A triumvirate of factors has led to a slowdown in commercial real estate sales. More employees are becoming teleworkers, economic growth has slowed, and unemployment is rising. Nonetheless, the distressed sales buyers are waiting for are not materializing.
Instead, corporate real estate lawyers are reporting a large gap in seller and buyer expectations. A little give and take on both sides could get more deals done.
Even though private real estate funds are eager to invest their huge stashes of cash, commercial real estate sales are not getting completed. The sticking point is a mismatch in views on market values between buyers and sellers. The difference in price expectations is wide at 12 percent.
Although both sides are eager to do deals, they should not throw caution to the wind. The commercial real estate market has changed dramatically in six months.
Negotiating Tips For Sellers
Do not negotiate without your lawyer present – Most buyers on the market are large private equity funds. They are using their REITs funds as investment benchmarks. They see that the return of the Nareit Office REIT index was down 27.8 percent in the first six months of 2020. But very different dynamics are driving office building valuations today.
Ensure your lawyer closes the deal – Whether or not your deal is a distressed sale, sellers are negotiating while under more financial stress. Under these circumstances, shrewd buyers often try to slip in more favorable terms right before the deal is signed. Your commercial real estate attorney should never leave the table, especially in the final steps of the transaction.
Negotiating Tips for Buyers
Get all bank financing terms in writing before the closing – For big commercial deals, the bank's lawyer will be present. This lawyer represents the bank's legal and financial interests. Banks are under pressure to negotiate the highest rates. Ensure your commercial real estate lawyer is the only one negotiating on your behalf.
Perform thorough due diligence – The commercial office rental business has changed. More rental payments are behind. With more workers telecommuting, tenants' office needs are changing, and often shrinking. Contracts are being renegotiated for less square footage or are converting to month-by-month rentals. 2019 financial statements, or those for the last quarter, do not reflect the current financial picture.
The Cost of Not Getting the Deal Done
The distressed deals investors are waiting for may or may not materialize. But the opportunity cost of investors waiting too long to come down on their price expectations could be high. Buyers and sellers should consider sitting at the bargaining table with a corporate real estate attorney and completing the deal.