Video Index:
0:00 Retail invesment activity from 2020 to today
1:59 The crash that never happened, and the amount of cash waiting to be deployed
2:58 Rising inflation rates and how they affect investment activity
3:20 Interest rates for borrowing money are still near historic lows
3:54 Cap rates are at or near historic lows
4:45 The uncertain future of 1031 Exchange.
5:25 Potential increase of the long term capital gains tax

Hello Investors!

If you are considering the sale of your property in the next 2 or 3 years, listen up. We may be in the best seller’s environment in recent memory, and we could be close to an inflection point where we could at any moment flip to a situation where the tables have turned. And when inflection points like this happen, it often creates a lot of regret from owners who had been on the fence about selling but never got around to it. If two years down the road, you felt that you had missed a great window of opportunity to sell, would it bother you?Today, I’m here to help prevent that from happening. While I’m not trying to convince you to sell if it’s not in your plans to do so, I’d like to lay out in this email the factors which I believe make this an excellent Seller’s market – one which we may not see again for another decade or more.

As you might know, retail real estate was hit pretty hard in 2020, but it bounced back in 2021. 2021 was my highest income year in brokerage, and 2022 is off to a great start. I’ve done more proposals in the past few weeks than I did in the entire year of 2020. But why are owners looking to sell, and should this be something for you to consider, as well? Below are the reasons why;

The crash that never happened

Back in the summer of 2020, soon after COVID came to the US, I had many clients call me and ask if I knew of any distressed sellers who needed to unload their properties at a discount because their tenants weren’t paying their rent. I told them I didn’t hear of any.

In the cases where tenants couldn’t pay, the landlords were either absorbing the loss, or their banks were allowing them to take forbearance on their mortgages. I didn’t hear of a single investor losing their property to the bank.

The media reported that they expected deals to hit the market toward the end of 2020, but in my world, these deals didn’t materialize. My managing broker Brad Umansky wrote a great article a year ago on this, called “When Will all the Retail Investment Bargains Arrive?”

As a result, many of these buyers who were waiting on the sidelines for a decade or more to buy a deal, didn’t find the bargain they were looking for in 2020, and ended up buying in 2021, or are still holding onto their money in 2022, still looking to invest. In conclusion, there is still a lot of money waiting to be spent.

Inflation

The inflation rate continues to rise, and we are at 7.5% for the 12 months ending January 2022, the highest in 40 years – since February of 1982. This means that every day your dollar is sitting in the bank, it’s losing purchasing power, which is even more reason for investors to looking to put their money to work. Investors are looking for investments with leases with CPI increases or fixed percentage increases that will help outpace inflation.

Interest rates for borrowing money are still near historic lows

Many of the single tenant properties out there which are being sold at 4% cap rates are being purchased with cash. But for many investors who are financing their purchases, typically on multi-tenant properties $3 million and up, low interest rates are an incentive for people to buy when it’s cheap to borrow. The Federal Reserve has already announced that it plans to raise rates at least twice in 2022. Having your property on the market while buyers can borrow with attractive terms increases your buyer pool and increases your chance of getting the price you want.

Cap rates are at historic lows

Rising inflation and low interest rates are driving up demand for property. And when demand goes up, prices go up. Cap rates are at their lowest point since Costar started reporting data in 2020. Since 2009, the average cap rate for commercial property in the Inland Empire has come down pretty consistently from 7% down to 4.8%.

If we look at just the retail market in the IE, we are approaching the historical low cap rates we saw in 2006 of 5.88%. Today’s average retail cap rate is about 5.95%.

This cap rate compression is the driver behind property values rising. I’ve been surprised at some of the sold and asking cap rates for some properties, but I guess if there’s ever been a time to test the market with a low cap rate, now is that time.

The uncertain future of the 1031 Exchange

Ever since Joe Biden ran for President, there has been a lot of talk about the possibility of the 1031 Exchange going away, or being significantly curtailed. I made a video on this a few months ago, where I quoted congresswoman Judy Chu, who sent out a letter saying that the 1031 exchange would stay intact. But the truth is, after I saw letter from her office, I haven’t see any other news that says the exchange will be kept intact, eliminated, or changed.

The changes that Biden proposed when he ran for office were to limit the tax-deferred portion to only $500,000 – and everything else above that would be taxed. Biden’s got a lot of other things to worry about right now, but that’s not to say that his administration could revisit this topic in the near future.

Increase in the long-term capital gains tax

Another proposal of Biden’s tax plan is to increase the long term capital gains tax rate from 20% to almost double, 39.6%. So if you chose not to exchange your property, or if the exchange were to be eliminated, and you had to pay your tax, you could be stuck paying almost double the taxes of what you’d pay if you were to sell today. I don’t know who likes paying extra money to Uncle Sam, so if you want to keep more money in your pocket, this huge potential tax increase would not be in your favor.

Conclusion

With all of these factors, I think this creates a perfect storm for selling. As I mentioned earlier, if you plan to hold on to your asset and pass it down to the next generation, you don’t need to worry about any of this. And if that’s the case, I appreciate your reading all the way until the end of this newsletter! But if you have been considering or been on the fence about selling, I’d strongly encourage you to reply to this email to get a free property valuation and learn about how much your property is worth.

Thank you for reading! I’ll see you next time.

Connect with me here:
Website: https://mikelincre.com
YouTube: https://www.youtube.com/MikeLinCRE
LinkedIn: https://www.linkedin.com/in/MikeLinCRE
Twitter: https://twitter.com/MikeLinCRE
Email: mike@progressiverep.com

It’s A Great Seller’s Market

Hello Investors!

The crash that never happened

Inflation

Interest rates for borrowing money are still near historic lows

Cap rates are at historic lows

The uncertain future of the 1031 Exchange

Increase in the long-term capital gains tax

Conclusion

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