In Part I of The Two Critical Factors in Selling (or Not Selling) Commercial Real Estate Part I: Market Demand, I suggested there are two main reasons why commercial properties don’t sell. I discussed how understanding Market Demand is not only critical to the disposition process, but it’s often misunderstood. In Part II, we are going to dive into property pricing.
But first, let’s revisit the Q&A mentioned in Part I of this article:
Question: But why isn’t it selling?
Answer: 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.
Too often, when selling (or leasing) commercial real estate, pricing becomes the only strategy people consider. It’s easy to say, “it’s overpriced.” But that’s not always the case, as discussed in Part I about Market Demand. It’s easy to tell a Seller that if they would just lower the price, they could probably sell it. Well of course, that’s logical, but surely not always prudent when you are trying to maximize the equity in a property for your client. If the property or asset is priced at market value, then a price reduction is not always the answer.Let’s start with establishing the listing price range which is a detailed financial process of Market Analysis combined with Income Analysis. Throw into the mix several variables including zoning limitations, tenancy, parking, environmental issues, capital improvements, taxes, etc., and now it’s time to reconcile it all and come up with the listing price range opinion for the Seller.
Ultimately, the decision for the listing price is that of the Seller. A quality commercial broker will be involved in every aspect including providing data, market trends and their own opinion, but it comes down to the decision of the Seller. This is where pricing the property can go sideways. Not all, but many sellers believe their property is worth more than it is. Most of us have been guilty of this in one way or another. It’s human nature. This is where solid commercial broker guidance comes into play. We want to avoid sellers getting in their own way; it’s part of our job.
Most successful commercial brokerages are not interested in “buying a listing.” If you’re not familiar with that industry phrase, it simply means a broker will take on an overpriced listing just to add it to their inventory, knowing it likely will not sell. That’s why you will sometimes see nonsensical pricing on commercial properties (and residential, too, for that matter). Either they don’t know what the product is trading for in the market and they’re taking their best guess, or they’re just slapping some silly price on it that the Seller thinks is okay. That doesn’t work.
So now, the property has been out of the market, for let’s say 6 months, and there have been no offers. The broker and Seller need to have a talk about what’s going on with the listing and review activity, in addition to feedback, online tracking data, and market activities. If the property has received the proper marketing and advertising, broker follow-up, and status reports to the Seller, then it’s usually time to start talking about pricing. This is when a good broker will reference the original valuation and comparable docs, while also doing a market update to fully understand what the competitive landscape looks like for the subject property. The data and listing history should speak for itself.
Options Beyond Price Reductions:
There are other basic strategies to consider outside of reducing the price on a market-value asset. First, why not put more marketing dollars into a targeted market campaign to ensure the property is getting in front of the true potential buyers that need to see it? What about a broker commission incentive…or a roof allowance that can be escrowed to take care of a key problem all buyers keep mentioning? How about a social media campaign reaching the building owners in the neighborhood letting them know this property is for sale? Guaranteeing rent for 3 – 6 months instead of dropping the price by another $25,000? This list could go on and on.
Not only is this about the listing broker’s prowess at finding a buyer to get to a successful closing/funding, but it often comes down to the Seller’s motivation to sell. From the moment our firm considers taking on a listing to market and sell, we need to clearly understand the level of seller motivation. RE/MAX Results Commercial Group has bank clients that expect us to dispose of the REO inventory within 6 months or less. A net lease asset is often expected to sell in 3 – 6 months. On the other hand, we have sellers that are working on a three-year timeline to sell prime commercial development land. Seller motivation can vary dramatically in commercial sales. It’s the broker’s job to adjust their marketing and pricing strategy to match the Seller’s expectations along with their motivation.
There’s no reason, when selling commercial real estate, to make pricing the ‘elephant-in-the-room’ and allow it create tension in the disposition process. If a property is priced properly, then a Seller should expect more from their broker than the same old, “drop-your-price” line.As mentioned, in Part I of this article, sometimes it’s just that one buyer that the property is a perfect match for the current market price. Perhaps, the listing just needed more work and time to get the best buyer match.
Once we have a good understanding of the two critical factors why some commercial properties don’t sell as quickly as others, then we can adjust our strategic sales direction to get the property sold and closed.