CRE deal volume falls for the first time since 2009

Commercial property developers in Missouri and around the country have enjoyed healthy gains in recent years as deal volume has risen steadily, but a recent Wall Street Journal report reveals that the total volume of real estate loans closed in 2016 was down by 11 percent year-on-year. This represents the first drop in closed loan volume since 2009, and it has prompted several industry experts to speculate that the current positive cycle may be coming to a close.

Institutional investors like hedge and pension funds are generally risk averse, and analysts say that the drop in volume observed in 2016 is largely due to asset managers in these organizations moving away from commercial property in pursuit of more secure investments. Interest rates that are beginning to creep up from historic lows and a looming glut of new construction are both major worries, but it is plunging capitalization rates that have institutional investors most concerned.

A capitalization rate is the ratio of a property’s net operating income to its asset value, and the reason why investors are so concerned is because prices in many markets have risen sharply in recent years while income levels have remained largely unchanged. Capitalization rates in the retail and office sectors have been a worry for some time, and apartment projects in some areas now have capitalization rates as low as 3 percent. This has prompted a number of risk-wary institutional investors to pull their money out of such markets.

Investors and economic indicators can be unpredictable, and attorneys with commercial real estate experience may understand that developers hoping to mitigate their risks must complete their projects quickly. Taking a development from the planning stages to completion involves dealing with a variety of legal challenges, and even minor missteps can lead to costly delays. Lawyers could help developers avoid delays by ensuring that permit, zoning, subdivision and land use issues are addressed promptly, and they may also negotiate, draft and review contracts and other important documents.

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