Commercial Real Estate 101 ~ Part I
Sales Volume Down
Commercial Real Estate sales volume is down – way down. According to Real Capital Analytics, a New York research firm who has been tracking commercial sales for almost a decade, sales and projections through the end of the year are at levels not seen in the market since the early 1990’s. The National Association of Realtors’ Commercial members in a recent survey reported that commercial sales volume is down to 1994 levels for all sectors – office, industrial and retail.
Not Much Price Adjustment to Date
Despite the economy’s continued struggles, most property owners continue to believe that “a recovery is just around the corner” and therefore “why should I lower my price if I can wait a few months and get the price I’m asking?”
As a result, most CRE pricing remains at 2007-2008 levels. The thought process continues with – “I can always lower my price if I start too high but if I start out low then I’ll never know if I could have gotten a higher price.” But what most often happens is that the offers made are well below the asking price. These offers are quickly dismissed, slotted as “low-ball” offers and the wait goes on for the Seller to get their asking price. Buyer confidence has declined to the point that they would rather wait and try to find the bottom rather than risk buying at a price that may fall even more. The reality is that these “low-ball” offers are likely “market offers” because buyers are not going to pay 2007 – 2008 asking prices. Months later when either more low offers or no offers come in – sellers realize that the “low ball” offer was a market offer and the best one that they will likely receive.
Commercial Property Owners – How Long Can you Wait?
So the question that Sellers may need to start asking themselves is – can I afford to wait months, a year, or more to get my asking price or do I need to price my property and sell it now because the offer I’m likely to get in the future likely won’t be better than the offers I’m receiving now.
If Sellers are waiting for pricing to return to pre-2008 levels it may be awhile based upon recent comments by Dr. Mark Dotzour, Chief Economist with the Texas A&M Center for Real Estate. Looking at the near future, he sees 2010 as a tough year for the banking system as real estate financing continues to drive the industry. Foreclosures are expected to increase and refinancing will continue. Slow job growth is projected to pick up in 2011 and no new real estate supply being added but rents should start to stabilize. By 2012 he predicts rapid job growth, no new real estate supply but property values should begin to grow. By 2013 he projects a rise in property values and a subsequent fall in cap rates, as the market finally stabilizes.