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To price or not to price? That is the question.

I have pondered for years whether or not it was good practice to price an asset. Here are two main reasons for not pricing commercial real estate assets.

 


 

The first, is if there is some underlying value greater than the property’s apparent value, such as an office building built on an oversized lot. Is the investment worth more because of the office building, or would leveling the property and building a mixed-use apartment complex produce the maximum value? There are many instances where a scenario like this could be considered.

I was once hired by a prominent investor/broker to sell his office building. The building’s only tenant was a bank with a lease that was nearing expiration. The investor was not thrilled with the prospect of carrying a vacant office building because of imminent depreciation. We determined the initial value of the building to be between $10mm and $13mm. This was based upon a value-add investor group purchasing and rehabbing the building, and then leasing it up at current market rates. We did an excellent job of building the pro-forma and were fairly certain on how the acquisition would be structured.

An alternative option was to locate an owner-occupant for the building who could theoretically pay more. However, after asking all the top office leasing brokers, we were unable to locate a tenant seeking 116,000 square feet overlooking an airport. We ultimately made the decision to take the property to market unpriced and “whisper” the strike price to the investor community while holding out for an owner-user.

We ran the initial listing for 30 days, did several tours with various investors, and set our best and final date. The offers started coming in between the $10mm to $12mm range. Ownership was not thrilled, but they were also not about to jeopardize a deal. On the last day, I received a call from a residential broker asking if the building was still available. After explaining the situation, he begged for us to set a meeting with his client. This new buyer offered $17mm on the condition we would allow him a six-month due diligence period so he could rezone the property into a hotel. We ended up closing and opened the hotel two years later!

The second reason why brokers do not price an asset is because the price the seller is demanding is well above market value, and releasing that price to the marketplace will diminish any interest. In this instance, it is best to get potential buyers engaged and then negotiate when both parties are at the table. I have zero stories for this scenario, but I have spent a lot of time on listings without making a penny. I believe that buyers know when this is the situation and choose to shy away from unpriced listings. Oftentimes the broker is afraid to have the price discussion with their client, and simply wants the listing. This is especially true if it is a competitive situation with several qualified brokers vying for the listing.

If you own a piece of property in a major market where development and prices are on the rise, then choosing not to price an asset makes sense. However, not pricing an industrial portfolio because the seller has unrealistic expectations could be a waste of everyone’s time. The first question you need to ask is – Does the seller need or want to sell? If the answer is no, then I would recommend you pass.

At CREXi, I am in the fortunate position of helping over ten thousand brokers located throughout the southeast sell their assets. The question on whether to price or not to price comes up frequently. Typically, I share the above anecdotes, but I now have data to back up my theories.

With more than 100,000 properties listed, 20,000 properties sold, and over $60 billion in offers, I reached out to our analytics team for some help. Here’s what they found:

On average, properties received 2.2 times more leads and 3.8 times more offers on assets that were priced. These figures are further broken down by market and product type in the chart below. There is no discernible regional differences with the exception that the western states seem to tolerate lack of pricing more than the eastern states.

MSA Primary Secondary Tertiary
Priced vs Unpriced P vs UP P vs UP P vs UP P vs UP P vs UP P vs UP
Product / Activity Leads Offers Leads Offers Leads Offers
Office 2.3 5.4 2.3 5.4 2.3 5.4
Industrial 3.8 5.8 3.8 5.8 3.8 5.8
Retail 2.2 6.2 2.2 6.2 2.2 6.2
Multifamily 1.8 4.8 1.8 4.8 1.8 4.8
Self Storage 4.8 3.3 4.8 3.3 4.8 3.3
Land 5.6 7.2 5.6 7.2 5.6 7.2

 

For more market insights check out our recently launched CREXi Market Intelligence