Commercial Real Estate Investors

In years past, as commercial real estate investors have looked at possible investments they have focused mainly on the Capitalization (CAP) rate. This is a method by which investors measure the ratio between the Net Operating Income (NOI) of an asset and it’s purchase price. Investors would not rely solely upon the CAP rate to determine the strength of the investment, however it is a quick way to decide if it is worth pursuing further.

In years past, commercial real estate investors could purchase an investment with 10 % down. Now, investors are forced to come up with a minimum of 30% and most cases more. This drastically decreases the buying power of investors as well as the number of capable buyers. As the amount down required to buy a property has tripled, and sometimes even more than tripled, buyers are focusing more on the cashflow in years one through three.

Considering that real estate investors have to come up with much more of a down payment they are evaluating their risk tolerance. Will the rental rates increase in the next few years, will occupancy numbers go up, will I see a further decline in property prices? After determining the risk, they are then must consider the potential upside. When the market turns our rental rate will go up, causing the value of the property to go up. How much and how fast will it be?

There is no doubt that the current economy has presented more variables into the consideration of the value of a property. However, as these variables slowly diminish, property values inevitably will rise, and commercial real estate will continue to be a great long term investment.

This entry was posted on Monday, May 11th, 2009 at 11:10 am and is filed under Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.