Featuring: Bill Asher
My advice to clients in a transitioning market is similar to what the legendary basketball coach of UCLA John Wooden would say: “Be quick, but don’t hurry.” When athletes rush they can lose their technique. Wooden wanted his players to learn to do the right things but learn how to do them quickly. So, what strategies do sellers need to learn to move quickly?
Projected rising interest rates have caused buyers to be more cautious in their purchasing decisions, and, in many cases, sale cycles are taking longer than in previous years. Therefore, it is important to be strategic in properly pricing assets for sale to appropriately engage prospective buyer interest.
The single-tenant net lease (STNL) category continues to possess the largest transaction velocity and the highest number of potential buyers seeking a flight to quality. These buyers specifically want properties with new construction, long-term corporate guaranteed leases, and internet-resistant tenants in good locations. They are also showing more willingness to acquire new investments nationally rather than in their local market.
STNL pricing $5 million and under remains the most consistent with the smallest separation between asking and final sales price due to this category having the largest buyer pool and being less reliant on financing. However, the depth of formal offers submitted from this buyer pool has started to shrink. Typical listings are generating an average of five offers or less compared to approximately five to 10 offers 18 to 24 months ago.
STNL assets priced $5 million and higher have seen similar results but are experiencing longer marketing periods to procure a buyer due to sellers’ rear-view mirror pricing expectations, rising interest rates, and the fact that most buyers need financing to transact. Institutional buyers are approximately 30 basis points to 50-plus basis points higher on pricing compared to private investors. The separation between asking and final sales price has widened in this category.
Demand remains at an all-time high for grocery-anchored investments, which have traditionally been considered a safe haven for both institutional and private investors. Watch for institutional buyers to look at markets outside of their typical criteria due to the lack of quality opportunities. Well-located properties with daily needs and internet-resistant tenants with sustainable market rents continue to be key acquisition criteria characteristics. Food and more service-driven retail properties, including successful mom and pop restaurants, nail and hair salons, and dry cleaners are examples of internet-resistant tenants that investors prefer. Prospective buyers are carefully assessing these types of assets where a grocer is not the top performing store in the market or a grocer has transitioned to a second-tier option in the trade area.
Break-up sales plan
As demand and pricing for non-core grocery-anchored shopping centers continue to slowly decrease, a break-up sale can help provide an owner with better overall proceeds. By selling a shopping center in pieces, a seller can realize an improved value compared to selling the entire center as a whole. Furthermore, the pricing of separate, smaller offerings, typically appeals to a much larger buyer pool. For example, within the last year, Hanley Investment Group sold six pad buildings within a Walmart-anchored shopping center that resulted in approximately 100 basis points more in total value as compared with the center being sold as one property.
Success is where preparation and opportunity meet, so looking ahead to 2019, consider being quick, but don’t “hurry!”
Bill Asher is executive vice president at Hanley Investment Group Real Estate Advisors. With 20 years of experience in commercial real estate, Bill specializes in advising clients in the acquisition and disposition of retail properties nationwide.