Why Would a Seller Sell Today if They Didn’t Have to?

 Regular StreetWise reader, Jason Bartlein, suggest I address the question posed in the title of this piece. And it is a great question. Values are well off of their peaks, fundamentals are stressed, capital markets are erratic and participants generally feel that market conditions are difficult. Why would someone sell a property now, under these circumstances?

 The first thing I always tell a potential seller is that I guarantee that their property will be worth more at some point in the future. Worth more yes, but when, is the question. Is the seller willing to wait for that point in time when the property is worth more? And when it is worth more, how much more will it be worth? And how much more will alternative investments be worth? And what are the costs to wait until the value increases? The answers to these questions are all guesses (some more informed than others) and those guesses make the market.

There are always people who have little choice but to sell. The quintessential reasons for this forced selling include death, divorce, tax obligations, insolvency, partnership disputes and the like. These reasons exist in good times and in bad times with a clear propensity for the obvious ones during down markets.

We have seen some of this forced selling in this cycle but not nearly as much as we anticipated. Normally, discretionary sellers feed the supply chain of available properties. As market conditions become more difficult, discretionary sellers leave the market and the supply is normally fed by distressed sellers. During this cycle, we have not seen distressed sellers swoop in to fill the void.  For this reason, supply constraint rather than waning demand, the volume of sales has been miniscule ( I discussed this acute imbalance between supply and demand in last week’s column which is keeping values higher than economic fundamentals would dictate).

So why would a seller sell today if they didn’t have to? There are several reasons. Portfolio repositioning is a big one. If you wait to sell when prices are high, the properties purchased with the proceeds will be priced highly. If properties are sold when prices are low, replacement properties will be priced lower. From this perspective, the timing of a sale is all relative.

We have several clients using current conditions to realign their portfolios. Some are selling smaller properties and purchasing larger buildings. Others are selling non-core assets and acquiring additional core assets. We have clients selling properties so they can move from class c product to class A and B. Some are selling properties in the boroughs and using today’s market conditions to buy in Manhattan. This realignment is something that is often better done during a downturn than when things are booming. This is due to the fact that the price deviation between the high end and the low end is widest during the boom.

Another reason to sell today is to create a reserve of equity available to purchase opportunities which may arise. Sellers who have healthy equity cushions in some buildings may elect to sell in order to be ready for, what they perceive to be, better opportunities tomorrow.

Clearly, the distressed asset recycling and deleveraging process has not occurred to the extent that it must and when it does, excellent buying opportunities are likely to present themselves. Some sellers who believe prices will fall further are positioning themselves to take advantage of this.

A motivation closely associated with the one above, is that due to the economic uncertainty in the U.S. today, some people just want to sit on cash. We have several clients who are selling, paying the taxes, and sitting on the cash so they can sleep at night. All of the non-sense the country is going through today with runaway government spending, deficits, taxes, probable inflation, healthcare, etc, induced one client to sell his portfolio in order to move to another country to escape what he believes is a disastrous environment for those of means. He is actually becoming a citizen of his new country.

Some of our clients are looking at their portfolios and identifying properties which they feel have been “maxed-out”. These are properties which have gone through a value-added process and there remains little upside potential other than letting the value trend in tandem with the market. These assets are being sold in order to take advantage of the sell-low / buy-low dynamic as the seller looks for properties with imbedded upside potential which they can tap with some elbow grease.

Many clients are selling today to take advantage of the supply / demand imbalance that I mentioned earlier. Supply is currently very low and the demand side has seen extraordinary growth. High net-worth individuals and families have been the most active buyers in the past two years as institutional capital was sidelined when we tangibly started to feel the credit crunch in the summer of 2007. We have witnessed a resurgence of institutional capital recently as distressed buying funds have been formed and are actively seeking opportunities.

Additionally, foreign demand from high net-worth individuals has risen sharply to levels not seen since the mid-1980’s. All of this demand, in conjunction with little supply, has led to relatively strong prices. Some sellers are taking advantage of this condition as they believe supply could be increased greatly when distressed ostriches either decide to pull their heads out of the sand or are forced to. If supply were to increase greatly, it would exert significant downward pressure on prices.

Other discretionary sellers are concerned about interest rates. The inevitable inflationary pressures, which will result from the doubling of the money supply in the U.S., will push interest rates up. Also, when the Fed exits the market, it is likely that interest rates will increase. As rates increase, there will be significant pressure for banks to increase mortgage rates which will drive prices downward.

Expectations of increases in the capital gains tax rate is another reason why sellers may elect to sell today. The current federal rate is 15%. If the Bush tax cuts are allowed to sunset, the rate will go to 20%. If either of the House or Senate healthcare bills are passed, the rate would increase by another 5.4%. The administration has indicated that an additional 5% increase may be put on the table. In aggregate, this could result in a capital gains tax rate of around 30%.

There are no clear directions for any of these policies at the moment. Within the past two months, we have heard the Bush cuts will not sunset, they will sunset and that they will not sunset for some of us but will for others. Who knows what will actually happen? Those who think the rates will rise significantly (not a bad bet as capital gains are perceived to be only pertaining to the rich) may elect to sell at today’s historically low rates.  

The last reason a seller might decide to sell today is simply due to a lifestyle change. Some property owners spend all of their time dealing with the many issues that come with owning commercial real estate. Property management can be a time-intensive endeavor dealing with headache after headache. Years of headaches later, some owners decide they have had enough.

If retirement or a significant lifestyle change is contemplated within the next couple of years, an owner might decide to pull the trigger today. It is easy to surmise that things will not get appreciably better in the short term, as we will need substantial job creation over an extended period of time for our fundamentals to be sustainably enhanced. Most economists believe that the recovery will occur slowly and, likely, in a jobless manner. Sellers who are impatient may not be willing to wait.

Notwithstanding the seemingly poor market conditions today, there are many reasons why a seller may decide to sell today. Timing is such an important part of commercial real estate investment and sometimes there are externalities which create motivation to act. Given today’s lack of product, anything that would add to the supply of available properties for sale would be welcomed. We expect supply to grow as distressed sellers realize that working through their problems is inevitable and discretionary sellers may decide to sell for any of the reasons given above.  

 Mr. Knakal is the Chairman and Founding Partner of Massey Knakal Realty Services in New York City and has brokered the sale of over 1,050 properties in his career.

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27 Responses to “Why Would a Seller Sell Today if They Didn’t Have to?”


  1. 1 John R. February 28, 2010 at 11:20 am

    Hi Bob, I always enjoy your articles. I am an investment broker located in Miami and was talking to a client who owns property here and up in New York. He told me that you write another weekly column for a local newspaper that he and other property owners in New York consider the most insightful real estate commentary on the market. I have several clients who own property in New York and in Florida. Where can I find your other articles?

  2. 2 rknakal February 28, 2010 at 7:39 pm

    Hi John, thanks for your post. The other column I write is for a newspaper called The Commercial Observer which is a commercial real estate publication. You can access my column at http://www.observer.com/term/robert-knakal. Thanks for the kind words.

  3. 3 JWB March 1, 2010 at 9:38 am

    Thanks for the article. I really enjoyed this one. I think the above are all great reasons for sellers to move from the denial to acceptance stage of today’s market. I think everyone in the industry will find this take valuable in gaining transaction movement. The reality is that no one has a crystal ball and those who reposition last in trends benefit the least.

  4. 4 Silvio March 3, 2010 at 10:26 am

    Bob, do you see properties for sale increasing so far in 2010 ?

  5. 5 Sean O'Shea March 3, 2010 at 11:23 am

    Bob:
    I, too, have begun to look forward to each of your pieces when published. Globe St. was both wise and timely to include insights and market intelligence from a seasoned practitioner like you.
    In our Net Lease Advisory in Los Angeles, where 60+/-% of the recent historical 1031/1033 trades were initiated in the halcyon days of 2003-2007, we most often represented buyers. It is so helpful and important for investors and brokers, alike, to be afforded credible insights into the range of issues a Seller considers in making a disposition decision.
    Part of our job, as responsible Buyer’s representatives,has been to appropriately “educate” the Buyers in this market to temper and sometimes re-calibrate their expectations regarding achievable deal terms. We try to review the ‘real life chair’ in which many Sellers are sitting.
    Your current article is helpful in sensitizing the market that every Seller is not a distressed situation which would allow Buyers, even strong cash buyers, to overstate (to themselves) what can be achieved in deal terms for a deal that will have a high certaianty of full execution.
    Thank you, Sean

  6. 6 Henry Brinks March 3, 2010 at 12:52 pm

    TRENDS TRENDS TRENDS!

    1)Baby-boomers will be net sellers over the coming decades…either downsizing or giving properties to their heirs. Many of those properties will be dumped onto the market.

    2)Generation X is not interested in major investments as they are just having children today (boomers’ grandchildren). What little they have will be put into retirement accounts.

    3)Generation Y is only interested in ipods, iphones, and living off the baby-boomers. Unemployment within this generation is going to be chronically high over the coming decades. Low motivation within this generation, free-loaders.

    4)Lack of science/math/engineering graduates and poor domestic policy towards this field will cause Intel, IBM and many others to escape to other countires.

    5)Healthcare will dominate GDP% for decades. It will change and shape public policy within a decade regarding Medicare (today’s healthcare debate is a joke). People will and must pay more out of pocket if they want good healthcare and all the services to prolong life. No free lunch here. Health Insurance is like life(death) insurance…it’s a losing proposition. Only derivatives can play with the numbers here.

    6)The internet will shape our culture like never before. Like-minded people will gravitate towards blogs and like-minded articles which will cause networks of thought and provoke policy change. This will create multiple political parties. Tea Party is a start. Republicans and Democrat = gridlock.

    7) There will be an increase in the haves vs. the have-not’s.

    Where will the money to invest into real-estate come from?

  7. 7 GRM March 3, 2010 at 1:09 pm

    Bob, I have enjoyed your articles immensely and have learned a lot from you. I came across a charity called Ice Hockey in Harlem and the president is listed as Robert Knakal. As Knakal is not a common name, I am assuming that is you. Is that correct?

  8. 8 Tony J. March 3, 2010 at 1:13 pm

    Mr. Knakal, with activity in the market picking up we are all getting busier and busier. I understand that you actively broker as your business partner, Mr. Massey, runs your company. How do you find the time to write each week? I have been told that I should write articles but I can’t seem to find the time. I certainly hope that you continue to share your insights with us.

  9. 9 Clinton W. Blume, Jr. March 3, 2010 at 7:22 pm

    Bob
    It is always an enervating exercise to read and digest your forays into really thoughtful real estate analysis.
    Which is probably why you have so many bright Colgate types esconced at M/K ?
    Does your firm have a softball team in summer ? How about a game with the ABS team ? Losers buy the beer!
    Clint Blume, Jr.

  10. 10 rknakal March 3, 2010 at 10:14 pm

    Hi JWB, thanks for your post. Yes, indeed, those who are last are defintiely worst off. Thanks again for suggesting the topic.

  11. 11 rknakal March 3, 2010 at 10:19 pm

    Hi Silvio, thank you for your post. Yes, product and supply is picking up. Discretionary sellers are considering selling and distressed assets are starting to flow. Thus far in the cycle, we have completed over 1,000 valuations for banks and special servicers. From September of 2008 through September of 2009, we obtained 12 listings from these distressed sellers. Since October 2009 through last week, we have received 47 listings of notes and REOs. Clearly, activity is picking up.

  12. 12 rknakal March 3, 2010 at 10:21 pm

    Hi Sean, thank you for your post and the kind words. It is interesting to hear what is going on in LA and I appreciate your input. Understanding the perspective of the other person in a negotiation is among the most important aspects of Negotiating 101. Thanks for pointing that out.

  13. 13 rknakal March 3, 2010 at 10:26 pm

    Hi Henry, thanks for your post. Boy, I thought I was a pessimist!! The money will come from all of those who have it. Not much new money will be made for a few years as we go through a very slow expansion with perhaps 3 percent gdp growth for a year or two.

  14. 14 rknakal March 3, 2010 at 10:39 pm

    Hi GRM, thanks for your post. Yes, I am the Robert Knakal who is the President of Ice Hockey in Harlem. One of the things I really admire about the real estate industry in NY is that some many people are so philanthropic. I was inspired by this and have become active in many charitable causes. Ice Hockey in Harlem is an after school program for disadvantaged children in Harlem. If the children come to our afterschool classes, they can get on the ice. The average grade point average of our children is well above the school’s average which we are very proud of and this is really the goal of the program. If you have a chance to support one of our programs, please feel free to do so.

  15. 15 rknakal March 3, 2010 at 10:46 pm

    Hi Tony, thanks for your post. Yes, Paul runs the firm as my management input is on a very macro basis. I spend most of my time selling buildings which is what I enjoy doing more than anything. And yes, I don’t know how I find the time to write over 3,000 words per week. Between this blog and my Commercial Observer column I am writing a minimum of over 3,000 words each week. This requires a lot of time and effort but it has been a great experience for me. The feedback I have received from all of you has been overwhelming and is much appreciated. I believe it is important for those in our industry to stand up for what is best for us and if I can contribute in the way I have been, I would like to continue to do so.

  16. 16 rknakal March 3, 2010 at 10:48 pm

    Hi Clint, thanks for the post. Massey Knakal has a company softball team which has actually won the New York real estate softball league championship two of the last three years. We would be happy to play you and we will pick up the cost of the beer regardless of who wins. Let’s chat…..

  17. 17 MJK March 4, 2010 at 9:54 am

    Hi Bob,

    Grear article in a soft current real estate market. What we need is financing to encourage sales and new developments. Keep up the good writing.

  18. 18 Rob Mathes March 4, 2010 at 10:08 am

    Another issue to sell related to your last point is to address estate issues before the principal dies. Additional family expertise may not be available. There may be disagreements among the beneficiaries over who is best suited to manage the asset (which is a separate issue from who actually owns the assset). Cash is easier to divide. Futher, If sold to a REIT, OP units retain tax advantages of deferring the gain.

  19. 19 jstamp02 March 4, 2010 at 10:48 am

    Mr Knakal, this is a great post, you present a lot of reasons to sell that one doesn’t normally consider. The one point I question is the idea of selling to upgrade in building class (B to A) or upgrade in terms of geography (Brooklyn to Manhattan). While these are all great reasons to sell in theory, class A buildings in Manhattan aren’t up for sale and the ones that are have unrealistic price tags.

    Thanks for your consistent write-ups, as a student I’ve learned so much from you and you’ve allowed me to hold my own in conversations about Manhattan real estate. I look forward to your future posts.

    Joe Stampone

  20. 20 Henry Brinks March 4, 2010 at 2:25 pm

    During the Great Depression, we didn’t have credit cards or social security or many other unfunded liabilities we have today. All these liabilities will be massive in the coming decades. Fundamentals will be poor, at best. Yes, those with money will buy our buildings but what will that building be worth in 15 years with fundamentals so poor? Tenants will not be paying more in rents with declining incomes and expenses will go up, I promise that.

  21. 21 Carl Todd March 4, 2010 at 4:36 pm

    rk
    In my 60 years of experience in the field and from my observation the basis for the motivation of my client’s appraisal request from me for a disposition valuation study, my answer to your question why can be stated in three words: INCOME TAX CONSIDERATIONS.

    Every investment and many user properties that I was part of the advisory team it was income taxes, income taxes and income taxes that determined the final acquisition, disposition or hold and alter the property decision. Every thing else was a secondary consideration.

  22. 22 rknakal March 5, 2010 at 6:45 am

    Hi MJK, Thanks for the post. Yes, financing is critical to getting our market moving. In New York, community and regional banks have remained active throughout the crisis and continue to lend today. Commercial and money center banks have been difficult to find. We hope they return to the market soon. Also, we expect debt for income producing properties to return well in advance of construction financing.

  23. 23 rknakal March 5, 2010 at 6:48 am

    Hi Rob, thanks for the post. You make a great point. Estate planning is certainly another reason why sellers may sell. Cash is definitely easier to divide than bricks and mortar.

  24. 24 rknakal March 5, 2010 at 6:54 am

    Hi Joe, thanks for your post. Your point is well taken. The fact is that there are not a lot of any type of property on the market for sale today. This supply/demand imbalance is causing prices to be higher than they probably should be.

  25. 25 rknakal March 5, 2010 at 7:00 am

    Hi Henry, thanks for your post. Boy, I thought I was pessimistic….. While what you say is correct about liabilities, we have so many more ways to do business and make money today. Technology has completely changed the world since the Depression and has created more opportunities for those who wish to take advantage of them. While I think we will slog along for a while, I remain very optimistic about the future, caveated only by the fact that Washington needs to get its act together. Political blunders present the biggest downside risk to our future.

  26. 26 rknakal March 5, 2010 at 7:06 am

    Hi Carl, thanks for your post. Yes indeed, what you are left with at the end of the day is the real decision driver. Would you rather sell for $10 million and be left with $7 million after taxes or sell for $13 million and be left with $6 million? The answer is clear and exactly why tax policy is so important.

  27. 27 JWB March 5, 2010 at 11:01 am

    MJK, One positive thing worth mentioning in regards to financing that I think will help in the long run is the resurgence of CMBS debt. We currently have about a half dozen conduit lenders that have reappeared and have begun lending in the first quarter…all with different floor loan amounts and parameters.

    For now, the terms are more conservative than they were 3 years ago and still more conservative than agency loans for multifamily, but nonetheless a national option for commercial and apartments that don’t fit agency criteria.

    Our market thrived on a secondary loan market (even for balance sheet lenders). If that market can be recreated, there will be much more available capital. The first few securitizations will determine how aggressive the pace of pricing will go and where the market standard will be, but the take away is that a huge gap in available financing is slowly coming back, which should translate into improved overall market health. It will be interesting to see the speed of which the impact will take place.


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