Re-framing Uncertainty into Opportunity

It’s time to re-frame uncertainty as opportunity!

Commercial real estate is at its core the difference (spread) between how much you make vs how much you owe. That means pricing is very dependent on debt costs (interest rates). The current situation is:

    • Sellers are largely still asking for pricing from early 2022 – when debt was in the 3.5% range
    • Buyers are putting together offering prices based on debt costs at 6%+

That’s a significant spread!

As a result, not many transactions are happening. No one wants to move their offer/ask 25%+ in this environment. And unlike when we bought property in COVID the Fed is currently working to slow the economy down. That means buyers really don’t want to come up when there’s a good chance more headwinds are coming.

Here’s the opportunity though – that means there are owners (potential sellers) getting squeezed. A lot of owners used short-term leverage to buy and assumed small, no, or (*big red flag*) negative cap rate growth… that means they are no longer able to give the expected returns to investors.

Some of those HAVE to sell to cut losses:

    • They can’t refinance out of the short term loans with high rates and still cover their costs with property incomes.
    • They can’t hold it without asking investors for more money to lower loan-to-value (LTV)…and getting more investment is unlikely to happen in the current environment.
    • They get the choice of selling for a much lower return or holding and hoping the market changes before they run out of operational income.

These are the owners who will cross the spread first.

It means opportunity for those that focus on managing operations and kept underwriting conservatively throughout the good times. That’s what we do at Club Clover. We keep making offers where we know we will protect our investors. We are in the arena working to find the right deal that prices in the uncertainty and take advantage of this opportunity.  All while continuously improving our operations at existing properties to add more value to investors.

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