Come to Us for Central Massachusetts Commercial Real Estate
Would you recommend that I drop my asking price in today’s commercial real estate market? Y
You’ll hate this answer since it seems to waffle, but my answer is, “it depends”.
After all, what’s the definition of value? “What a willing buyer will pay a willing seller”. If your property is priced to attract buyers in our current market and it’s not selling, then there may be other factors such as location, condition, visual appeal - or is it a specialized user building with a high conversion cost? These can prevent offers from coming in from buyers.
But if your property is priced - not based on the current market, but rather on what you paid for it, what your mortgage balance is or what you just plain want for it – then be prepared for a long wait. Buyers today are not the same as buyers of even two or three years ago. At that time, investors were over paying based on true economic value because they too often felt there would be someone else out there who would over pay at an even higher rate. And perhaps they panicked thinking that if they didn’t buy the building of their dreams then, it wouldn’t be there in a short time.
That period of buying frenzy is now a foot note in history. It’s best to forget it and form a strategy based on what today’s market will bring. No one knows what the commercial real estate market will look like in one, two or even five years. The smartest people I’ve listened to predict at least a five year period to return to a “normal” market, whatever that is. No one predicts that it will look like the hyper inflated market of the earlier part of this decade.
The Wall Street Journal reported that “Feds Fret About Commercial Real Estate”. More financial pain is expected as they force banks to recognize losses. There’s even one dire prediction that as many as 45% of loans could be at risk. If your mortgage loan is “under water”, perhaps you should consider how to dispose of the property before your lender decides to foreclose. Some strategies might include a short sale with the lender’s cooperation, a voluntary auction or simply adjust your asking price to current market rates.
Some sellers want to keep their price artificially high hoping that a buyer will make an offer based on that price. This seldom works. Most buyers won’t make the effort to offer what they feel to be the real current value because they “might insult the seller”, or just don’t feel it’s worth the effort to go through a protracted negotiation when there are so many other properties available today. In the meantime, the commercial market prices are still trending down and future pricing is guesswork. If the Wall Street Journal’s pessimistic outlook is correct, prices will fall dramatically.
So, what will your pricing strategy be? Our purpose here is to help you create a plan that will bring you the best value available - today. The past is histiory, the present is now and the future is, well, muddled at best.
We'll be glad to offer our help in developing that strategy with you, or use your own real estate professional. The most important point is to be aware of current market conditions and price your property to sell.
This article submitted by Robert L Yale, CCIM
contact Bob at bobyale@svn.com
Central Massachusetts Commercial Real Estate
Come to Us for Central Massachusetts Commercial Real Estate
Why? It boils down to fundamentals. We recently experienced an unprecedented upward spiral in commercial real estate (CRE) values with some properties selling at unrealistically high prices compared to their underlying real value. Too many investors bought at low CAP rates in the 3 to 5% range without paying enough attention to the true value of some of the leases, the tenants, and the local market. And they over leveraged their purchases at 80% loan to value or more. This didn't leave a lot of room for the loss of a key tenant or, as is the case now, tenants coming back to the landlord to renegotiate their rents downward - or just vacating before their lease terms expire.
I heard a report this morning suggesting that there are $1.7 Trillion dollars of CRE mortgages outstanding today. Not all of these are in trouble, but the estimate is that 25% of these, or over $400 Billion worth, are "under water". Of this figure, lenders have only recognized about 10% of these troubled assets.
No one knows what the real number is, but let's say $350 Billion of troubled assets are still to be recognized and dealt with in some manner. How will this affect you?
We already recognize that, in general, values have dropped from 30% to 50% from their peak in 2006-07. If this is true in your market and for your property type, then your 70% loan to value mortgage is under water and subject to be called by the lender. The momentary favorable news is that lenders don't want your property and are tending to "kick the can down the road" as one commentator put it. In other words, defer action and see if the problem will go away.
I'm a glass half full guy and I hope the problem will go away, but I was in this business during the late 80's and early 90's and saw that these problems tended not to go away.
Are there steps that you can take today? Yes, although I don't want to imply that any single fix will correct everyone's problems. Each owner's asset must be looked at carefully with consideration to the points above and more. The US commercial real estate market is made up of thousands of local markets. No one brush can paint them all equally. So even within a portfolio there may be different solutions suggested.
As part of a national real estate firm we're in a position to put you in touch with the right experts to offer a solution. These parties may be local, part of our national Asset Recovery Team (SVN ART) or one of the many outside firms with whom we have affiliations for specialized purposes.
Whether you contact Sperry Van Ness or another source, take a look at your CRE properties now, recognize the true value of your property and compare it to your mortgage value. Include in this a risk analysis for your tenant base and discount any growth you may have built into your operating statements - since the growth may go the other way.
This artilce contributed by Robert L. Yale, CCIM
Sperry Van Ness/ComVest Realty
Northborough, MA 01532
508-351-7079
bobyale@svn.com
Central Massachusetts Commercial Real Estate