Dealing & Reeling

Necessity and Desire Will Lift NYC’s
Commercial Real Estate Market

When buyers and sellers will be ready to deal again.

Dealing & Reeling, Volume One. Part One.

The steadfast decline in NYC’s commercial real estate prices has left owners, lenders and investors in a state of dazed paralysis. Real estate analysts attribute the plummeting values to significant job losses; tightening of consumer spending, and a global pull-back in demand for exports.  Additionally these economic conditions, aggravated by the chaos in the commercial mortgage back securities sector, have resulted in a market devoid of credit and confidence. Although on an economic level, these factors make sense, they do not explain the underlying reasons for such a significant decrease in market activity in a City reputed for its big deals and mushrooming edifices.

In every market transaction, one side always wants to receive more and the other side wants to pay less.  In a stable market (albeit inflated in the recent past), the parties can look towards several, if not numerous, comparables to establish the price-tag of a property.   Both sides have the ability to access the same data and as a result feel safe in doing deals with confidence that the data is reliable, and therefore the property will continue to increase in value over time. This negotiation scenario centers around the price rather than real value of the property.  Namely, the seller wants more of her price and the buyer wants to pay less of his.

In stark contrast, today’s commercial real estate market has slowed to such an extent, that comparables are challenging to find and added to sobering economic data, mistrust pervades rather than confidence. Lenders, sellers and buyers no longer expect that the market will increase organically without more. Information about the sale price of similar properties is no longer perceived as reliable, and that’s if available data even exists.  Trust is an integral ingredient in every negotiation. In a typical market transaction, the parties do not necessarily have to trust each other, but they need to trust the information available and the negotiation process.

Here is where the concept of “readiness” comes in. In every negotiation, the parties at the table need to have either a need or a desire to reach agreement. It is the need or desire that makes a party “ready” to make compromises for the sake of the deal.  If the available comparables data is unreliable and economic forecasts are dim, I submit buyers will become ready by becoming informed, and sellers will become ready by engaging informed buyers. Moreover, future transactions will no longer center around price but instead will become more appropriately about the value of the property.

This value-negotiation is more sophisticated and complex. From the buyer’s perspective a desire to negotiate a successful transaction will require him to become informed about the value factors that impact a specific property. This consideration can entail but is not limited to: cost per square footage, air rights, government incentives and policies, location, condition of the property as well as the value of properties surrounding it, costs of improvements or construction, demographics of the area, visibility, suitability and legal feasibility for the purposes intended, and of course, available comparables and the cost of financing. To a large extent, a buyer is capable of becoming sufficiently informed to ready himself to deal.

Sellers on the other hand, without clear comparables have lost their desire to engage in market transactions. They do not have sufficient data to ensure they are not underselling their properties, and therefore they continue to price them according to the inflated values of the past. I submit, sellers will be ready to deal only when introduced to informed buyers.

Vacancy rates, increasing interest rates on commercial mortgages, and the lack of available credit will compel sellers, owners and banks alike, to engage in value-negotiations.  But how do sellers go about ascertaining value without reliable comparables? Quite simply, by engaging informed buyers in value-negotiations.  The old adage, that an asset is worth what a buyer who is ready willing and able to pay for it, will play-out loud and clear in NYC’s commercial real estate market in the near future.

Buyers who have the desire to invest, need to become informed about the value of the specific property they want to purchase. They need to have quality information about a property’s value including future economic factors that may impact that value. Moreover, buyers need seasoned professionals who prioritize serving informed clients, and support their client’s information-gathering and evaluation analysis of properties.

Sellers who are compelled to sell their properties, need to become more receptive to buyers’ value assessments, and more importantly, be able to distinguish between an informed buyer and one just looking for a “deal” for the sake of exploiting the current market conditions.

When informed desire and necessity meet, buyers and sellers will resume doing deals at the velocity seen pre-2008. It is this intersection, if fully supported by real estate professionals on both sides, that will lift NYC’s commercial real estate market from its current lethargy.