We have been in a Seller’s market for the last several years. Properties have been sold at values that have not been seen since before the great recession of 2007-2008. The Federal Reserve has artificially kept the interest rates low and the President in 2020 and 2021 pumped billions of dollars into the economy. Yes, this helped some people during the pandemic, but also prevented the normal cycle we have seen over the last 40+ years.
In South Florida, every 10 to 12 years, we have seen a down swing in property values, adjustments and corrections for a few years. The downcycle was due to change around 2020, but, instead, the market heated up. Why? Due to the movement of large corporations, senior level executives and large private investors moving to South Florida. This was due in part to the pandemic and no personal income tax. This kept home prices from declining and values dramatically increasing. They also sold their investment properties in the high tax states such as NY, NJ, California, Pennsylvania, etc. and purchased replacement properties in Florida.
Why is the market starting to shift now? Because the Fed is looking at multiple rate increases (4) this year of 0.5% each meeting. We could see interest rates as high as 6% to 7%, before the end of the year. This means that Capitalization (Cap) rates must also move up, which will cause the pricing to decline. We have seen this already occurring in other states in recent weeks. This will make Buyers happy and put Seller’s in a state of reverse sticker shock, and, in some cases, they may even pass on good sale prices because they do not believe prices are declining. Buyers are already refusing to accept some of the low cap rates on non-credit tenant transactions. Transactions will slow in the third and fourth quarter of this year except for seller’s that are now trying to complete their 1031 exchanges. These only will happen on truly all cash sales with no debt as the current rates are in the 4.5% to 5% range from banks and you can’t buy a property with leverage at a 4% to 4.75% cap rate. The returns are breakeven to negative.
So, I believe we are entering a stabilizing market, we will see adjustments in the next 12 to 18 months, but not a crash. It won’t be a Sellers or a Buyers’ market, but a market at equilibrium. This means that both sides will walk away giving a little to make a transaction happen.
If you are a seller there is still time to take advantage of this market, but you need to be realistic and move quickly. Properties need to be properly unwritten with management fees (5%), vacancy and collection rates (5%), reserves for replacements, adjustments for increased property taxes based on sale, and a reasonable cap rate.
SperryCGA can help you still take advantage of the market. We have 60 offices throughout the US, with 8 offices here in Florida.