” and of course, the obvious implication was that “it was time to sell.” While the theory was seductive, I didn’t subscribe to it then and I won’t subscribe to it now. Real Estate values have continued to rise over the last 2 years in spite of interest rate increases. As late as last fall, properties were still receiving multiple offers when they first hit the market. However, the market is starting to slow down and return to more “normalcy.” Remember five years ago when a building would be put on the market, everybody would be able to look at it, analyze it and make an offer based on due diligence and the buildings would sell within 90 to 120 days? I believe the market will return to this more normal state for the next several years. This will be a healthy cooling off period where buyers and sellers can negotiate on an even playing field without the hype that has occurred in the last several years. The stock market has very low transaction costs, which allows investors to play the market. They can sell their stock when they feel it’s high and wait for the market to correct and then buy back. However, the Real Estate market has relatively large transaction costs and it’s difficult to acquire the same property back once you have sold it. Thus, the Real Estate market isn’t as liquid as the stock market. Also, the Real Estate market is very finite. They are not creating any more land or many more buildings for that matter on the Westside. Over time, the demand will continue to rise in Southern California, which will keep upward pressure on the market. More buildings are coming on the market now and the time it takes to sell is increasing. Values will probably remain static for the next one to two years. Real Estate investors usually sell for reasons other than playing the market. Owners usually have another motivation, such as sending kids to college, retirement, etc., which leads to the sale. However, if real estate values are not going to go up in the next two years, it may be prudent to sell in the earlier part of the cycle than toward the end of the cycle. Investors on the Westside do not buy based on cash flow, cap rates, etc. Real Estate investors here are only buying for appreciation. That said, the longer the flat period extends, investors will become increasingly choosy and less likely to bid up properties because the appreciation factor is not as readily apparent. In fact, it may not exist until the next upward cycle which will start slowly and then steadily build. Of course that cycle could take years to come to fruition. I do not believe that values will drop significantly. But if you are at all thinking of selling in the next several years you may want to consider in the earlier part of the flat cycle than the latter part. If you are thinking of investing in property the most important thing is acquiring the right property. In the next several years, there will be opportunities to acquire well-located properties at high prices but the values will eventually increase. As we all know, it is about “location, location, location” and acquiring a property that fits into your investment parameters and your portfolio.
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