Commercial Brokers Open to Off-Market Deals


NEW YORK – As commercial real estate investors face a reset in property values, finding off-market deals is becoming increasingly more attractive. Investors expect that they will get a better deal if they don’t have to compete for properties through a bidding process, in addition to enjoying a more straightforward path to a closing, according to Russel Ingrum, vice chairman of capital markets at real estate services firm CBRE.

Off-market deals have always been highly sought after because investors believe that opportunities that haven’t been widely distributed and/or marketed offer more attractive pricing, said Daniel Herrold, senior vice president at real estate brokerage and advisory firm Northmarq.

But interest in such deals has been gaining further momentum since the Federal Reserve started raising rates last year, according to Aaron Jodka, director of research|U.S. capital markets, with real estate services firm Colliers. Owners with properties to sell shifted to off-market sales strategies as deals began falling out of contract and buyers walked away, he said.

“These types of deals have increased due to the risk of fully marketing a property that doesn’t sell,” Jodka noted, adding that some owners worry about marketability of their asset if it’s been marketed extensively and still fails to sell.

While there has always been tremendous investor interest in off-market opportunities, until recently, they’ve been few and far between because there was so much liquidity in the marketplace that owners were unwilling to entertain the idea when they could receive 50 competing bids, noted Ben Harris, senior vice president for investor relations and fund manager at CRG, the real estate investment and development arm of Chicago-based real estate and construction firm Clayco.

“In recent quarters, though, there has been progressively less liquidity in the market as interest rates increased,” he said, adding that with sales volume down, private off-market transactions are becoming more available.

Meanwhile, off-market deals also provide buyers with better timeframes and more flexibility if they are facilitating a 1031 exchange, said Kevin Crook, director of acquisitions with Los Angeles-based Investors Management Group (IMG), a real estate sponsor focused on multifamily assets nationwide.

“We have also found these transactions to be more personal in that buyer and seller can more easily cooperate in regard to the other party’s motivations,” he said. And at a time when property values are declining and price discovery is clouded, sellers might actually prefer that, noted Ingrum.

However, if sellers agree to an off-market transaction right now, they will probably want the buyer to remove the financing risk from the equation and will have little tolerance for adjustments to the pricing once it’s been agreed upon, Ingrum said. As a result, investors that can close all-cash deals and eliminate financing risk have an advantage in securing off-market sales.

In addition, owners willing to sell their assets at a time when values are declining usually have a motivation to sell, such as personal financial need or an upcoming loan maturity, so they are looking for a qualified buyer who can offer speed of execution and transaction certainty, according to Herrold.

Kevin Crook of IMG noted that his firm’s established reputation has been a big advantage in securing off-market acquisitions as sellers are most comfortable working with investors who have solid track records for closing deals and owning and operating properties.

Challenges remain

Identifying potential off-market deals has always been a challenge for investors who find these deals in various ways, ranging from sourcing them from their network of commercial real estate broker relationships to independently making cold calls to owners of properties they would like to acquire, according to Herrold. But while local government records provide property ownership information, many properties are owned by LLCs, making actual owners difficult to identify and contact. Third-party services, such as CoStar and skip-tracing software, such as LLC Lookup and phone lookup software services, may be able to provide property owner identity and contact information noted Herrold. “But it’s never easy.”

Meanwhile, Ingrum noted that investment sales brokers know all of the assets in their markets and most of the owners. The key to finding a good asset match is for the buyer to clearly define what they are looking for so the sorting process can take place, he said. “Once that happens, the universe is narrowed down to a manageable list of what is possible.”

IMG uses available industry tools, such as Yardi Matrxi and CoStar, to perform in-depth market and property-level data analysis; but ultimately, Crook said he learns about potential off-market opportunities through personal relationships.

These have always been hard to come by because most owners believe they’ll get a higher price if the property is full marketed, Crook noted.

“We know the value and returns we need on any particular deal, so oftentimes we’re happy to give the seller his price so we don’t have to go through a long and protracted bidding process,” he said. However, “today’s challenge for sourcing off-market deals is that without a bidding process, sellers do not fully appreciate how much value they’ve lost over the past six to nine months. Right now, a true market offer is likely to be rejected because the seller won’t accept today’s new values.”

In fact, getting buyers and sellers on the same page when it comes to pricing is the biggest challenge in today’s market, according to Crook. Interest rate hikes have impacted values in some key markets by 12 to 20% over the last year, he noted.

“Whether the property is fully marketed or negotiated off-market, sellers are quite surprised at the loss of value due to the cost of debt and rising cap rates.”

As a result, sales velocity is down considerably year-over-year and isn’t expected to pick up until sellers accept the new value paradigm.

© 2023 Penton Media

©Florida Realtors®

Source link