Off market deals happening in commercial real estate

05/26/2015

stan stouder, News-Press

In the second quarter of 2014 in this column I wrote about large, national users beginning to return and occupy large spaces. Many of those larger spaces had been vacant for years but then as 2014 progressed got occupied.

This article is about a new trend that has surfaced in the Southwest Florida market since Market Watch 2015. This trend is off market deals. What is an off market deal?

In residential real estate the term MLS is familiar to most. Commercial real estate has similar services but they’re just not called MLS. The MLS type commercial listing service most known to the public, because its fundamental features are free, is called LoopNet. When professionals are asked to market property putting it on LoopNet is perfunctory. So for this article a property found on LoopNet will be defined as on the market. It is listed in a public space for anyone looking to find.

I once heard Property Appraiser Ken Wilkinson say that Lee County alone has more than 500,000 individual parcels on its tax roll. Using random numbers to illustrate the point, assume that only 25 percent of those, which is 125,000, are commercial properties and if LoopNet has 5,000 Lee county properties listed, then 96 percent of all commercial properties are off market.

Clients ask us to find them a property to buy or lease. We search sundry MLS type services, LoopNet being just one, using a range of criteria that encompass the assignment to find a match. With our market knowledge we then comb over the results and winnow them down to only those that best match the client’s request. This is time consuming for brokers but frees the client to focus on their business and then only look at properties that best match their need.

What happens if the search fails to render any properties that match the client’s need? In 2015, in specific market segments but not all, this is increasingly becoming the case. Successful brokers then will try to find, using their accumulated market knowledge and relationships, properties not on the market, aka off market.

The more criteria the user has the fewer listed properties there are that match. Think of it like booking commercial air flights. Seats are always available for flights that depart at unseemly times of the night with multiple layovers. But the best flights are harder to find, more expensive and often sold out. The number of properties that match a search declines disproportionately with each level of criteria added.

Have you ever tried the “wouldya” question? I have a regional company ready to pay $1.5 million to $2 million in cash for a property if it meets specific criteria. We found two properties on the market that each met some, but not all, of the criteria. While showing these two properties the V.P. of real estate began to share additional criteria. I have a relationship with an owner of a property that meets all the criteria, but it was off market. I went to the seller and said “wouldya” consider selling if a buyer would pay you X. The seller said yes. I presented to the seller the buyer’s offer, not at X but close enough to get a counter offer, around the first of May. The result will likely be better for both buyer and seller.

What is the best way to find off market properties? Retain your broker with a buyer broker agreement. This is a topic that requires more space than I have here. In short it assures the broker they’ll be paid so it allows you the user to see both on and off market properties. I just entered into a buyer broker agreement to find land for a financially strong client, but one who has very specific and narrow criteria.

If it is getting harder to find suitable listed property is it time to build new commercial property? My opinion is not yet and here’s why. New construction costs have returned to their 2005-2006 apogees; some material costs have actually surpassed them. Rents have not kept pace. Lease terms are typically 3-5 years here so it will likely require 18-36 months of leases rolling over to build rents back up closer to a level necessary to sustain the cost of new construction.

Here is another reason. Banks today don’t like to lend on speculative new construction or vacant existing buildings being bought for investment purposes. Banks may make a loan to a borrower based solely on their “global cash flows” but not the more traditional model of 20 percent down and borrowing the balance. Many investors can build for cash but have to measure the adversarial effects on their rate of return from building or buying existing properties without borrowing and holding costs until lease-up.

If one wants to do a spec building now they’d likely have to fund it using all cash. They would be wise to confer with their broker to find out what criteria the market is most commonly demanding in their product type and include as much of it as the site will support in their new construction. The more boxes your property checks the greater the odds it’ll get and stay filled.

Off market deals are happening now. Stay tuned to Market Watch to see not what was, but what’s next, in real estate in this region.

Stan Stouder is a founding partner of CRE Consultants. He can be reached at stanstouder@creconsultants.com.

Southwest Florida Land MarketLand zoned for industrial and commercial uses in Southwest Florida has 5 out of 6 arrows on the attached chart pointing up. This is in part because of selective purchases of land by users who can’t find the right existing building to meet their needs. In the absence of existing buildings with the right criteria for a business to efficiently operate the user must either modify an existing building, or take the voyage and additional time to build a new one, which requires land.

Commercial Land:

Expect to see intensifying demand for both parcels that are entitled with some infrastructure in place and just vacant parcels in shadow locations to medical campuses and existing successful retail corridors like around Coconut Point, Colonial and I-75, Gulf Coast Towne Center, and Immokalee Road and 951. All these locations are on the heels of growth and expanding demand in the area. Demand for retail land continues in part due to the higher sustained occupancies the retail sector has enjoyed and the large number of new national restaurant related users who are opening in this area.

Industrial Land:

Although select build-to-suit projects have taken shape, achievable market rents remain well below the threshold of new construction costs required to support new speculative construction. However users are beginning to consider, especially for specialty uses that their best, but not only, option may be to buy land and build for their specific need.

Other Land:

With apartment vacancies at near record lows, sustained demand for apartment sites will remain at the top tier sites with additional demand from multi-family developers seeking to increase their infill pipeline with smaller-sized, urban and suburban parcels in close proximity to retail services and demand generators including core workforce corridors, universities, and recreational amenities. Developers of senior housing facilities are finding a limited availability of parcels zoned by right, and not by Special Exception, for this type of development.

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