Selling Motivation

What’s selling motivation, you may be wondering. True that! We’ve not experienced much since the middle of 2022 when the Federal Reserve mounted its stair climber and hiked interest rates several times over the next eighteen months. Most of the selling motivation from the start of 2021 was fueled by crazy high prices investors were willing to pay paired with cheap money. Some never considering a sale of their property cashed in during this run up. We even saw the occupant premium disappear for a few months. An occupant premium refers to a higher price the user of a building is willing to pay versus that of an investor. You see, occupants consider the utility a piece of real estate has to offer its operation whereas an investor is interested in the income generated. Generally, that means they’ll pay more. Once the easy money evaporated and investor buyers were relegated to the sidelines - selling motivation ebbed. I believe in 2024, we’ll experience a different kind of selling motivation - more forced selling. Bear with me as I review five situations that could render me prescient. 
 
Transition triggered by one of the Ds. Transitions can predict a sale. Most common among the transitions owners face are divorce, death, disposition, distress, disputes, and dissolution. When a marriage ends and the combatants must reconcile the assets, sometimes a sale occurs. Death creates an interesting tax treatment known as a “step up in basis” which makes selling more attractive. Sometimes business owners decide it’s time to sell their companies. What follows, occasionally is the sale of the building the operation occupied. A vacant address with a mortgage means someone must foot the bill. Distress happens when no one wants to rent the premises. Arguments can lead to a sale. When partners can’t agree on a direction for the property, selling could be imminent. Finally, when an ownership entity is dissolved a property is sold. Effectively ending the involvement of the members. 
 
Lender pressure. Here’s my theory. Stress among regional banks has been widely reported - especially, if the bank has risky loans on the books or faces upward rate pressure in its bond portfolio. The demise of Silicon Vally Bank and First Republic are examples. If a bank funded construction loan was originated at the beginning of 2022 - which financed the construction of a new building - certain assumptions were made. These included the costs, the time to complete the build, the lease rate that would be achieved, and the amount of carrying time before an occupant moved in. The expectation was a permanent loan would replace the short term construction loan. But now the new structure is delivered into a very different world - lease rates have softened and vacancy times have expanded. Plus interest rates have risen substantially. Lenders fear their construction loans may not be timely repaid and could force a sale. 
 
Owner capitulation. Refinancing into a higher interest rate market could bring some owners to the table with selling motivation. This will especially be true with the owners of office properties. If the owner of an office building faces substantial vacancy, and must resort to lowering its lease rates to attract a tenant, the income generated by the office building is less than anticipated and may not service the debt. Additionally, if substantial capital expenditures are necessary in order to attract occupants, the money may not be in the budget. As you can see, a tsunami of issues could cause a seller to hand the keys to their lender. The lender, not wanting to own commercial real estate, then disposes of the property at a discounted amount.
 
Short term rollover. We currently represent an occupant looking to acquire a building in the Inland Empire. During 2021, this business owner was effectively blocked from purchasing because he could not compete with the investor activity. Investors were willing to pay astronomical prices with very few contingencies, and close quickly. Therefore, we sold and leased back for two years. Our theory was we could re-buy before lease expiration and we believed the market was headed for a correction. We are now noticing some building owners, faced with a pending vacancy, looking to sell rather than experience the lengthy and costly process of originating a new tenancy.
 
Investors awakening from their slumber. Who knows when we’ll see an uptick in investor activity. My prediction is this genre of buyers - faced with allocation requirements, a declining interest-rate market, and a realization of where lease rates have settled, will cause some buying activity this year. The interesting part of the equation will be how owners - not faced with any of the pressures above - will react to unsolicited investor offers. We shall see. 
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.