Real Estate Investment Fundamentals Still Strong

Let me start today by asking a few questions:

Why do buyers of commercial real estate think that just because the economy has been squeezed by a few percentage points, that ALL properties are now somehow poisoned assets? Did somebody change the fundamentals of real estate investing when I wasn't looking? When interest rates are at an all-time low, why are investors now nervous about buying solid assets with good leases to national tenants and demanding higher cap rates?

Now before you call me a whiner, let's qualify my comments a little bit. I believe that a correction in the market place is unavoidable at this time as the financial institutions have, indeed, tightened their proverbial belts and made it a bit more difficult to get favourable terms i.e. LTV ratios are different today than they were even just eight months ago. Many companies are having to look at their plans for the future and are asking themselves if expansion or new facilities fit with the economic realities of today. I get that.

What I don't get is that there seems to be a giant chasm between perception and reality as it relates to commercial real estate in Canada right now. As one of my clients recently put it, " the point of capitulation hasn't been reached yet." Why does there need to be a point of capitulation? If an investment has solid fundamentals, a good lease with a strong covenant, a good term remaining on the lease, a building that's in good condition and well located, why is that investment so much riskier today? I'd argue that it probably isn't.

The rules of the game haven't changed; perception in the marketplace has.

I'm really looking forward to reading any comments or additional ideas you might have on this topic, so please comment below.


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