The Two Critical Factors in Selling (or Not Selling) Commercial Real Estate Part I
Written By Mark Hulsey, Managing Broker
While so many aspects of the CRE industry can be complicated, there are some basic principals of an open-market sales environment that determine success or failure when selling commercial buildings. After years of marketing and selling hundreds of commercial properties across the Minneapolis and St. Paul, MN metro, patterns begin to show themselves repeatedly.
When a commercial property has been for sale, properly packaged-up & marketed for a reasonable amount of time and it’s not moving, the question is simple, “Why isn’t it selling?” This simple question is the one that keeps brokers up at night. When we put a lot of time, work, and money into each listing, it can be maddening when the property just won’t sell.
But why isn’t it selling?…
Here it is: When selling commercial real estate, it often comes down to two things: Market Demand and Pricing. Sure, selling commercial real estate is a lot more complicated than selling a bag of potatoes, but they both come down to market demand and pricing.
Let me explain and we’ll start with Market Demand.
As a Seller’s broker, we must quickly determine what I call ‘potential market interest.’ Understanding this is critical relative to market pricing, market interest, sales strategy, and timing. For example, there can be a dramatic difference in potential market interest between two nearly identical retail buildings, but one is in a rural community about an hour outside of the metro. The other is in the core urban Minneapolis market. In this case, potential market interest has a direct correlation to population density and other key demographic & sociographic elements.But what is the market demand for an old church in the city with no parking, or a parcel of land in a designated wetland jurisdiction, a vacant gas station with USTs, or an office condo with high association due? Vise-versa, watch the market go crazy for a properly priced 40-unit apartment building in South Minneapolis, or a 50,000 SF industrial building in Eagan, or retail mixed-use on Snelling Avenue in St. Paul. Granted, these are obvious examples and most commercial properties fall somewhere in-between these two extremes.
Market demand plays a huge role in the net-lease marketplace. There’s significant difference in market demand around key variables including location (where in the US), type of industry, term, cap rate, and guarantor. Naturally, market demand is absolutely factored in pricing. If the asset is not selling and the market turns its nose to it, then the broker must determine the derogatory influencing factors.
Never forget, while it’s easy to blame ‘market demand’ for a building not selling, there are unique commercial properties that are absolutely going to have a limited number of potential buyers. Regardless, we all know, it only takes one buyer. And, there are plenty of deals, where you can only say, “thank goodness for that one buyer!”
In the next post, I’ll dive into what we see with pricing commercial real estate and it’s affect on market timing, buyer perception, and sales strategy. While pricing seems simple & straight-forward, the answer isn’t always just “lower the price.”