Owners Holding On To ‘Losers’ Could Be Skewing CRE Pricing

The old adage that owners will sell a winner but hold onto a loser seems to be holding true amid the pandemic-fueled slowdown. And that tendency towards potential sellers keeping “losers” off the market seems to be affecting average commercial sales prices. 

That’s according to a new analysis from New York-based commercial real estate data firm Real Capital Analytics crunching the numbers for the deal volume for office, industrial and retail property that has sold at least once since 2007. 

“Those markets where a greater proportion of investors will stay in the money in the event of small-to-medium prices falls are likely to remain more liquid than those where a greater proportion of investors would experience losses in the event of the same drop in market pricing,” wrote RCA’s Senior Director for the EMEA region Tom Leahy in a blog post.

Variations from region-to-region are significant. Leahy notes that liquidity in markets such as San Francisco, where the rate in price growth has been at such a clip that prices would have to drop significantly before most investors would be underwater on their investments, is less vulnerable than it is a market such as London, where the price growth rate has been modest since the June 2016 Brexit vote.

There are caveats, however, Leahy notes. For one, pricing movement is calculated metro-wide and doesn’t account for variations at the property-level that can cause significant deviations from the local average.

He continues: “Second, while volumes and deal flow have plummeted in the wake of the Covid-19 lockdown, property prices in the direct market are yet to shift significantly.” Leahy points to a recent analysis from the MIT Center for Real Estate Price Dynamics Platform which indicates that the expectations of buyers and sellers have moved further apart since the beginning of the COVID-19 crisis. The MIT analysis concludes that this could portend softening prices that are being cushioned by the current low-interest rates and the weight of capital.

“Anecdotally, we know that deals for good quality assets are completing with very small price adjustments to those agreed pre-crisis, but it is only when the market opens up fully and a broader spectrum and type of properties start to trade that we will have a better signal on where prices are going in the second half of the year,” Leahy concludes.