The Pricing Gap Narrows
Smaller markets are still experiencing a disconnect when it comes to pricing.
chasm between bid and ask prices that emerged after the commercial real estate
market plummeted in 2008 has narrowed significantly, and in some cases,
“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
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.