Friday, May 1, 2015

How do you KNOW if your Commercial Real Estate is OVER-Priced?

Image Attribution: www.realtytimes.com
Pricing. Ahhh, the P word. As commercial real estate practitioners we become keenly aware of pricing and whether a building is over priced, under valued or just right!

In the seller's market in which we are immersed, determining pricing for a vacant industrial building becomes a big challenge. I believe more challenging than a buyer's market.

Why, you may ask? Because as a market escalates and demand from industrial occupants sky rockets, you don't want to under value a building and consequently you must guess at where the next pricing plateau will be achieved and how is the new price justified. This requires a bit of pixie dust.

From experience, I employ the following system to determine pricing recommendations:

First, I take a look at the commercial real estate and note the building's features...size, percent of office within the building, location, freeway access, power, loading, warehouse clearance, fenced parking, fire sprinklers, column spacing within the warehouse, truck turning radius, etc.

Next, I analyze recent sales that closely mirror the features of the building I am evaluating. A certain lack of features will devalue a piece of commercial real estate - such as a warehouse with limited ceiling height or a building with more office than the parking can support. A recent set of comps will let me know where deals have transacted for similar properties.

Then, I pull a list of currently available  buildings that would compete with the building I am pricing. How many are there? Where are they priced?

Lastly, comes a bit of broker magic. I determine if the market is up or down trending and add a bit of up or down wiggle room to my pricing recommendation.

So assuming I get the assignment to sell or lease the building, How do I know if the building has been overpriced? Generally, one or more of the following will happen:

The phone will ring non-stop: Oops. Either I underestimated the demand and priced too low or there is a supreme shortage of available buildings and I'm the only alternative.

I will receive no inquiries: Functionality. There are not enough occupants in the market that need the features that the building contains...or lacks.

Many tours will be generated but no offers will be received: Pretty much a pricing issue. Many tours, no offers generally means you have scared the market of available occupants with your pricing.

Regardless, you should have some really good data points within the first thirty days of the marketing process.