There will always be a tug-of-war between retail buyers and sellers — or, really, buyers and sellers of any kind. Both parties want to achieve the best price, but that number looks quite different depending on their side of the table.
Though every asset is different, in many ways pricing is made easier based on whether it’s a buyer’s or seller’s market. But what about those transition times? The ones where a market has crested or dipped and is going the other direction?
“Pricing today is a little bit of luck, constant fine tuning and a lot of hard work,” says Jeff Conover, managing principal at Faris Lee Investments in Irvine, Calif. “With these changing factors, there’s no perfect science nor perfect strategy.”
The changes he’s referring to, naturally, are rising interest rates.
“Price expectations are still high for sellers right now,” Conover continues. “In many instances, we have to get their expectations down because current interest rates are rising during the escrow period and buyers are terminating deals as they witness their returns evaporating.”
Along with rising interest rates come higher cap rates, another fundamental truth about this market that sellers will need to accept, Conover notes.
“Say you’ve got a multi-tenant strip center offered for sale at a 5.5 cap rate,” he says. “With the loan constant at 6.25 percent today, buyers are looking for a minimum 6.25 cap rate or higher, whereas four to six months ago, that same seller might have received 5.5. Today, buyers are saying ‘absolutely not.’ They can’t even get financed at that cap rate/return. It doesn’t work nor pencil.”
Cash Is King
Speaking of financing, it’s a bit of a thorn in everyone’s side right now. Buyers are having a harder time securing favorable financing, while sellers don’t want to risk the deal falling apart at the eleventh hour.
The solution? Cash.
“I tell my single-tenant net lease sellers to really push for an all-cash buyer whenever they can,” Conover says. “That way we don’t have to play the shifting interest rate game with lenders or deal with unpredictable appraisers.”
In a market marred by unpredictability, Conover often advocates for a cash offer even if it comes in a little below the other bids.
“You want the highest probability buyer, even if they’re lower in price,” he continues. “If we’re on the market at $10 million, the cash buyer offer is at $9.8 million and a second buyer wants to finance with an offer at $9.9 million, I’ll take the all-cash bidder. For a certainty of close, I’d give on price.”
Cash is ideal for sellers, but not necessarily for buyers. Conover notes this can require a little ingenuity.
“I tell buyers to come in all cash if they can and then refinance post-closing,” he adds. “That way they win the deal. If you have to finance, a lot of times you’re getting pushed away.”
Coming In Hot
Just how much cash to come in with is another art-meets-science project in this changing market. Conover advises single-tenant net lease buyers to make an offer 50 basis points over the list price.
“The single-tenant net lease market is still aggressive, even though interest rates increased,” he explains. “It’s still a seller’s market”.
At the same time, variables within this market make it prudent for sellers to close quickly, which is why Conover suggests settling on a reasonable price that will move the property.
“You want to go a little less aggressive on pricing with multi-tenant properties because you have to be mindful of vacancies, interest rates, cap rates and returns,” he says. “You have to make sure there’s enough return on investment for the buyer to want to pursue the deal.”
For those reasons, Conover likes what he calls the “Carmax approach.”
“The beautiful thing about Carmax is there’s no negotiation,” he continues. “So rather than be priced so aggressively at a 4.75 cap, just take it to a 5 if that’s where you know you can deliver. Then hold firm and don’t play that negotiation game.” “The buyer is either in or out, and not a lot of time is wasted up front.”
Backing off on the cap rate can also open your listing up to more buyers who might have filtered out any deals below a 5 cap within their seach for property in the above example.
The multi-tenant market is a bit less aggressive in cap rate, though similar principles apply. Conover tells his sellers to grab the buyers’ attention with price and favorable returns, while he advises buyers to come in 75 to 100 basis points over asking to test motivation and achieve a higher return.
“If you’re a multi-tenant seller, your lure in the water needs to be a little shinier versus the competition, if you want to catch that fish,” he says. “So don’t price where all the comps are. Give a slightly better price to capture the buyer and get the conversation going.”
That’s precisely what happened this past April when Conover and his team pre-sold a five-tenant strip center in Chino, Calif., for $9 million. The newly constructed center sold before all the tenants — including Anytime Fitness, Brandon’s Diner, Jackson Hewitt Tax Services, Dragon Grill and Workforce Enterprises — opened for business.
The team targeted 1031 exchange buyers looking to invest in California. After generating multiple offers, an all-cash 1031 exchange investor from nearby Orange County was selected. The transaction closed at 98 percent of the list price, representing a 6 cap.
The triple net leased property sits adjacent to The Preserve, a new master-planned residential and commercial community. Aside from touting the location, Conover utilized another strategy when marketing the asset.
“Some tenants have clauses in their leases that can benefit an asset’s pricing,” he notes. “For example, Consumer Price Index (CPI) increases could work in your favor. You can price to how a tenant’s lease is structured. Absolute triple net leases or leases where the roof and structure are the tenant’s responsibility are a benefit to the landlord and should be priced to achieve more money on the exit.”
All five tenants at the Chino center had long-term leases with structured rental increases, providing security and stability to the investor.
Even the best pricing strategies won’t work, however, if the asset doesn’t get in front of the right investor.
“Marketing is absolutely critical,” Conover adds. “It’s about timing, being persistent and not giving up. You just don’t know when that 1031 buyer is going to surface, because the market changes every day. Use all the different platforms: commercial real estate databases, cross-sell from existing inventory, old-fashioned postcards, social media, you name it. Some agents get complacent if their properties are not selling in a timely fashion; however, my motto is always full throttle — no matter what. You don’t know when that next buyer’s going to surface.”