It is clear that people are looking at the world from a very different perspective than they did a year earlier, and there are a few things that puzzle me that I felt I would share with you in this month’s newsletter. First off, there are an alarming number of properties that are hitting the marketplace today, and I have firsthand experience given the number of new projects I have recently undertaken. The problem I foresee is that I am experiencing what I like to call an educational period whereas I have to spend much of my time educating my clients on the current state of the economy and how it affects their commercial property.

Many of the clients that have hired me to sell and/or lease their buildings today initially have unrealistic expectations as to what the true valuations are. I like to believe they have hired me because of my experience and knowledge in the commercial real estate arena. That being said, it is difficult for some of them to digest the facts that I bring to their attention. For example, a property owner who thinks his building should be placed on the market today at a higher price than the peak of the market two years ago simply has unrealistic expectations. Buyers are aware of the market conditions today given the consolidation of the entire economy and they are trying to bring down overhead to the best of their ability, and real estate is certainly one major cost factor they look at very carefully. That being said, a Buyer who is well capitalized and is a bonefide purchaser, knows that a building on the market with such a high price simply will not be looked at seriously for the mere fact they know the seller has these unrealistic expectations. Therefore, a Seller trying to sell their property with these inexplicably high price tags will simply lose out to the competition until such time they come to terms with the realty their building is simply priced too high.

Two months ago, if you recall, I addressed concerns regarding the world of lending, and in my opinion, banks are still not eager to push money into the hands of borrowers. They are cherry picking the deals they will lend on, and they are scrutinizing the borrowers and property valuations at a level unprecedented in the past several years. All lenders say they are in business today and want to lend money, however, the lending committee is shooting down the deal before it can get off the ground, or they come back with a number of caveats they would be willing to lend on the transaction (i.e. lower pricing, recourse to the borrower, etc.). This coupled with the fact that it is very possible to see interest rates on commercial lending rise significantly over the next year or two, Lenders are going to remain aggressively conservative with respect to their lending practices.

My advice to sellers would be to seriously consider adjusting their pricing sooner rather than later. Economic indicators illustrate downward pressure on pricing due to inventory levels being on the rise coupled with decreasing demand in the marketplace as the economy continues contracting. And Sellers who wait too long to consider reducing their prices may find themselves in a worse position in six months or perhaps twelve from now. In other words, Sellers should come to terms with reality that pricing is not what it has been over the past 15+ years if they want to dispose of their asset in a timely fashion.

Another misconception in the marketplace that I want to share with you is that many of the commercial properties hitting the marketplace today are large in scale. In my opinion, this reality is due to the fact that larger companies are disappearing and consolidating to the best of their ability to shed off their “fat” and try to survive this economic downturn. Smaller companies have an easier time weathering the storm. If you have ever heard the phrase, “The bigger you are, the harder you fall,” this will help understand why the smaller companies can work on ways to cut costs as opposed to getting rid of their space altogether. Therefore, there are fewer smaller buildings hitting the marketplace which is skewing some of the statistics. However, one should also note that pricing for smaller assets is also on the way down, but not necessarily for the same reasons. For example, if you go to rent space in an office building today, Landlords are offering generous work letters, free rent, and price reductions and thereby, making it more attractive to lease rather than purchase. Landlords are also negotiating rent reductions to keep their tenants happy and in place rather than lose them to competition. Therefore, companies are rethinking what they can afford pay for the real estate component of their total overhead, and many of them realize they are not financially strong enough nor do they have the excess capital readily available to purchase a commercial building today, and therefore, leasing is a better alternative.

I hope you found this month’s issue informative and if you have any questions and/or would like to continue a “conversation,” please contact me at your convenience. I may be reached at my office or via email at dlizzack@naihanson.com . I look forward to sharing my thoughts with you next month.