Should You Sell?

I am wearing a jersey instead of typical business attire today. This jersey features the Red Wings’ number 19, Hall of Famer and current General Manager Stevie Yzerman. As the GM of the Tampa Bay Lightning, he was responsible for building a team that won multiple Stanley Cups. He did so by knowing when to trade and release players that no longer helped the team and brought in talent that would make them better. Your investment portfolio should be treated the same way. You need to know when it is the right time to shed properties that are just costing you too much or not making you enough. Let’s focus on some factors that should motivate you to make some changes to your portfolio. I am Howard Freedland, and this is your Echo Commercial Tip of the Week.

Point One – Interest Rate Change

If you are leveraged with your investments, the rapid uptick in interest rates may be catching up with you. As stated in my writings earlier this year, The Mortgage Bankers Association (MBA) estimated that “of approximately $4.4 trillion of outstanding commercial and multi-family mortgages, $728 Billion (16%) matures in 2023, with another $659 Billion (15%) maturing in 2024.” This is significant – going from rates that were in the 3-4% range to 8-10% can put you into negative returns overnight. There is still low inventory for high-quality property, but the number of calls we are getting about “pocket listings” – listings that are not on the market, but the owners are ‘testing the waters’ – are growing, which indicate that there may be a significant number of opportunities in the near future. Know where you stand with your adjustable-rate note.

Point Two – Insurance

Nationally, we have seen insurance rates explode in recent years. Florida, a state that has seen it’s fair share of natural disasters, is often at the top of the list of state increases. Some of this is attributed to the number of insurance companies that have pulled out of Florida. The increased frequency of tragic weather events has put even more pressure on a very tightly wound industry. The push for reform is strong, but the state is not moving quickly, leaving many people with decisions to make due to skyrocketing premiums.

The Wall Street Journal reported in October that national CRE Insurance costs have risen 7.6% annually since 2017, but we are seeing over 10% in areas such as Florida. Unlike mortgages that often cover long terms, insurance contracts are renewed annually, which has forced commercial property owners to sign more expensive policies or skip coverage altogether.

These are just two of the mitigating factors that can affect a business’ cap rate. If you invested with cash, you have a much better chance of weathering the storm. However, if you are leveraged, you have to channel your “inner Stevie Y” to be able to make good decisions about your company’s future. Get to know all of the factors that can change the trajectory of your investments.

If you are questioning if it is time to divest and want to talk it through, please reach out to my team at howard@echofineproperties.com. We are currently working with a number of property owners that are assessing their portfolio’s future.