Commercial Real Estate IBuyers - Will we See Them?

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I read with great interest Jeff Collin’s column entitled - Will Online IBuyers Upend Home Sales? If you missed the column - shame on you! But, allow me to provide you the abridged version. Currently, there is a trend in residential sales wherein on-line buyers purchase your house quickly and you avoid the hassle of the marketing steps - choosing an agent, pre-sale prep, repairs, staging, showing, negotiating and closing.

Akin to CarMax - you receive an offer on your house - with fees, closing costs, and repair concessions baked in. If you say yes - the deal is done without you ever having to V-dent a sofa pillow. Easy. So what’s the catch? Just this. IBuyers rely upon a motivation which eclipses most sellers. Simply - you MUST sell and can’t wait for the normal sales process to unfold. Remember - the IBuyer isn’t planning to live in your house. They’ll buy it, fix it and flip it to someone who will. Therefore, you walk away with less than a conventional arrangement. How much less? It depends on the condition of your house - repair offset plus the larger fees associated with an IBuyer.

So what’s this to do with commercial real estate? I pondered this question and my thoughts are outlined below.

Do commercial IBuyers exist currently. The short answer is no. Buyers of commercial real estate typically fall into two broad categories - occupants and investors. The difference? Occupants buy to house their business. Investors rely upon the rents paid by the tenants in the building. Residential IBuyers are investors with no desire to lease the house. Their play is to acquire it, prepare it for sale, and sell the home to a resident. Could such a strategy be employed commercially? Sure. Some value-add investors operate this way. But the price delta is enormous. Most commercial real estate sellers - when shown the amount a value-add investor will pay compared to an owner occupant - will opt for the latter.

Can commercial real estate be standardized. Another challenge confronting commercial IBuyers? No two commercial buildings are identical. You may say - gee, neither are there synonymous houses. However, tracts of cookie cutter domiciles dot our poppy filled hills. Very few differences exist within plan models sans owner changes. Not so with commercial real estate. So the challenge becomes just how to value a commercial offering. Layer in some special features such as upgraded offices, a fenced outdoor yard, or special power feed - and the challenge continues. Considered next would be the out sale price or expected lease rate less the cost to originate the lease - fees, concessions, down-time, etc. Kinda complex.

Will we see IBuyers. We’ve certainly encountered on-line selling platforms. What started as a way to liquidate distressed lender owned buildings under the umbrella Auction.com has morphed into Ten-X which relies upon one of three ways to create buyer pools for commercial assets - traditional auction, managed bid or offer select. I’ve used Ten-X successfully. With certain commercial offerings - it works quite well. But the lack of lender owned portfolios of problem properties has slowed their volume. Another drawback? The large buyer load - in addition to the fees paid by the seller to his broker. It’s quite expensive.

The takeaway. Yes. We will see IBuyers. When? Hard to say. Our industry is too huge and spans over 55,000,000 commercial properties nationwide. That’s an awful lot of semolians! Some well-heeled tech savvy group will figure it out and disrupt the commercial buying process. Just look at the way in which CoStar upended commercial real estate research and inventory. Stay tuned.

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.com.