We are a mid-sized insurance group based in Beijing that have been holding on a couple of mixed-use developments in Florida. We keep hearing that the market is past due for a downturn and are trying to determine if we should sell these assets now or be prepared to hold on to them for four or five years. When do you think the U.S. commercial real estate will begin its downturn? How long do you think the downturn might last?
Answers
Get a survey of the market from a knowledgeable group. Look for an adviser with background. Talk to market brokers. Then test your property for downturn risk. What is the remaining term of your leases? Are the tenants credit-worthy? Does the property need work? Upgrades? Then, depending on the type of asset, you will have the ammunition to make a decision.
Major market shifts are very difficult to predict accurately or see coming. Very few saw the financial crisis and Great Recession coming in 2008, and those who did and acted did extremely well. I think it is fair to say that most experts think that capitalization rates cannot move lower, so price appreciation can really only come from either increases in rents or increases in capital flows. Most believe that the U.S. economy remains strong, so slow and steady growth is likely for the next year or perhaps two years, but many see a very mild recession by 2020 or 2021. Very few expect a severe recession like we had in 2008, which dragged on for many years. Since leverage on assets is so much lower than in past cycles, given much greater lender discipline, the kind of downward spiral we experienced 10 years ago is unlikely in the next recession, which should be mild and not of long duration. That said, I do not see a lot more real appreciation on most assets, especially in places like Florida (though there are always special cases), but if you like the cash flow you are getting and not overleveraged with good long-term debt in place, you may be better off holding unless you have better investment opportunities into which you would deploy sale proceeds.
