CRE Buyers View Transaction Market as Advantageous

Hello! I hope you all are well during this time. I am a commercial real estate (CRE) contributing editor and writer. Most recently, I was the New York Bureau Chief for ALM Real Estate Media Group, overseeing content for GlobeSt.com and Real Estate Forum magazine. My writing has been published in the Associated Press, Washington Post and various other publications.  

The article below is the start of my LinkedIn series, where I interview stakeholders to discuss trends and nuances, gathering their perspective from where they’re seated in the industry. Meant to provoke thought and stimulate conversation, I will document happenings as stakeholders experience them. This content and other news are also available at my site MariahBrownProductions.com.

The coronavirus pandemic has brought unexpected outcomes to the global community at large, which includes the commercial real estate market. This week I spoke with Brandon Polakoff, senior director of investment sales at Avison Young in New York City and Brian Rosen, chief investment officer at Accesso Partners, an owner and operator of properties in Minneapolis, Chicago and the Sun Belt. We discussed buyer temperament, property demand and negotiation tactics in deal-making today.

CRE Buyers View Transaction Market as Advantageous 

Real estate transactions have slowed as a majority of stakeholders try to navigate the cloud of uncertainty over the market, but some buyers see it as an opportunity to scoop up properties for a lower price or nab a discount for retraded assets.

There is plenty of capital in the marketplace hunting for discounted deals given today’s market conditions. However, the opportunities do not readily exist because it is too early for an abundance of distressed situations to emerge, and owners are not parting with assets at the bottom of the market unless for personal motivations, according to Polakoff. “Unless immediately stimulated by the ‘four d’s’ - death, divorce, dispute, or debt - owners that do not have to sell are taking properties off of the market and waiting,” he said.

The bid-ask spread between buyers and sellers that was present before the coronavirus pandemic reared its head has only widened as investors wait for distressed deals to surface. As a result, buyers feel cash is king. Unless the property is extremely cheap, buyers aren’t in a hurry to put down a deposit, Polakoff added.

In deal negotiations, buyers have also used re-trading tactics to muscle sellers for properties that went under contract or had a contract sent out pre-coronavirus. While confidential, Polakoff was able to provide half a dozen examples.

For properties that are currently trading in the market, sellers still have expectations for pricing that reflect their pre-coronavirus outlook, specifically for multifamily, according to Rosen. 

Despite concerns around various asset classes, multifamily is performing relatively well and rent collections are going strong for the time being, which has been supported by government stimulus checks and unemployment assistance. However, some pain is expected in 3 to 6 months when governmental assistance wears off, but nonetheless, demand for rental housing is consistent. “Multifamily is still regarded as a top asset class,” Rosen said. “It is a good investment option in comparison to other investments, such as stocks, which have demonstrated great volatility.” 

For properties that were already under contract pre-coronavirus, the sweet spot for retrades is between 5 percent and 15 percent in New York. For new acquisitions, bids are now coming in at 15 percent or more off the original pricing. This is attributed to the fact that there is so much market uncertainty for hotel, office, retail and residential sales, but less so for multifamily, putting aside political risks from the passing of the 2019 rent laws under the Housing Tenant and Protection Act.

Once people are back in the office, they will likely want to live within walking distance of their offices to avoid public transportation, which should drive up rental demand for those areas. This is likely already taking place in areas surrounding hospitals like the Upper East Side and Murray Hill, where employees are still going into work, Polakoff said. 

Also, if a seller decides to not sell their property to a buyer under contract because of a discount request, when it goes back onto the market it is highly unlikely to command the same price. And if the seller agrees to the buyer’s demands, they can take a costly bite into their profit margin, according to Rosen.

“It’s about figuring out the fine line. Even if I get the deposit and go back onto the market am I going to net myself even less,” Polakoff said. “It’s about how badly you want to sell, how big the deposit is, and understanding what the market value is under the best and worst-case scenario.” 

* Avison Young has published its April 2020 middle-market investment sales transaction report that tracked Manhattan sales for March, which includes transaction details and trends the Avison Young team is eyeing. Access it here.