A question I’ve pondered many times over the years is whether to price an asset or leave it unpriced when selling commercial real estate. There are pros and cons to each option. In this piece, we break down situationally why sellers of commercial real estate properties might hide or post their asking price.
There are two main reasons not to list your commercial real estate pricing: its value is worth more than just money, or you have a strategic reason to draw prospective buyers further in the process. However, data supports some instances where sellers should price their properties. Let’s explore these ideas.
Commercial property value is about more than money.
The first reason not to include pricing is that some underlying value is greater than what is apparent. For example, consider an office building with adaptive reuse. Such an office building would typically be sold compared to its current use and income. Yet, the right investor could transform it into a much more valuable property. Since it is unknown what type of buyers will show interest, it would be better to leave it unpriced and let the market decide.
A prominent investor/broker once hired my team to sell his office building. The building had a bank as its only tenant, and the lease was about to expire. The owner had no interest in retaining a vacant office property, as it would have significantly impacted his returns.
We valued the building between $10 and $13 million based on a value-add investor purchasing the building, rehabbing it, and leasing it at current market rates. We did an excellent job of building the Pro-forma and were pretty confident that the building would sell. One option was to locate an owner-occupant for the building who theoretically could pay more. However, we reached out to the top office leasing brokers in town, and nobody knew of a tenant looking for 116,000 square feet overlooking the airport.
Therefore, we decided to go out unpriced with the plan to “whisper” a strike price to the investor community while holding out for an owner-occupant. We ran the process for 30 days, did several tours with various funds, and set our best and final date. The offers poured in at the $10-$12 million range.
As the offers came in, I received a call from a residential broker who wanted to know if the building was still available. He implored me to set a meeting with his client. This new buyer met and offered $17 million, provided we would give him six months’ due diligence to rezone the property into a hotel. He ended up closing and opened the hotel two years later.
The art of managing expectations
The second reason why brokers don’t price an asset is — frankly — because the seller has unrealistic expectations about the property’s value. By keeping the price under wraps, brokers can get the buyers engaged and negotiate with them to pay more, convince the seller to take less, or both.
I believe that buyers instinctively know this trick and shy away from unpriced listings. Often, this happens because the broker is afraid to have the price discussion and wants to win the listing, especially in a competitive situation with several qualified brokers vying for the same project.
If you have property in a large market where development and rates are shifting, perhaps hiding your commercial real estate pricing makes sense. However, obscuring an industrial portfolio’s price because the seller has unrealistic expectations could be a waste of everyone’s time. The first question you must ask is, “Does the seller need or want to sell?” It may cost much effort and earn little if you only answer yes to the latter.
What data says about commercial real estate pricing.
At Crexi, brokers frequently ask us whether they should price their listings. I reached out to Cam Tucker on our analytics team for some insights. Here’s what he found:
Land and Texas property can sell without pricing.
Land accounts for the largest share of unpriced listings by property type – 17% of land listings in 2021 to date are unpriced. Texas accounts for the most unpriced listings on a state level so far in 2021 and even more striking is that over 25% of all listings in Texas are unpriced.
Bob Turner of ALC offered the following as an explanation of land’s lead on unpriced listings:
“In certain markets and specific situations, we put properties on the market without land pricing and let the buyers set the market. Some properties are in high demand and can bring a higher than average price thanks to timing, quality, location, and lack of supply.
In one sale, for example, the market showed a farmland property would bring in $6,150 per acre. We sold it for $6,800 per acre in a two-week private bid sale, with 14 interested land buyers. In another transaction, the market showed $1,100,000. In a 10-day private sale, we closed at $1,600,000 with ten potential buyers. In both cases, the property was unpriced.
Suppose you know your markets and are trained as a land expert in evaluating properties for buying and selling. In that case, you know the situations when a property will demand a higher price from multiple buyers. That’s when you advise your sellers to trust your knowledge of the market and let you make them some money!”
Time on market goes up without commercial real estate pricing.
The data suggests that unpriced listings, across all property types, spend about 23.6% more time on the market than their priced counterparts. Office properties in 2021 however, spent a similar number of days on the market, whether priced or unpriced. This even keel speed suggests a more competitive market for office properties, with sellers and buyers comfortable discussing pricing later in the transaction process.
Buyers are considering unpriced assets more than in previous years.
While in 2020, assets with pricing received on average four more leads per listing than unpriced ones, the data indicates a changing paradigm. 2021 metrics from Crexi’s platform show that unpriced assets earn slightly more leads than those with price tags.
Of interest: web search engines are more likely to identify a property as “for sale” if there’s a price tag attached, and rank the property higher in search results targeting buyers as they are in the exploration stage. Yet the changing trends indicate that buyers are performing digging deeper to find the right asset despite the presence of a price.
Cam Tucker is a Senior Analyst at Crexi with 7+ years in data and analytics.