3 REASONS WHY ONE GROUP HAS THE ADVANTAGE
As we approach the third quarter of 2014, commercial real estate remains a seller’s market. There simply are a lot more buyers than there are sellers. Therefore, the seller is benefitting from the increased demand & competition for their property. There are many reasons why it is a seller’s market:
1. Low Inventory
Low inventory means increased demand for existing properties available for sale or lease. When this happens, sellers are at an advantage to sell their property quicker and/or at a higher price. Because of the lack of options, buyers face increased competition. It is not uncommon for a property to receive multiple offers from different buyers. In the end, this means more money in a seller’s pocket.
2. Capital Gains Tax with 1031 Exchange Property
With a capital gains tax added as part of a 1031 Exchange, the added expense may take a toll on buyers. Most working people in America (individuals making between $36,250 and $200,000 per year) are charged a 15% capital gains tax. Any person involved in a 1031 Exchange is required to pay this tax, only if they fail to buy a property within the required time frame. Paying the tax will affect a person’s purchasing power since they have less money to put down on another property. For example, a property owner sells a $500,000 building. If they sell the property, theoretically they can put money down for a $1.5 million property (30% down). Because of the 15% capital gains tax, they are left with $350,000 – enough only for a $1 million property. This means higher demand for less expensive properties.
3. Stock Market Volatility
The stock market will always have its ups and downs, as the real estate market does, but some aspects of the stock market have a high degree of volatility that real estate does not have. For instance, people will often invest in penny stocks believing it will significantly increase in value. Most often, these stocks only increase by a limited percentage, stay stagnant or tumble. Also, if you compare the Dow Jones Industrial Average from January 1, 2000 to today (September 5, 2014), the index has only increased about 49% (11,497.12 and 17,137.36). In contrast, the real estate market usually sees significant appreciation value over time. For example, a property on Wilshire Blvd in West LA sold for $3.6 million in 1994. In 2008, the same property sold for $17.4 million. This represents a 383% appreciation in value. That is an appreciation rate of just under $1 million each year. Because it is more stable and has a greater overall appreciation value, real estate presents itself as a safer investment to buyers. Also, real estate holds intrinsic value, whereas stocks does not.
According to George Pino, co-founder of Commercial Brokers International, the current “seller’s market” trend will continue to persist for another 6-9 months, when supply will exceed demand. For now, sellers have the upper hand in price negotiation and the overall transaction. Therefore, as with most anything, timing (for both buyers and sellers) is critical.