The United States continues its predictable and inevitable slide into a recession. For more information on market cycles, please reference NetGain’s essay “Market Cycles and Income-Producing Real Estate.”

Highlights of the current U.S. economy:

• The unemployment rate for October increased to 6.5% from the prior 6.1% rate for September
• The Consumer Confidence Index for October is 38 (1985=100), a record low
• The Commerce Department reported that the gross domestic product (GDP) fell at an annual rate of 0.3 percent in the July-September period, a significant slowdown after growth of 2.8 percent in the prior quarter

Current capitalization rate recommendation: Income property buyers should consider capitalization rates of 7% minimum. Included in determining the capitalization rate should be an attentive lease rollover analysis. The probabilities are that releasing lessees will be executed at lower rates.

Consequently, all income from leases that expire within one year has to be re-evaluated when determining the net operating income to compute a capitalization rate. The collected income from those leases has to be adjusted to what the probable income would be. Remember, the lease that offers the option to renew at a previously negotiated rate is a unilateral agreement (at the discretion of the lessee). If market rates are higher, the lessee will execute. If market rates are lower (as is the case in most instances), the lessee will not execute the option, but will re-negotiate to get the lower market rate.

Where does the economy go from here? For informed analysis and answers, please reference NetGain’s essay “America’s Current Economic Downturn and the Solution.”