SB Equities

Since the first of the year, the volume of investment properties coming onto the market has certainly increased.  Although not many seem to be selling, there are clearly a lot more offerings out there as compared to 12 to 18 months ago.  But it seems like I am seeing two distinct types of offerings.  One type include very safe investment properties, typified by a long-term lease to a single, high-credit tenant.  Examples include Walgreens, KFCs and longer-term government leases.  The asking CAPs for properties in this segment have settled back down into the 7 percent to 8 percent range.  The other type include almost everything else but the asking caps are dramatically higher – most are starting at 10 percent and go up from there.  Properties in this segment have lower-grade credit and/or shorter-term leases.  But the thing that really strikes me is the scarcity of properties priced between an 8 CAP and a 10 CAP.  If the property is high-credit with a long-term lease, its an 8 CAP or lower.  If it’s not, its a 10 CAP or higher.  And there seems to be very little in between.  So being the curious mind that I am, I decided to do some research and see if the data proves out my theory.  My methodology was simple – I conducted a series of searches for investment offerings from a variety of on-line sources.  Using the usual suspects – CoStar, LoopNet, CCIMnet and a few key brokerage websites, I developed a sample set of about 1,000 properties nationwide.  I exported all of this data, sorted and compiled it into a spreadsheet and graphed the results  (by the way, 20 years ago, this would have taken a week to do – today it took about 20 minutes).  This graph appears below and confirms my suspicion – a decent amount of offerings in the 8 CAP and lower segment and large number of offerings in the 10 CAP and higher segment.  But in between is a noticeable dip. 

So the next logical question is why?  Here is my suspecision.  The demand for the really safe properties has lessened but never really gone away, as investors would much rather earn 7 percent buying  a Walgreens vs 1 percent putting thier money into a CD.  But this segment now is almost exclusively populated with buyers that are all cash.  If you want or need financing, this segment has become much less attractive.  In the old days (circa 2003-2007), financing was both cheap and plentiful so the cash buyers would chase the high-credit product and the leveraged buyers would slip into the next slot, the good-quality properties that were in the 8 percent to 10 percent range.  But today, financing may still be cheap but it is no longer plentiful so the majority of these buyers on gone.  And if the buyers have dried up, the sellers will soon follow.  It has taken the market a little while to adjust but I think that this graphic illustrates that a shift in asking prices has occurred.  What this means going forward remains to be seen but the fact that the gap is narrowing between asking prices and bid prices has to be a considered a good thing.