The economy has been chugging along fairly nicely in most areas for several years now. But this then always begs us to ask the question, “When will we experience the next economic downturn?” This isn’t a question that we often like to ponder, but at the same time, we’d always like to anticipate what’s coming our way.
Keeping this in mind with respect to commercial real estate, we can sometimes even notice specific advance warnings of a downturn. For example, when cap rates have been getting lower on investment properties, and they’ve now plateaued and they haven’t been getting lower for a while, this could be a signal that we’ve hit the market peak. With this in mind, if we look back over the last 40 years or so in commercial real estate investing, once the market has plateaued after prices have been rising for awhile, the next major move will most likely be down rather than up. So then we are left with guessing as to when, exactly, this cycle is going to turn.
Keeping this in mind, the big question then becomes, “Are you going to ride out the next economic downturn no matter what with the properties that you currently own, or do you want to sell one or more properties at or near the peak of the market?” Because if you’re planning on holding onto your property and just riding out the next economic downturn, there’s no reason to even ask yourself if now is the time to sell, because you’ve already decided that you’re not going to do it. So your game plan will just be to stand pat and hold firm with your existing real estate investments.
But if you’re someone who would like to sell one or more of your properties before the next downturn hits, ask yourself, “Would now be a great time to cash in and take my money, or maybe even get into another kind of investment, or do I still think that my property will continue to appreciate even more before this next downturn hits?”
With this in mind, how much lower do you think cap rates will go before this next downturn hits us, and do you think you’ll find someone who will ultimately pay you that higher price? In addition, consider that once the lenders begin recognizing that a downturn may be coming, they’re more likely to then tighten their lending standards, making it more difficult for your buyers to then pay you the price that you really want.
Putting all of this together, if your plan is to remain a long-term holder with your commercial real estate, there’s no decision for you to make right now about selling. But if you want to sell at or near the top of the market, you need to be asking yourself, “Should I sell right now, knowing that I’ll find a buyer who will pay me great money, or do I feel confident that I’ll get an even higher price by waiting?”