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Long hold

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  • | 10:22 a.m. February 18, 2011
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There are great commercial real estate opportunities for those who can pay with cash. But the big question is: how long to hold until investors see a return on their investment?

“Buy stuff you can live with today,” counsels Randy Anderson, the chair of real estate at the University of Central Florida.

Anderson says some commercial real estate investors are overpaying, spurred by a flood of investor money chasing too few deals. He's seen top-quality buildings in the Orlando area sell for as high as 5% capitalization rates, a commonly used ratio in the business defined as annual net operating income divided by price. Such low cap rates were last seen only during the recent boom.

“A lot of the transactions this year were stupid,” Anderson concludes. That's because the economic recovery may take longer than expected.

Another concern is that the Federal Reserve's short-term rate increases to counter the inevitable rise of inflation will limit appreciation. “There's no way we're going to pull the brakes in time,” Anderson says. “It's coming.”

Also, it may take longer than expected for the recovery because so many areas of the commercial real estate market depend on job creation. “We really need to see jobs created before the market tightens up,” Anderson says. “There's so much slack in the labor market.”

It's also not clear how much commercial real estate inventory the banks continue to hold. If they decide to flood the market with properties for sale, that could depress values further.

Anderson's conclusion: “Don't buy with heroic assumptions.”

If investors can be disciplined a buy commercial real estate at reasonable prices, Anderson calls the current situation a “once in a 20-to-30-year opportunity.”

“Be early, sell early,” says Anderson, repeating the commonly used rule of thumb. “It's a good time to buy before everyone realizes it.”

Still, some property types are performing better than others. Apartments are filling up because many people lost their homes to foreclosure or prefer not to rent homes that may be foreclosed in the future. “In Orlando, there aren't any concessions anymore,” Anderson says.

Medical-office space may also be among the first sectors to recover. That's because physicians have been waiting for greater certainty in health-care legislation.

Another promising area of commercial real estate is the industrial sector, particularly warehouses in port cities such as Tampa. That's because the widening of the Panama Canal will attract more shipping to Gulf Coast ports.


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