It is amazing how many students from my Commercial Brokerage class call and say they have an investor with $5,000,000 looking to purchase a commercial property showing a return of 10% on the investment. Or they ask do I know of any triple net lease properties with national credit tenants for sale with a return of 8%. In the real estate market today these types of properties are just not available for these kinds of return on investment.
Traditionally, real estate investors have been seeking investments with returns in the range of 8% to 10%. However, with the very, very low interest rates on savings deposits sellers are less willing to sell their properties in this market. Their position is that if they sell their property the net amount to reinvest after income taxes will not yield the same income as the property they now own.
The income properties which do come on the market are being sold because of issues with the property or issues with the owners of the property. Issues with the property could be it needs to be improved, re-marketed, has lost tenants or the market area has changed. Issues with the ownership could be partnership disagreements, lack of capital to improve the property, mortgage finances, a desire to reduce management responsibility or ownership is seeking to change/diversify investments.
This leads to a strange market condition in which the availability of properties for sale have returns on investment lower that the market is willing to accept “prices are too high” and buyers with expectations which cannot be obtained “investment returns are too low”.
Over time buyers become more willing to accept a lower return and are willing to pay higher prices. I guess you could call this price creep. We see this when we buy gasoline. Three years ago the price of $3.00/gallon was too high and we were aware of the this high price. Today the price is approaching $4.00/gallon and we just accept that this is the cost of driving.
Therefore, as the overall real estate market improves buyers must become more willing to pay a higher price if they want to invest.