While real estate is a cyclical business, the real estate market has not undergone a significant downturn like this since the Telecom Bust. This is a direct result of bank reform, where lenders are tightening their lending requirements and fewer buyers qualify for properties that aren’t owner occupied. As a result, cash and credit are more important than ever.
It is difficult to get an investment property financed, however, if a prospective purchaser is not overly leveraged and has a reasonable cash reserve along with good credit, then the sky is the limit. Cap rates have risen over the past 18 months as savvy investors have taken advantage of a down market. With less qualified buyers, sellers have to increase the yield to lure qualified prospects into an investment sale transaction. In an effort to clean up their balance sheets, banks are reigning in on investment lending and are either calling notes due or are simply not renewing notes as they have in the past. This creates a unique opportunity for the right investor.
Although a property may be cash flowing and that particular owner has never been late on a payment, the inherent risk that banks see trump all logic, resulting in a distressed owner, but not a distressed asset. Mom and pop stores with long histories are trading between 9-11% and investment grade properties have seen Cap Rates rise from 6-7.5% to 7-9%. While many people are upset that this is a tough market, I have not heard any complaints from my qualified investment buyers. They have not seen opportunities like this in some time and can’t wait to capitalize on tighter lending guidelines.