How to avoid paying too much for commercial real estate

Commercial real estate in The City That Never Sleeps is believed to be overvalued by many in the local industry.

When entering the commercial real estate market, avoiding overvalued properties is just as important as finding below the radar deals. To that end, buyers must be aware of what types of properties and which regional markets are best to avoid in order to keep from getting stuck paying more than the property is worth.

Be wary of New York City
New York City is the biggest market in the country, but its real estate may be significantly overpriced, according to a survey by the accounting firm Marks Paneth & Shron. Over the course of June and July, they talked to 100 executives at commercial real estate companies in the city, and 54 percent of them expressed their belief that values around town were inflated. That held with a survey done by the Gotham Commercial Real Estate Monitor this past winter that showed the same results.

"The view that Manhattan commercial property is overvalued dovetails with perceptions about office leasing prices: Most real estate executives who participated do not believe they're getting back to pre-recession levels very quickly. It could be that there's an underlying feeling that foreign investors are inflating values in Manhattan," said William H. Jennings, partner-in-charge of the Real Estate Group at MP&S.

Increasing interest rates' role in property values
Property values aren't just tied to their region or neighborhood. Market forces also play an important role. Interest rates have an obvious and important impact on how real estate is valued, and with interest rates on the rise, commercial real estate brokers may have to modify some of their valuations.

Beyond the direct effect of interest rates on a property's cost, they have implications for the market as a whole. Even with recent increases, rates are still at historic lows, and have been for some time. The somewhat artificial suppression of rates, brought on by the Federal Reserve's $85 billion a month bond buying program, could be playing a role in inflating property values since many buyers have found relatively cheap credit over the past few years.

Investing in commercial real estate, whether you are looking for a quick flip or want to settle into commercial property management, is about buying the right property at the right time in the right place. The current market provides numerous opportunities all over the country, but the astute investor will know where to avoid putting their money, and be sure not to get hooked into a property that has seen its value rise for reasons that are untenable in the long run.

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