Paul Richard
Senior Associate, NAI Latter & Blum
Richard is past president of the CID (Commercial Investment Division of the New Orleans Metropolitan Association of Realtors), president of the LACDB (Louisiana Commercial Database), commercial director of the Louisiana Realtor Association and program manager for the Economic Real Estate and Forecast Symposium.
Most excited about…
One exciting aspect of the market is the 1031 real estate exchange. As a result of the long recovery and run up in value, many investors are sitting on substantial property equity that can be converted and reinvested in a tax-deferred exchange. A commercial realtor today can add value by facilitating complex transactions and by identifying required replacement properties, even those that may never hit the market. In most instances, investors will not sell unless a replacement property can be identified. As such, the currency of today’s market and for 2018 is access to information and available replacement properties.
Biggest anticipated challenge…
We are now entering a “post-peak” period. The value grid line is beginning to flatten and there is a higher perception of risk, particularly interest rate risk in the market.
In response, banks have begun tightening their underwriting for commercial real estate. Lower loan-to values (LTV’s), shorter loan terms, and higher debt coverage ratios are now baked into most deals. The big unknown is the trajectory of interest rates. Of course, the “X” factor is what’s going to happen with tax reform, particularly relating to 1031 exchanges. What we do know is that for every uptick in interest rates, there is a resulting increase in capitalization (CAP) rates, which will result in value compression.
Absorption rates are slowing, and days-on-market are getting longer. The deals of tomorrow will have to be well researched and layered with financing that will sustain any increase in interest rates at term, or stay within a debt coverage range that contemplates flattening or even decreases in rent.
