(post by Dee) I recently read a blog post titled Slow Motion Crash that predicts commercial real estate is headed in the same direction as residential - down. He compares the life cycle of the housing market bubble to that of commercial properties, and points to higher vacancies and longer time it takes nowadays to lease retail spaces. I must say I was personally upset to hear that my two favorite retailers, Cold Stone Creamery and Starbucks, just yesterday darlings of Wall St., are closing locations (see Cold Stone Feels the Pinch).

One comment in particular, though, has caught my attention… namely that the cap rates (capitalization rates) have “edged up”. Now, this is no place for technical broker terms but higher cap rates equals lower prices. This is new. Every investor I work with has been looking for higher cap rates the past couple of years to no avail. I have been unable to find them any quality commercial properties in NYC at decent price / cap rate. Yes, occasionally we find good deals (i.e. a multi-family in less-desirable parts of Brooklyn come up) but otherwise, it’s a needle in a haystack. This higher cap rates business would be good business for sale transactions. When I forwarded this article to a seasoned colleague, I got a response from him that I thought worthy of sharing (with his permission, of course):

“Re higher cap rates…It seems like it, but I haven’t seen prices move at all on commercial. Now the other thing is you have firms like Massey Knakal who get listings at over-priced number to begin with, and then get their seller to reduce the price after the listing sits there for a while. They promise to get inflated, unrealistically high prices, then blame the weak market and drop the price.

If people were to list at reasonable market price from the get-go then it wouldn’t look like prices are dropping. This is commercial real estate and this irrational pricing should not happen. We should be looking at income! Like that small mixed-use 2-unit you’ve just sold… If you listed at the crazy number you wanted, and then we sold 100K (15%!!!) lower…. Would you then say the prices are dropping 15%?”

It’s all relative. Here, in the trenches, there’s more to the story than the eye meets. Don’t believe the headlines 100%. It’s also why we, real estate brokers, have our jobs.