Valuation

The Pricing Gap Narrows

Smaller markets are still experiencing a disconnect when it comes to pricing.

By Beth Mattson-Teig |

The chasm between bid and ask prices that emerged after the commercial real estate market plummeted in 2008 has narrowed significantly, and in some cases, disappeared altogether.

“In 2008 and 2009, there was a definitive disconnect in pricing. At the end of 2010 and now into 2011, there is a lot more reality from the seller’s perspective,” says Craig Thomas, CCIM, a senior associate and associate director of the National Retail Group at Marcus & Millichap in Jacksonville, Fla. Buyers also have had a reality check, because the tidal wave of distressed sales that many anticipated never emerged.

Some buyers had hoped to cherry pick A properties for B, C, or even D prices, and that simply hasn’t happened, Thomas notes. “Buyers have realized that they are going to have to step up to the table a little more if they actually want to acquire any of these different types of properties,” he adds.

The increase in transaction activity is one clear indication that the price gap has shrunk. That is most evident in properties that are trading at the upper end of the market. Demand for class A properties in major metros is creating competitive bidding scenarios for properties across property types from grocery-anchored shopping centers to high-rise apartments.

That being said, the pricing gap still presents a challenge in some markets. Multitenant retail properties in particular still have a fairly significant bid-ask gap between buyers and sellers, especially among the B and C properties in older non-core shopping centers with no anchor tenant. “Those are the ones that you are seeing where there is a significant difference in asking and actual selling pricing,” Thomas says. Class A shopping centers are commanding capitalization rates as low as 6 percent, while non-core distressed shopping centers are garnering cap rates in the double digits.

In addition, the pricing gap is typically more pronounced in smaller markets that don’t have the competitive buying or the strong economic fundamentals that exist in major markets. For example, there is still a sizable spread between bid and ask prices in Kansas City, but that spread is narrowing as time wears on, notes Ronald D. Jury, CCIM, president of Jury & Associates in Shawnee Mission, Kan. “The buyers are really looking for discounts in today’s marketplace,” Jury says. “Part of that is because lending is so tight right now that you need at least 40 percent down on most investments, which takes a lot of capital to get into a property.”

Beth Mattson-Teig is a freelance business reporter based in Minneapolis. For more on commercial investment activity, read her article “Buyers Are Back!” in the March/April 2011 issue of Commercial Investment Real Estate.