How to handle a market correction

Question

Does anyone have experience holding small (less then 25 units) commercial multi unit deals through market corrections like the 05-08 timeframe? Would anyone recommend leveraging now into a small commercial deal like this or advise to wait for a market correction before taking any sort of leveraging action? Did anyone see the 05-08 positively affect the buyers market for commercial deals? Market rates for commercial deals locally at the moment are at cap rates between 5-7% and I am wondering if a market correction would likely improve those numbers for a buyer.

Account Closed · Answer

I really don't think we will have another crash like we did in 2008. That was not a part of the normal real estate up-down cycle. That crash was caused by a credit bubble, which created a housing bubble. The credit bubble popped and you know the rest. My point is that a lot of measures have been put in place to prevent this sort of thing in the future. Without a doubt, it is harder to get bank money now than it was in 2005.

Source: I watched "The Big Short"

Scott Bowles · Answer

Account Closed No I don't think there will be a "crash" either but I think I correction sometime in the next 3 years is very likely. I am wondering how closely the smaller commercial market prices and cap rates follow the standard residential trends in peoples experience.

Antoine Martel · Answer

Scott.

I didn't go through the market crash, but I think that it depends where you are located. In the Bay Area, cap rates went up a little bit from the 4-5% that they were at, but not by much because the demand. If you're in a market like Memphis where the cap is 8% right now, then maybe that property will go up to a 10-12% if the market were to crash. I think the location matters the most. Of course when the market crashes prices will go down.

How to handle a market correction

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