I've recently heard about five transactions in suburban New Jersey real estate markets, where sale prices for commercial buildings were extremely low. Of these five, two transactions have closed and three are under contract.
In some cases, sale prices have been so low that they equal nothing more than the rent most tenants would pay in the first year of a typical lease.
How low? Here's the perspective:
The cost to newly construct buildings comparable to those that recently sold could be between $75.00 to $150.00 per square foot, or more, and corresponding rents could be in the $12.00 triple net to $45.00 gross per square foot range.
Ready? The buildings referenced above have sold or are under contract at prices ranging as low as $14.00 per square foot to as high as $39.00 per square foot! At $14.00 per square foot, that's 18.7% of a $75.00 per square foot replacement value!
In all three instances, these buildings were sold either by their lenders or by the court through bankruptcy proceedings. Developers, investors, and others in the know, tell me this is just the beginning. They say that lenders are finally loosening their grip and actively seeking to sell properties that are in default on their mortgages and those on which lenders have already foreclosed.
Is this true? Are the flood gates beginning to open? Will we see a flurry of commercial buildings come to market around the country at below replacement cost? What will this do to prices for those buildings that are not in default? None of this sounds positive for sale values.
If the above is more than a blip on the pricing radar, the positive news is that it will likely foster transaction and lending activity. And, that's a good thing.
How will the above effect pricing for corporate sale / lease back transactions? Will these events result in the wholesale lowering of commercial property rental rates across the country? Will it hinder or help to stabilize commercial property values?
What are your thoughts?
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