Gap in Buyer, Owner Expectations in Property Pricing Continues

While commercial property prices have not yet had a major decline in connection with the coronavirus pandemic, the gap between buyers’ and owners’ expectations on price has widened, Real Capital Analytics Senior Vice President Jim Costello wrote in an RCA Insights blog post.

Researchers at the MIT Center for Real Estate Price Dynamics Platform analyzed the disconnect and found that the gap is growing, especially in the retail and office sectors, Costello wrote.

If owners tried to make up the recent decline in deal volume by cutting prices, the MIT researchers found, they would have to reduce office prices by 12% and apartment prices by 8%, Costello wrote.

While transaction volume and liquidity have fallen, Costello wrote, it would be “wishful thinking” to expect that the shift in buyer expectations alone will lead to a decline in price.

Costello compared the situation to the expensive bottle of whiskey waiting unsold at his local liquor store.

“They want $700 for this bottle of Yamazaki but I do not want to pay that much, and it has sat there for some time,” he wrote. “The fact that the bottle remains there does not mean that the price is going to fall: the owner should eventually get that price. What it shows though is that at this price, the liquidity for that bottle, so to speak, is low. The same issue plagues the commercial property market today.”

While Costello said he expects prices will eventually decline as the recession continues to affect the economy, he emphasized that owners can delay potential losses.

“As long as the owner of the liquor store up the street is in good standing with the bank and cash is flowing, it is wishful thinking that I will get that bottle of Yamazaki for the price of a bottle of Evan Williams,” he wrote. “In the same way, expecting that suddenly you will be able to buy office buildings at a 23% discount to the prices from last year just because the prices of office REITs have fallen that much is wishful thinking.”

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