What is Owner Financing for Commercial Property?

In most commercial real estate transactions, the buyer finds a property, negotiates a purchase contract with the seller, obtains financing from a commercial lender, and closes escrow.

However, a growing number of property owners are discovering that they can directly provide financing to buyers to sell property faster, ultimately generating more potential profits from interest income.

Owner financing for commercial properties gives buyers and sellers more control over the transaction and enormous profits by cutting out the traditional commercial lender as a middleman.

What is Owner Financing for Commercial Property

Some commercial properties for sale by owner (FSBO) offer buyers owner financing. When a real estate sale by the owner occurs, the seller accepts regular monthly payments directly from the buyer instead of the buyer having to go through the time, trouble, and expense of obtaining a commercial real estate mortgage.

Depending on the market in which the investment property for sale by the owner is located, owner financing may go by a different name.

The terms seller financing, owner carryback, the owner will carry, carrying the note, commercial owner financing, and the owner brought financing are all used to describe owner financing. In some regions, owner financing is referred to as a ‘land contract,’ even if the property is a building versus commercial land for sale by an owner.

Pros and Cons of Owner Financing

There are several benefits and potential drawbacks to buyers and sellers who agree to owner financing:

Seller benefits include:

• The ability to sell a problematic property at a reasonable price with a faster closing and fewer days on the market.
• We are accruing monthly interest income for the seller as part of each mortgage payment from the buyer.
• We are paying capital gains tax pro rata with each buyer's mortgage payment instead of in one lump sum.
• The ability to sell the note to a real estate note buyer.
• Option to foreclose and take the property back if the buyer defaults on the owner-financed mortgage.

Seller drawbacks include:

• Sellers must conduct due diligence on the buyer when providing owner financing.
• Sales proceeds are received as part of mortgage payment instead of upfront.
• An attorney is needed to draw up loan documents, and an escrow company is used to collect and track buyer mortgage payments.
• Economic cycles may affect mortgage payment collection from the buyer.
• While the seller can foreclose if the buyer defaults, the seller may not want the property back.

Buyer benefits include:

• The buyer does not have to meet traditional lenders’ requirements of a commercial bank.
• Potentially easier to qualify for owner financing offered by a seller.
• Close of escrow usually is faster with owner-financed commercial real estate.
• Easier to negotiate owner financing terms such as interest rate, payment due date, and time of the note.
• Lower closing costs due to the absence of bank fees and financing costs.

Buyer drawbacks include:

• Not all sellers are willing to offer owner financing.
• Sellers may demand a higher price in exchange for carrying the note.
• Owners offering owner financing may also be less inclined to negotiate on purchase contract terms and contingencies.
• Sellers offering owner financing may still investigate buyer credentials such as credit, assets, and liabilities.
• Missed mortgage payments to the seller can lead to foreclosure and loss of property.

How Owner Financing for Commercial Property Works

Now let’s look at an example of how owner financing in commercial real estate can work.

In this scenario, we’ll assume the owner is offering owner financing to sell a difficult property, reduce upfront capital gains tax liability, and earn interest income. The buyer benefits by making a lower down payment and getting a very fair price on the property at an attractive interest rate:

• Purchase price = $2,000,000
• Down payment = $200,000 (10% of purchase price)
• Amount financed = $1,800,000 (owner carryback)
• Interest rate = 8%
• Amortization = 30-year repayment schedule
• Term = 10 years (remaining loan balance must be paid in full)
• Mortgage payment = $13,207 (principal and interest)
• Total interest received by seller = $1,499,460 over 10-year loan term
• Total payments received by seller = $1,756,531 (principal and interest) over the 10-year loan term
• Balloon payment received by seller = $1,542,928 at the end of the 10-year loan term
• Total proceeds received by seller = $1,756,531 (principal and interest) payments + $1,542,928 balloon payment = $3,299,459
• Original owner carryback amount = $1,800,000

Owner Financing Terms to Know

The terminology used and structure of an owner-financing mortgage document (also known as a promissory note) is similar to what traditional commercial real estate lenders use:

Amortization

Amortization is the schedule of periodic payments, including principal and interest. In the above example, the owner carryback amount of $1,800,000 is amortized over 30 years even though the loan term is for ten years.

Term

The loan term is until the borrower must pay off the remaining balance. While most residential mortgages have 30 years, commercial real estate loans typically have terms of 5, 10, or 15 years. In our example, the time of the owner-financed loan is ten years.

Balloon

The balloon is the remaining loan balance principal that must be paid at the end of the loan term. In the above example, the seller receives a $1,542,928 balloon payment in addition to the periodic mortgage payments already received from the buyer. The buyer and seller could agree to finance the remaining principal balance with a new owner financing note, or the buyer could obtain financing from a traditional commercial lender.

Promissory note

A promissory note details the terms and conditions of the owner-financed mortgage, including:

• Loan amount
• Repayment term
• Interest rate (fixed or variable)
• Repayment schedule
• Payment frequency (monthly, quarterly, etc.)
• Payment amount (principal and interest)
• Property taxes and insurance are included in the payment amount
• Balloon payment details
• Late payment fees
• Prepayment penalty
• Due-on-sale clause (requires loan to be paid in full if the buyer sells the property before the end of the loan term)

Owner financing for commercial property can create a win-win situation for sellers and buyers. Sellers who provide owner financing can benefit from faster marketing time, additional profit from interest income, and spreading the payment of capital gains tax over a more extended period.

Buyers who buy property from a seller carrying the note can benefit from having flexible loan terms, a faster close of escrow, and lower loan fees since no commercial lender is involved in the transaction.

 

 

Source: What is Owner Financing for Commercial Property? | Crexi Insights

https://www.creconsult.net/market-trends/what-is-owner-financing-for-commercial-property/

Partners

eXp Commercial Partners provide our clients with the best-in-class services needed to complete a streamlined, cost-effective, successful commercial real estate transaction and assist you throughout the ownership cycle, including Capital Markets, 1031 Exchange Intermediary, Cost Segregation, Property Tax and Title Services
https://www.creconsult.net/partners/

2023 eXp Commercial Commercial Real Estate Symposium

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The Commercial Real Estate Symposium will provide junior and senior agents and brokers with valuable insights on topics, including: international opportunities, capital and funding for small businesses in today’s market, how to attract investors, and much more.

Dates: April 25-26, 2023
Start Time: 9 a.m. - 4 p.m. CST
Location: eXp Commercial Campus

We look forward to seeing you in the metaverse!

Important: Please download the virtual eXp Commercial Campus prior to the event, and follow the instructions to login and create your avatar. Feel free to explore the campus before the event begins.

 

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Interested in Joining eXp Commercial as a Commercial Real Estate Agent?

Further Info

https://www.creconsult.net/market-trends/2023-exp-commercial-commercial-real-estate-symposium/

How to Find and Finance Your Next Multifamily Property

Finding your next multifamily investment can be challenging, especially in today’s market environment. Cap rates are at record lows, and interest rates are rising. Inflation climbed 7.9% year-over-year as of February 2022, increasing operating expenses and the cost of capital improvements. Rent growth has been the only saving grace, surging nearly 20% across the top 50 metros in 2021.

Discovering the right opportunity requires looking at more deals when they hit the market and being prepared to move forward quickly with a firm bid. Understanding your financing options is vital for improving your chances of being awarded a deal and maximizing your returns.

Small loans, ample opportunities

When considering your financing options for 5+ unit multifamily properties, you should go beyond your local bank and consider financing through an agency small loan program. Fannie Mae Small Loans and Freddie Mac Small Balance Loans (SBL) offer some of the most competitive terms in the market, so they’re worth exploring if your property is eligible. This article will walk you through your financing options and help you navigate the property-specific agency small loan requirements, so you know what to look for when searching for your next multifamily investment.

Multifamily financing options

Agency small loan programs

Fannie Mae Small Loans and Freddie Mac Small Balance Loans (SBL) can be game changers for achieving your investment goals, limiting risk, and maximizing returns. They typically provide an ideal mix of low rates, maximum leverage, speed to close, and non-recourse debt for stabilized, 5+ unit multifamily properties. Specific benefits include:

• Loan amounts from $750k – $7.5 million
• Fixed and hybrid rate loan options
• Up to 80% LTV
• 30-year amortization
• Up to 30-year loan terms
• Up to full-term interest-only
• Yield maintenance and declining prepayment penalty options
• Non-recourse
• Assumable
• Can close within 60 days or less
• Available nationwide
• Stable source of capital
• Rate held at application for Freddie Mac SBL
• Supplemental loans available for Fannie Mae Small Loans

How other financing options compare:

Financing options	Potential advantages	Typical disadvantages
Banks and credit unions	Floating rate options Less than 5-year loan terms available Shorter closing time frame Less stringent property and borrower requirements Lower prepayment penalties Less due diligence/ documentation Lower closing costs	Higher rates Capped at 75% LTV Limit cash-out proceeds 25-year amortization 5–10-year maximum loan terms Limited interest-only Full or partial recourse Not assumable Limited geographically Deposit requirements Less stable source of capital
FHA/HUD	Lower rates Up to 35-year amortization and loan terms Construction and rehab loan products are also available	Typically require 6+ months to close More excellent due diligence/ documentation No hybrid rate options
CMBS	Less stringent property and borrower requirements May allow the use of mezzanine debt or preferred equity	Higher rates Capped at 75% LTV 10-year maximum loan term $2MM minimum loan amount Less flexible prepayment options Cannot hold rate until a few days before closing Less stable source of capital More stringent servicing requirements w/ cash management triggers
Life companies	Lower rates Rate locked at the application	Capped at 65-70% LTV Limit cash-out proceeds Limited to higher-class properties 25-year amortization $2MM minimum loan amount
Debt funds, construction, bridge, and hard money lenders	6-month to 3-year loan terms Do not require stabilized Occupancy (lend on new construction, lease-up, and rehabilitation/ redevelopment projects) Shortest closing time frame	Higher rates and only floating rate options are available Capped at 75% LTV Shorter loan terms Partial or full recourse

Key takeaways

Local banks and credit unions may provide greater flexibility and lower closing costs, however; they will likely have higher rates and limit you to 75% LTV, 5-year loan terms, 25-year amortization, no interest-only, and require at least partial recourse.

Lenders that may be able to offer lower rates, such as FHA/HUD or life companies, require greater due diligence and can take too long to close (FHA/HUD) or are only available for higher class properties and limit your loan proceeds to less than 70% LTV (life companies).

So, what should you look for when searching for your next multifamily investment to ensure you can take advantage of the ideal mix of terms provided by Fannie Mae and Freddie Mac’s small loan programs?

Finding a multifamily property that fits

Property must-haves to qualify for agency small loans:

• 5+ units
• $750k – $7.5MM loan amount (approximately $1MM minimum property value)
• Stabilized occupancy (At least 90% minimum physical occupancy with certain exceptions down to 85%)

Property may be eligible if:

• Currently benefiting from specific tax abatements
• Age-restricted or “seniors housing” as long as it does not provide resident services
• Offering tenant-based rental assistance with no more than 20% of the units encumbered by a HAP contract or subject to other approved affordability restrictions/contracts

Property may NOT be eligible if:

• More than 5% of its branches will be operated as short-term rentals such as Airbnb units
• Comprised of micro-units of less than 350 SF
• There is more than 50% commercial (non-residential) space or commercial income
• There is more than 50% student, military, or single employer concentration
• Comprised of non-contiguous parcels with individual buildings consisting of less than five units
• Considered a “fractured condo,” representing only a portion of the project’s total units

Where to look

A great place to start your property search is right here on Crexi! You can apply the following filters to make sure your property meets the agency programs’ “must-have” requirements:

• Property Type = Multifamily/Apartment Building
• Min Units = 5
• Min Price = $1,000,000
• Min Occupancy = 85% (although you may not want to apply this filter as listings missing this information would also be excluded)

And don’t forget to consider the other eligibility criteria as you narrow your search. Once you’ve identified a winning property and are ready for more precise loan terms based on your unique situation and goals, connect with one of our expert MultiFi partners to learn more and get a quote!

 

Source: How to Find and Finance Your Next Multifamily Property | Crexi Insights

https://www.creconsult.net/market-trends/how-to-find-and-finance-your-next-multifamily-property/

Selling an Apartment Building FAQ's

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Top Frequently Asked Questions on Selling a Multi-family in Chicago

Are you thinking of selling your multi-family property?

Here are some of the most frequently asked questions we get from clients looking to sell multifamily properties in Chicago.

Before You Sell:

How is selling a multi-family different than selling a single-family home?

If you’ve sold an investment property before, you’ll be familiar with the ins and outs of selling a multi-family. However, if it’s your first time, you’ll learn that the process works differently than it would with a single-family or condo.

A large part of a multi-family’s sale appeal will lie in its cash flow. Buyers looking for a multi-family are looking for more than just a home: they will want to see a property that generates good rental income, rents easily, and provides a financial incentive for them to buy. This could be in the form of easy upgrades they can make to boost rental income or as an empty unit for them to occupy and offset their own living expenses.

Do I need a broker to sell a multi-family?

Of course, we’re biased...but we do recommend working with a broker who is experienced in the multi-family market in your neighborhood. Not only will they be able to pull good comps and provide a market analysis of how you should price the property, but an experienced agent will know how to show the proeprty to different types of buyers, whether they are experienced investors or first-time multi-family buyers who want some supplemental income. Brokers who work in multi-family markets are also in the know about rent prices and trends, which will help them sell your home at the right price.

Do I need to make repairs before selling?

Some buyers look for multi-families with units that could benefit from some updating because they see it as an opportunity to raise the rent using some sweat equity. Your agent should be knowledgeable of the renter’s and buyer’s market for your area and property type and will have good recommendations of what types of updates to make before selling.

Making simple upgrades around the property and in common areas like hallways and entryways can be an easy way to boost the property’s curb appeal that won’t break the bank, whether it’s through new fixtures or a fresh coat of paint.

How do I list a multi-family?

One of the most important parts of getting ready to list your property is confirming the number of legal units in the building. In a city full of old homes like Chicago, many apartment units have been created in old basement spaces or have been de-converted into larger single unit. If you sell your property with an incorrect number of legally recognized units, you could face legal issues down the road. To get the most accurate picture of how your property should be valued and listed, get in touch with the local village to confirm the number of legal units listed in their records.

How should I price my multi-family?

Buyers and their lenders will typically appraise a multi-family home using the income approach method instead of simply using comps in the area to compare values. This means that the appraiser will look at the cost of property maintenance and rental income to evaluate a property’s cash flow. To price your multi-family, you should do appraise a building’s income and use comps in the area to accurately represent what someone might want to pay for it.

How should I market my multi-family?

• You’ll want professional photos of each unit to get ready to list your property, which means asking your tenants to clean their spaces and set up a time for the photographer. Having an empty unit comes in handy because it gives you the opportunity to deep clean the space and potentially even stage it with furniture to show off its potential.
• Put together a financial breakdown and lease abstract to show possible buyers. This might include details like current rents, cost of utilities, and other maintenance fees to give them a better idea of potential rental income.

Selling a building with tenants.

How do I sell my multi-family with occupied units?

One of the trickiest parts of selling a multi-family is to make sure that you are aware of your tenants’ legal rights and that you make the selling process as effortless for them as possible.

• Breaking the news to tenants: Announcing that you’re listing your property for sale isn’t the easiest conversation to have with tenants. For them, it means the hassle of cleaning their apartments for multiple showings, a change in landlords, and a potential increase in their rent after the sale. However, you are legally obligated to inform your tenants when you sell the property, so it’s important to have that conversation before getting too far into the selling process.
• Tenant’s rights when a property is listed for sale: To protect yourself from liability and provide a smooth transition for your tenants during the sale process, it’s important to be aware of their rights determined both by the state and by their lease agreement. Your tenants most likely have a right to be notified a set amount of time before showings and have a lease that can’t be terminated just because you want a vacant unit to sell the property. Reread your lease agreements and the tenant’s rights for your city before listing your home or schedule showings.

How do I show a property with occupied units?

An experienced Broker will know the ins and outs of how to show a property with occupied units (which is one of the biggest reasons why you should take your time to find a good agent). The most important concern when it comes to showing units is to make sure that the tenant is aware of the appointment sufficiently ahead of time. Check your lease agreement to see if there are already guidelines in place, or contact your tenant prior to listing the process to come to an agreed-upon amount of days or hours before the showing when they should be contacted.

Have you thought of selling your property and would like to know what it's worth? Request a valuation for your property below:

Request Valuation

 

Source: Selling an Apartment Building FAQ’s

[/ux_text] https://www.creconsult.net/market-trends/selling-an-apartment-building-faqs/

How to Diversify Your Investments With Commercial Real Estate

Diversifying your investments is always a good idea. And in an economic moment like the present, it's a borderline necessity when the market looks to be approaching a volatile period.

For investors in residential real estate looking to upgrade their portfolios while scaling down their risk, commercial real estate offers an exceptionally safe and lucrative harbor. The commercial real estate market is much more insulated from market shocks than the residential market. The returns can be very attractive — often on par with top-quality investments like dividend stocks.

Let’s look at some of the unique pros and cons of investing in commercial real estate and some of the best ways to allocate your money in the commercial real estate world.

What Makes Commercial Real Estate Investing Unique

Commercial real estate investing is different from residential real estate investing in some fundamental ways. First of all, there’s more money involved. The average commercial property has a higher price tag than all but the highest-end residential properties, so it’s tougher to buy in.

Those high stakes also necessitate more careful analysis. While a simple comparative market analysis is great for residential investments, a commercial real estate investment demands more in-depth number-crunching.

However, that high price tag has an upside. Commercial investments are based more on careful analysis rather than heated speculation. Since relatively few investors can participate, there’s much less competition in the market.

Commercial properties also come with long, multi-year leases, ensuring a steady cash flow. Returns on a typical commercial investment are 6% to 12%, much higher than the standard residential return.

Finally, commercial properties can be extraordinarily low-maintenance. While residential rentals can be pretty low-maintenance if you work with a property management service, property managers also eat up a significant percentage of your rents. Using a triple net lease for your commercial property means the tenant pays maintenance, taxes, utilities, insurance, and everything but the mortgage. While triple net leases come with slightly lower rents than leases in which the owner foots some of these costs, they’re still much more lucrative, on a dollar-for-dollar basis, than professionally managed residential properties.

So what are the best ways to diversify into commercial real estate? Let’s look at some of the most popular paths.

Using a Transaction Sponsor

If you want the most streamlined, low-maintenance commercial real estate experience, putting your money into a project led by a transaction sponsor is likely the best way.

A transaction sponsor scouts out potential commercial projects. When they find one that’s promising, they negotiate a purchase agreement, assemble investor materials, and bring in the capital needed to buy or renovate the property.

You don't have to do much as an equity investor in a project like this. The transaction sponsor will oversee and is responsible for every phase of the project, from pre-acquisition due diligence through to the final disposition of the finished product.

To maximize diversification, allocate money to several different transaction sponsors. Since most sponsors specialize in various projects, you’ll likely have money in various properties.

Diversification Through Types of Commercial Real Estate

There are four main types of commercial real estate; allocating your money among them can further insulate you from risk. The main types are:

Industrial

This type includes buildings like warehouses as well as production or logistics facilities. Industrial properties offer excellent cash flow and low operational risks but are vulnerable to market downturns. They’re also typically quite large, which translates to high upfront costs.

Office

Office spaces offer excellent stability for investors, as leases are typically long and come with low tenant turnover. However, one of the significant downsides of a long lease is the few opportunities for rent increases. On top of that, there may be high upfront costs if an office space needs to be customized for a specialized client, like a medical facility.

While office spaces are typically stable even in volatile economic times, the rise of remote work during the pandemic has cast the future of office space into doubt.

Retail

Tenants like retail shops, gyms, entertainment properties, and bank branches use these properties. Similar to office space, retail spaces often come with long leases. On the downside, retail tenants are vulnerable to market changes and sometimes go bankrupt. Because the spaces are highly customized, expensive renovations are often necessary between tenants.

Multifamily

A commercial multifamily property has five or more residential units. While these properties are well insulated from economic turbulence, they come with the labor-intensive obligations of smaller residential investments — for example, property management costs and high tenant turnover. Despite their residential nature, these properties are still considered one of the core types of commercial real estate.

The genius of diversifying among different commercial real estate types is that you can take advantage of every market condition. For example, in a booming economy, you’ll reap the benefits of owning industrial space, and when the market enters a downturn, your multifamily investments will weather the storm.

Diversifying Through Property Classes

Savvy investors can also allocate their money to and invest in real estate along different commercial properties. Commercial property classes are:

Class A

This is the highest quality commercial property. Typically, the property is new, well-maintained, and centrally located. Consequently, it offers shallow risk and very predictable returns.

Class B

The second-highest commercial property class is usually between 10 and 20 years old, in need of minor renovations, and in a decent but not top-quality market. This property class offers slightly more risk but can give investors great returns if correctly managed.

Class C

Older properties (usually between 20 and 30 years old) require moderate repairs. Nearing the end of their usable life, they’re also located in fringe areas and require prudent management to deliver a consistent return.

Class D

These obsolete properties may require significant renovations or repairs to get back to acceptable conditions. Their very low buy-in could yield considerable profits to an innovative manager, but they could also result in a total loss.

Again, allocating investments among every class can offset risk and maximize profit. A Class A investment will consistently bring in cash flow, while a handful of lower-class assets can result in exponential gains.

Diversifying by Location

Finally, allocating money among different geographical locations allows you to avoid being too tied up in the fortunes of any one market. Especially as issues like climate change threaten prime coastal markets like Miami and water scarcity threatens prospects in the West and the Sun Belt, it’s essential to keep “location, location, location” in mind.

The Bottom Line

Commercial real estate investments offer a viable and reliable sector into which to invest capital and diversify your portfolio. It’s worth exploring various asset classes, locations, and property types to find the best investment property. And, of course, when in doubt, it’s best to talk to an experienced commercial real estate broker to gain detailed market knowledge before you buy and receive guidance throughout the investment process.

 

Source: How to Diversify Your Investments With Commercial Real Estate | Crexi Insights

https://www.creconsult.net/market-trends/how-to-diversify-your-investments-with-commercial-real-estate/

Bridging The Bid-Ask Divide: Brokers On Getting Past Who's Going To Blink First

As rising interest rates and economic volatility have stifled buying power for investors over the last six months, commercial real estate sellers often have found themselves somewhat of a standoff with potential purchasers.

Who will make the first move in adjusting expectations?

For the brokers sitting in on those negotiations daily, it comes down to serving both sides a dose of reality about market conditions. And that isn't accessible medicine for buyers or sellers to swallow right now.

"The reality is, sellers still want 2021 pricing, but buyers just can't step up to that number," Joe Powers, regional manager of Marcus & Millichap's Chicago downtown office, told Bisnow.

The bid-ask spread between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept proved to be a challenge in 2022 and continues to be one into 2023.

"It's become more important now, I think, than in recent years because, for a while there, you could throw a number out there, and someone would grab it, whereas now, real information is dictating the market," Powers said.

In office space especially, the bid-ask divide has become particularly wide, reaching a spread of about 30%-40% as of November and December 2022, according to Wei Luo, global associate research director at CBRE Investment Management. Before the pandemic, the bid-ask spread hovered around 10%-20% for offices.

"It's common for a spread between the bid and asks. That's why we need brokers," Luo told Bisnow. "It's not uncommon, but I would say once the gap reaches beyond 30%, that's when the sector has a problem. That's when activity will be coming to a standstill. ... When people go to a negotiation, they're not expecting to cut 20% off their price."

In its 2023 Trends to Watch in Real Assets report, MSCI estimated that London office prices would need to fall 29.3% from October 2022 levels, and New York offices would need to drop 10.4% to bridge the gap between what sellers want and buyers are willing to pay, Bisnow reported.

Meanwhile, CBRE predicts another 5%-7% decrease in investment values in 2023, coming off a 10%-15% decline across the first three quarters of 2022.

"As the market has become more difficult the last four to six months, people have struggled with, from a sell side, how tough do I become, and from a buy side, how much am I willing to move up?" Steven Weinstock, regional manager of Marcus & Millichap's Oak Brook office, told Bisnow. "The sellers have been unwilling to move because 'I still own the real estate, so why am I going to make the first move? Nothing is causing me to make the first move.'"

In the case of office buildings, the spread is starkest when it comes to the differences between modern Class-A buildings and older buildings.

"When more modernized offices have become available, I think that's when you start to see that spread because investors now realize the bifurcation has begun, so you have two different assets — one that's kind of future-proof, one that's going to be obsolete at some time in the future," Luo said.

Office buildings that might have been built in the 1980s or '90s and weren't well maintained are bearing the brunt of the hit to their values, mainly as the pandemic brought into question the future of the office, Luo said.

However, new developments built with environmental, social, and governance principles in mind and modern amenities have seen demand outpace supply even in a downturn as investors participate in a flight to quality, she added.

"For any owners that are trying to sell right now, their goal is to get liquidity," Luo said. "They want to sell the office asset they own to get capital, to get cash so that they can recycle the capital into better-performing assets. But for the buyer who's in the market trying to buy an office, they want to buy low and sell high. They're looking for discounts when the owners are looking for capital."

Because both sides have misaligned goals and differing price expectations, Luo said, "it's tough to bridge when you're in such a tightened credit condition."

Luo said that retail, industrial and residential properties face price adjustments based on higher borrowing costs, but the bid-ask gap is relatively small compared to the office.

If interest rates stabilize, that will help close the gap, but office owners, in particular, will need to take some write-downs, which she said they have already started doing,

"Many office investors in the industry have started to do that because that's the reality. We can't bury our heads in the sand," Luo said.

Widening the pool of potential buyers has helped sellers become more realistic and get a sense of fair market value for their assets. 

"The bid-ask gap has become a 'who's going to blink first?'" Weinstock said. "Sellers have started blinking. They started saying, 'I got enough offers. I have enough interest. I know what the market pricing is. Even though I wanted more, if I want to transact, I've got to take the market price.'"

"It works if you take a property and bring it to market, expose it to the most people, and create competition," Weinstock said.

"In 2001, money didn't go across state lines. You stayed local," Weinstock said. "In 2023, you're not concerned where the property is anymore, so it's become very robust."

"There are two reasons why a property doesn't sell. It's either exposure or pricing, and if we've been able to generate multiple offers from qualified buyers, the market has spoken, and it's a function of pricing."

During this time of economic turbulence, WHe said Weinstock encourages sellers to sit down with their financial advisers to discuss their options, which aren't just to sell or own anymore; they can also decide to hang onto their assets and make improvements or to refinance and use the additional capital for other investments.

Industry players told Bisnow they see the gap narrowing by year's end.

"We always come out of it, and statistically, mathematically, the succeeding 12 months after whatever economic uncertainty there is have always produced a significant gain for the commercial real estate market," Weinstock said. "All we have to do is help our clients during this turmoil, however long or short."

 

https://www.creconsult.net/market-trends/bridging-the-bid-ask-divide-brokers-on-getting-past-whos-going-to-blink-first/