The West Coast CBRE team that covers the Southern California, Phoenix and Las Vegas region is getting deals done during the pandemic. The team has either closed or is in escrow on 16 deals totaling $194 million and more than 600,000 square feet. Most of these deals opened following stay at home orders in mid-March.
“The majority of interest is coming from 1031-exchange buyers that are looking to avoid tax implications, but not all deals fall into that,” Anthony DeLorenzo, a broker at CBRE, tells GlobeSt.com. “Some are traditional investors that are looking to place capital in safe assets. Most assets we’re selling don’t have a lot of tenants, maybe one, two or three max. With those it’s much easier to get your arms around the credit requirements. Generally speaking, assets with larger credit tenants are preferred.”
There is no geographic pattern where investors are showing more demand or interest. The team has sold properties everywhere from Los Angeles to Palm Desert to Phoenix in the industrial and office asset classes; however, rent roll is becoming outweighing property location during negotiations. “Most of our investors are looking for five years plus, in terms of remaining lease obligations,” says DeLorenzo. “With that, they feel comfortable that the asset and the income it produces can withstand the current turmoil. If you look at the volatility of the equity markets and compare it with the single-asset real estate market; the single-asset real estate market hasn’t seen this type of disruption. So, quality assets with one or two credit tenants that have years left on their leases feels like a really smart and safe bet.”
So far, any changes in pricing have been driven by debt terms and interest rates rather than buyer demand or valuation. However, there still doesn’t seem to be an overarching trend in pricing over the last six weeks. “No deal is like the next one but any price changes have mostly been driven by the debt market as lenders adjust loan terms,” adds DeLorenzo. “Spreads have widened and concessions are down, so our clients are telling us ‘my lender is moving on me, I need to move on you.’ The deals that have had the least pricing volatility are with those assets with long-term rent rolls. That factor is the most important piece in easing uncertainty concerns for both buyers and lenders.”
It is surprising to see such strong exchange activity during the pandemic because 1031 exchange buyers were granted an extension through July 15 to select an exchange property. DeLorenzo and Gary Stache, another broker at CBRE, expect to see an increase in 1031-exchange activity in June and July as a result of the extension. “Even though we are still seeing excellent 1031-exchange activity, we expect to see a flurry of trades in June and July as the identification date nears,” says Stache. “Currently we aren’t seeing a ton of new product come to market, but we believe that in June and July there will be increased demand and 1031-buyers who have waited to identify their properties will find a lack of quality assets to choose from, which will then drive pricing.”