Staying Aware of Excessive Risk

By Marcelo Bermúdez, President, Figueroa Capital Group, subsidiary of Charles Dunn Co.

Federal Reserve Chairperson Janet Yellen has made a pretty clear case that quantitative easing’s sunset is not too far away … about two years. With that information in hand, short-term speculators in real estate can tend to price that into decision-making processes to drive down cap rates of commercial real estate product unnecessarily, and that can slow down sales volume. If you’re active in the brokerage community, you can see it already with properties that are being marketed, especially NNN. They tend to get re-priced week after week as they don’t sell as quickly because sellers are betting on low interest rates to drive sales.

There are already conversations at the executive level at the Fed that the two-year window is too slow and should be sped up. This type of rhetoric makes the front page and ignores other data including retail sales reports, which show continued – albeit small – improvements from May to June.  The same type of good news is showing up in manufacturing reports.

Bank and life insurance lenders will continue to look at national inputs, but also ensure they’re paying attention to local economic data. If local vacancy data is higher or lower than the national average, they’re going to use the local data to ensure their risk pricing accurately reflects their expectation. Secondary market properties continue to get attention, but shorter term leases may affect terms the bank will offer and, in turn, sales pricing.

So, in a nutshell, my advice is to make sure investors stay aware of important data like employment, manufacturing, tax policy conversations, and technological breakthroughs that can disrupt the market, to ensure you’re not taking on excessive risk in your real estate investment portfolio.