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Flattening the Deal-Paralysis Curve

Tuesday, April 21 2020 3:40 PM

As a result of the Coronavirus Pandemic, the commercial real estate investment sales market has effectively been divided into two groups of properties:  Properties in which you can have a certain level of confidence that you know what your physical and economic occupancy will look like in the next 3-12 months, and properties in which you don’t know what the physical and economic occupancy is going to look like in the near or medium term.

The first group is made of tenants who are economically surviving, or even thriving, as “essential services.”  These include dollar stores, grocery stores, home improvement centers, pharmacies, and liquor stores.  Many of these were strong credit-tenants to begin with who are now stronger than ever.  Properties with these types of tenants are still actively trading and may even begin to see compression in the cap rates as capital that needs someplace to go is drawn to the safety and predictability of these investments.

The latter group, to some degree or another, is everything else.  These are properties with tenants that run the spectrum of financial hardship and future viability.  Some of these tenants will never reopen, some of these tenants will ultimately do just fine, and some of these tenants will limp along for the foreseeable future but may never fully recover from the financial wounds that they have incurred.

These are the properties, that at least at the time of this writing, are not trading because the true risk associated with these assets cannot be known.  If risk cannot be assessed, the value cannot be determined.  The imperfections and inefficiencies of the commercial real estate market are a large part of what typically creates opportunity, and therefore drives the market; however, in this particular and unprecedented market, it leads to paralysis.

Many buyer’s will presumably want, at least to some extent, to adjust values for anticipated forthcoming risk caused by the uncertain physical and economic occupancy of these properties,  while many sellers, who may not yet be under any financial duress, and may not anticipate being under any financial duress, will not be willing to discount their values for risk that is not yet fully determined or realized.

For these transactions to get done in the near term, this gap between buyers and sellers will need to be filled by an over-abundance of communication, information, and transparency between buyers, sellers, and tenants and guided by experienced, knowledgeable, creative, deal-making brokers and agents.

Sincerely,

Scott Harper, MBA, CCIM

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