Buyers and sellers who have been on the sidelines for the last 9 months may have noticed that a curious change occurred while they were away. Market psychology has quietly shifted, replacing buyers’ “glass is half empty” attitude toward asset value with a new “glass is half full” outlook and a willingness to focus on a property’s upside potential.
The result: multiple offers are back. But the path that lies between the bid and the close in this new market scenario can look like unfamiliar territory – even for sophisticated buyers. Is a fresh confidence in the economy fueling investor optimism? Probably not. In fact, many may even be less confident today than they were a month ago. But they haven’t given up, and that is key.
Last year, if a seller took a property to bid, the asset was lucky to receive a handful of offers. If it got to best and final, most buyers lowered their bids because they thought they could, and there was an intense focus on every detail that could possibly go wrong during the next couple years. Today, despite little statistical improvement in vacancies or rents, investors are more willing to look 2 to 4 years into the future and contemplate an increase in income. This has allowed a larger number of bidders to enter the process and prompted price increases of 10 to 20 percent for certain property types.
Market behavior also appears to be responding to a change in supply and demand. Forced to deal with an increasing inventory of REO properties, receivers, special servicers and banks are stepping up their release of assets into the trading pool – much to the delight of investors looking to put long-dormant funds back to work.
Unlike late last year, when there were few credit-oriented assets for sale and even fewer buyers, now so many buyers have entered the marketplace that their aren't enough available properties. Sellers, hearing reports of pent-up demand, may think they’re in control of the process. Not so. Buyers are more disciplined in how much they are willing to buy. They will pay more than they did last October, no question, but they remain committed to conservative underwriting standards.
Properties garnering the most attention fall on opposite ends of the spectrum. On one side, very secure properties with long-term net leases and strong credit may appeal to REITs, institutions or anyone who can see the light at the end of the tunnel and is interested in security. On the other side of the continuum, properties that are 50- to 70-percent leased present opportunities for investors looking for deals that promise high returns and the ability to increase cash flow and value over time.
Individuals who have been away from the market for a time should consider the following issues and challenges when dealing in the multiple-offer marketplace:
– The transaction process will generally take longer than it did in 2006 and 2007, especially if it involves special servicers and receivers.
– Special servicers and receivers are not obligated to accept the first or second offer that comes along. They need time to prove that they’ve taken the transaction fully through the process in order to receive sale approval from a court and/or loan pool.
– The negotiation process also has changed. More attorneys as well as multiple layers of contract approval and input can add weeks of extra negotiating time.
– Due diligence information is more difficult to obtain. Also, the number of complications common to dealing with troubled assets – including higher vacancies, legal issues and deferred maintenance, not to mention nervous buyers – is greater, adding complexity and challenges.
– Everyone wants to buy at the lowest point of the market, but the definition of the lowest point is where the least amount of light is shining – this is often difficult for buyers to remember.
– An experienced sales professional who understands how to work with investment committees and who knows the bidding habits of the market’s current players can add tremendous value to the team by anticipating needs from both sides.
– Investor interests are changing constantly and at a more accelerated rate than in the past. If you haven’t been in touch with investors in the last 6 months, it’s likely their standards have changed.
At an Urban Land Institute meeting last spring, buyers who purchased assets in 2009 were asked if they believed they could buy at the same terms now. They answered no, adding they wished they had bought more in 2009. It’s possible buyers will make the same statement a year from now. Barring another recession, most experts agree today’s purchases will prove to be good buys in 3 to 4 years and that investors will be paying more for the same asset next year.
Regardless of your perception of the recovery, next year we will be a year closer to it. It will happen. It’s a question of when, not if. The freeze is beginning to thaw, as reflected in asset prices and buyer demand. For buyers with a long-term view and a perspective for historic price levels, now is a very good time to be in the market.
— Steven Brabant is a senior vice president in CB Richard Ellis' Phoenix office.