Seeking Alpha - Bruce WIlds - 26 January 2017
Recently signs of rising prices for commercial property have started to appear in the Midwest. This trend seems to be driven by outside buyers coming in with cash. More and more I'm hearing of groups announcing plans to purchase and renovate buildings in my area. More often than not the numbers bantered around are substantial. This leads me to believe that with commercial property overpriced in so many other areas speculators are entering our market in search of bargains and fertile ground. No doubt part of this is the idea that those in charge of the economy actually want moderate positive inflation and "price stability," not zero inflation as they have stated by having a 2% inflation target.
One strong and defensible argument for higher prices on current buildings is that replacement costs have soared. Part of this is due to new codes, regulations, and restrictions as well as higher material and labor cost. This is driving a trend to remodel rather than building new when a property is available. This means repurposing commercial buildings is becoming very common. The exception being many big box stores and franchises with Wall Street money demand new build to spec facilities.
Another reason for money moving into this sector is that it is very interest rate sensitive and those buying today know when rates begin to rise the cost of money will create a strong barrier to new projects and construction which may cause rents to substantially increase.
It should be noted that this game is closed to many of those who might want to jump in because the rules for purchasing commercial property are far different than what a buyer faces when acquiring a house for their personal use. Unlike buying residential property, commercial property tends to require buyers to pay some rather expensive fees in order to satisfy the lender's requirements. Expect a detailed "ALTA" survey to run thousands of dollars and the same for a commercial appraisal. On top of that expensive EPA test and studies to prove the property is not contaminated are often necessary, in the end, these expenses make buying and selling commercial property a difficult endeavor.