FEATURE ARTICLE, NOVEMBER 2004

BUYERS & SELLERS: WHO COULD IT BE NOW?
A retail specialist explores the different situations that bring real estate buyers and sellers to the bargaining table.
Brad Umansky

Umansky

In theory, if someone is selling his or her property, the buyer should be getting a “raw” deal. Otherwise, why would that someone sell? Is this true? Not really. In this seller’s market, there are certainly some sellers that are selling because they believe this is the top of the market, but more often there are other reasons. Based upon my experience this year, sellers’ situations fall into one of the following categories:

• New Developments: Although there are some developers that build and hold every project, most developers are not in a position to do so. Many need to obtain a quick return of their equity so they can satisfy investors and also put some dollars in their pockets to cover both their business and personal overhead. Some of these developers are selling property that they truly wish they did not need to sell since they know it is great real estate.

• Non-Conforming Assets: I am in the process of selling a few projects, owned by institutional sellers, where the assets just do not fit into their portfolios. For example, an asset that was purchased years ago was supposed to be a “coupon clipper”, but did not turn out this way. The sellers realize that they are better off selling to an entrepreneurial buyer and taking their capital and reinvesting it elsewhere than trying to solve the problem themselves.

•Too-Much-Work Assets: These sellers are selling projects that are just too much work relative to where the seller is in their life. In most cases, the seller has owned the asset for many years and does not want “the job” any more. The risk profile of the asset combined with what it will take to maximize value is just not what the seller wants to do. These types of sellers frequently exchange into more easily managed, single-tenant properties.

•Moving-On-Up Seller: These kinds of sellers realize the benefit of leverage both from an appreciation and depreciation perspective. They realize that the more they own, the more appreciation they can realize. At the same time, they recognize that, in many cases, they have tremendous equity that is not being sheltered by depreciation because their basis is so low. These sellers are buying larger assets that allow them to increase the amount of depreciation they can take and, therefore, shelter more of their income from taxes.

Sellers confronting cap rates of less than 7 percent frequently ask, “Who are these buyers and why are they paying these prices for retail property?” It is important to remember that everything is relative to one’s alternatives and experience.

The following best describes the buyers of retail property in today’s market:

• Previous Owners of Multifamily: These buyers have seen tremendous appreciation in their apartment properties, yet, in many cases, have not received significant cash flow once they account for all the maintenance that needs to be done. Furthermore, they are tired of all the hassles resulting from owning multifamily real estate. These buyers are more than willing to pay a 6.5 percent cap rate, especially when they sold for a 4.5 percent cap rate. They love the fact that they can have fewer tenants with long-term triple-net leases.

• Land Owners: Every time a developer closes on a land deal, it frequently triggers an exchange. These sellers-turned-buyers have frequently received no cash flow for many years and now seek retail product because it is perceived as one of the easier product types to own and manage. Furthermore, most people feel that they can relate to retail. They can understand why a Ralphs, Staples, Wendy’s or Starbucks Coffee exists in a given area. They don’t necessarily relate to why an office tenant or industrial tenant occupies a certain building.

• Too Much Cash: There are many investors in the market that have a significant amount of cash. Some of these people are experienced retail players and some are first-time retail investors. In either case, compared with low money market and bond yields, as well as an uncertain stock market, retail real estate even at low cap rates has a lot of appeal.

• Value-Added Players: Although there is not much value-added property in the market, the value-added players are continuously seeking such product. This type of product comes on the market as a result of some of the seller profiles listed above. It just is not as plentiful as in prior years.

As indicated above, many of today’s investors are not “on the radar screen.” Consequently, creative, focused marketing strategies must be implemented to reach these and other investors so as to achieve both maximum value for one’s real estate and a smoother transaction.

Brad Umansky is a vice president at Sperry Van Ness’ Ontario, California, office.

©2004 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.