COVER STORY, DECEMBER 2009

Q&A ON TOPIC: Bridging the Buy/Sell Gap
Interview by Kevin Jeselnik

Heartland Real Estate Business spoke with Ben Reinberg, president and founder of Deerfield, Illinois-based Alliance Equities, about the gaps in sellers’ and buyers’ valuations and expectations and  how to bridge those gaps in order to create a more profitable market for both parties.

HREB: Buyers cannot afford to pay the higher prices that a seller could have received in the past couple of years because there needs to be more equity in deals to make that happen, which isn’t feasible...

Ben Reinberg: It is feasible, but there is a lot of equity sitting on the sidelines, and there isn’t a lot of equity coming into real estate these days. The ratio of equity to debt has gone up significantly. Lenders want more equity in the deals. The cost of debt has significantly increased, and the loan constants have increased as well. The debt market has shortened its maturity dates and amortization schedules, which are the loan constants.

Regarding the demand for greater equity, how do we motivate buyers? Basically, when prices go down and there is more credit available out there, I think you will see more buyers jump back into the market. When prices start lowering and cap rates start going up, people will be able to start pricing the risk.

HREB: The question of risk is interesting. Why isn’t risk being priced accurately now?

BR: That’s not the issue. If you look at the topic of this Q&A, basically, we are seeing, as we look at it a lot of deals every week, that there is a significant gap between sellers and buyers, and it is because of a couple of things. If you don’t have a highly motivated seller in this market, it is very difficult to get a deal done. The whole point of it is really educating buyers and sellers so they could come together. Hopefully, the seller is motivated. The only way you can get a deal done is if the seller has a real purpose. If you don’t have to sell, why would you sell in this environment, which is one of the worse we have experienced in years.

That being said, if you are going to sell in this market, you have to be a highly motivated seller. They will get deals because they will price their property in tune with the market. For example, if the risk says the property is a 13 cap, and you are willing to sell it at that, the seller will have an opportunity to get a deal done. Because of the cost of capital on that deal, the loan constants might be in the 9s, the seller might be able to price his equity and debt, and say, pay X amount return on my capital because the cost of capital has gone up, and the return threshold is higher as well. We live in a different world right now.

HREB: Buyers’ always face a risk in any CRE purchase; why is there so much more hesitance surrounding the perceived risk that one assumes when purchasing properties in the current market, including the risk of carrying a vacant property? If they are causing a downward pressure on prices, aren’t these risks creating a better buying market for investors, as far as the cost to get into the game?

BR: First of all, many tenants have weaker credit than in the past 3 years. Secondly, there are not a lot of tenants in this market that are expanding. A lot of tenants are contracting. Some tenants have simply gone out of business. Between all of these factors, you don’t have as many tenants absorbing space. So the carrying time is a lot longer on properties across the board. That is why vacancies are so high, and that is why buyers are concerned with acquiring properties in this market. People are struggling to make assumptions of when they are going to lease up space. Also, because tenants are leaving and contracting, a lot of landlords are concerned about turnover costs, as those have gone up as well. Again, this puts pressure on the price of these properties. If a seller is not in tune with the market, or doesn’t want to deal because they aren’t really motivated to sell — the deal will not happen. A highly motivated seller understands that being in tune with these factors will allow for the best sale opportunities. That is why you don’t see a tremendous amount of deals happening, because of the gap. Over time, sellers will become more motivated, as debt will come due the longer they sit and hold onto the properties, they will continue to have issues.

HREB: How attractive will those properties be if they have loans maturing that cause the seller to unload the property?

BR: It really depends on the real estate fundamentals. If it is a good piece of real estate that you will have the ability to hold over a significant period of time, investors will jump in because they will buy the properties at prices below reproduction cost. If an investor finds a property with good fundamentals and they can buy it at what they perceive is below reproduction cost to help them put in tenants at well below market rent, they’ll jump in. Investors are going to be picky because there is probably going to be a lot of product coming on the market, either through lenders, the brokerage community, sellers that are distressed. We keep hearing about this distressed market, and I think as time goes by, we believe you will start seeing more assets that are double digit cap rates with highly motivated sellers that need to move property for various reasons. That’s why it is a struggle right now, because people are frustrated.

There are a lot of buyers looking for opportunities in this market. It’s hard to hold on to tenants or keep them without lowering rents. Decreased rents push values down.

There is no general rule for when buyers will come back to the market. When more capital is available, between the equity and debt markets, and pricing is in tune where people can acquire properties potentially below replacement cost or protect their investment capital, I think you will see more buyers come into the market. Right now, buyers, generally speaking, don’t think sellers have lowered their expectations to where values are.

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