Pricing a property is the single most important economic factoring in selling an office building, a neighborhood retail center, or a 5-acre parcel of industrial land. We know that there is a relationship between NOI and marketability.
Then, of course, there is the CAP rate, many believing it the be-all and end-all…it isn’t.
Multiple other factors and influence the go-to-market price. Leases, vacancies, deferred maintenance, note calls, and an owner’s personal needs can all influence the price.
Commercial property owners who want to sell their properties will often be heard making one or more of the following statements:
“Price it higher than market so I do not receive low offers.”
“I need to secure this price because I need to recover loses.“
While we certainly understand the logic behind these and other statements used by owners to justify their pricing strategy, we don’t agree with the logic or the reality of such approaches.
Here is the truth about commercial real estate pricing. If a property is generating revenue, the price is a function of the cash flow, also known as the Net Operating Income (“NOI”). Real commercial buyers are attracted to investments that have a solid and performing NOI.
Another truth we should consider is that commercial real estate is similar in many respects to selling other types of assets, such as a stock. It would be laughable to think that we could sell our Microsoft, General Motors or IBM stock by inventing a price we want.
Commercial property owners who want to sell should recognize there is a market for their property, just as with a stock investment. If the property is leased to a tenant or multiple tenants, the investor is going to look at the lease performance, both current and future and the gross and net cash flows.
If the property sits vacant the value of the property always diminishes over time. Why? Because it has no cash flow. In the case of a vacant property it is even more critical that pricing be at or even slightly below the true market value. Simply put, empty properties place the new buyer at a higher risk than functioning properties. This risk, whether the owner believes it or not, will be a factor in determining whether the property sells before its market value drops significantly.
The price tension created by artificially inflating property values are deadly to the owner and almost always backfire. Properties that sit, decrease in value and create more “market skeptics” who further devalue the property.
The most important selling zone is the first 120-180 days from the time a commercial property hits the market.
Ask CPNA for Property Performance and Pricing Analysis (“PPPA”). Contact us or call us at (928) 445-7000.