This is a question posed to me recently by a property owner about to sell an office building. Either the owner needed a little more convincing or he needed talking points to support his decision for his presentation to the investment committee — or both.
It’s a seller’s market right now for most property types. Perhaps the owner, having leased up the building and harvested the NOI, is ready to monetize the asset. The owner might want to use the cash to target a different property type or location, to pay down debt or for myriad other sound reasons. But in this case, the owner is asking: What are the market risks? What could go wrong in the market that would make this a good time to sell the asset?
It’s a tough question because the market and economy are as strong as they have been since the recession ended in 2009, yet inflation remains low and interest rate increases are somewhere over the horizon. But even with the sunniest of forecasts, investors are wise to keep the risks in mind and have an alternative plan in case the risks materialize. Here are five risks to consider:
- Interest rate risk: The Federal Reserve is widely expected to begin raising short-term interest rates by the middle of next year. Before then, we could see another “taper tantrum”—the three-month period beginning in May 2013, when the 10-year Treasury yield doubled after Federal Reserve Chairman Janet Yellen talked about winding down the Fed’s bond purchase program. A lot is riding on Chairman Yellen’s choice of words.
- Stock market volatility: Stocks are “priced for perfection” and it may not take much to knock them off their pedestal. The stock market is a very imperfect predictor of the economy, but the loss of investor wealth and increased volatility could ripple through the commercial real estate leasing and capital markets.
- Global risks, both geopolitical (Ukraine, the Middle East) and economic (Europe, China, Japan). This could actually work in favor of U.S. properties, as crossborder capital seeks safety in an unsafe world. But weaker overseas demand for U.S. exports and a stronger dollar making those exports more expensive could hamper domestic manufacturers.
- Construction risks: Office construction is about halfway back to its pre-recession peak, and it is rising.
- The Known Unknowns: Economists are not good at forecasting recessions, which can blow in quickly like a cold front at the end of summer. In December 2007—the month the Great Recession began—only 38 percent of economists surveyed by The Wall Street Journal expected a near-term recession. Another risk factor: The recovery is now in its 64th month, longer than the 58-month average for post-World War II expansions. We know another recession is inevitable, and we can only wish that economists were as accurate as weather forecasters.