By Marion Jones
Something curious is happening in the marketplace. While expensive deal pricing is nothing new, brokers are witnessing a different urgency in most transactions.
Bidding wars are back, and they are back in a big way.
Low cap rates have allowed discretionary sellers to place the onus of competition on buyers, but potential sellers should take further notice of a recent shift in the pace of deal making in New York. Today deals are being struck faster, and the seller can achieve stronger results by defining a timeframe. Increasingly the marketplace supports bidding wars, and this possibility should inform a seller’s strategy.
For the last year, residential brokers have described bidding wars that broke out in the first hour of the first open house. For all the hype, anyone currently hunting for an apartment will find these tales entirely plausible if the apartment is priced correctly. The deal-making paradigm in commercial sales has been far different – that is, until recently.
Even as pricing rebounded in 2011 through 2012, expensive offerings would often sit, ostensibly collecting dust, while behind the scenes brokers were scouring the field of new players and international investors for that one magic buyer. In many cases, after 9+ months on the market, these deals closed at cap rates in the 4.0 to 4.5% range (and lower).
The deal pace could be slow and arduous, but high sales prices were eventually achieved — partially due to a rising market, but mostly due to the painstaking search for one or two aggressive buyers from a field otherwise fatigued by sticker shock. Sellers were wise to hold out, frequently maintaining a posture of passive disinterest, until the right group came around and pushed the transaction to the closing table. This “heels in the ground” strategy –long marketing periods, no bid due dates, refusal to provide counter offers — actually proved to be very effective for many discretionary sellers over the past two years.
However, as of 2nd Quarter 2013, potential sellers should be cautioned against this same strategy. In the last month alone, I have been involved in two bidding wars for Manhattan commercial buildings.
In one case the deal went to contract at a figure (roughly a 1.7% cap rate) above the already exorbitant asking price after only a couple of weeks on the market. In another case, I took a listing with a slightly above-market price from sellers who made it very clear they intended to issue a contract to the highest bidder in short order. Within one week, I had several groups competing for a non-contingent contract – each one meeting the non-distressed seller’s high price.
Generally speaking, the high prices achieved in both of these recent deals were equivalent to pricing metrics that, as recently as last year, tended to take months and months of broad exposure.
Some would argue that in the cases of the two above mentioned deals, the sellers would have likely done better to name higher asking prices and wait it out a bit longer. I disagree. Both of these buildings, one in the West 30’s and one in the Village, were priced slightly above an already inflated market.
The extreme lack of product, coupled with the abiding suspicion among some investors that many sellers of expensive real estate do not actually intend to transact, has changed the competitive landscape, especially in Manhattan. Most buyers have now digested the notion that yields are incredibly thin and product is in short supply.
Thankfully, I no longer receive the calls asking for 5.5% cap rate deals that beleaguered brokers in the early days of the recovery.
When sellers take the “sit-and-wait” posture, they risk alienating today’s field of aggressive, intelligent buyers. The paradigm of the “one right buyer” is diminishing for most offerings; instead, there is a dense field of buyers that are well-capitalized, shrewd competitors.
If sellers seek to manipulate this sophisticated pool of investors to record-breaking prices, the messaging should be clear: We intend to transact. Bid deadlines are coming back into favor. In another recent Manhattan deal, a bid deadline yielded five term sheets at, or very close to, the high asking price.
In the appreciating market rebounding from the recession, sellers were smart to let the market catch up to their expectations; typically they conducted a fairly passive process as they waited for a rising tide. However, the market’s landscape has evolved, and the strategic seller will adopt more proactive tactics to manipulate New York’s highly sophisticated, and increasingly dense, field of strong buyers.
Set a high price, establish a general time frame, and of course, hire a broker skillful on process. What can be achieved in the eleventh hour of cultivated competition is likely to far surpass the results of yesterday’s open-ended, long-form game.