by Bill Bubniak
Executive Vice President, Farbman Group
“To sell or not to sell?” Hamlet himself would have had no trouble making this decision. Across the Midwest, a convergence of market forces, a favorable supply-and-demand curve and fortuitous financial factors would seem to indicate that now may be the ideal time to sell.
But what are those forces? Why is now the right time to sell? And, for those who are thinking about selling, what kinds of factors should they consider?
Timing and demand
Real estate professionals who have lived through some tough times in the last few years may recognize intuitively that now is a good time to sell. Buyers are anxious to buy, there are not enough properties for sale right now and with lender deals drying up, prices are not suppressed. With lenders anxious to give clients money, there is downward pressure on cap rates. For sellers, all of that translates to good things in terms of yield.
Midwest market momentum
One of the most convincing signs that we have moved into a seller’s market is the fact that markets in Michigan and Ohio are seeing the same kind of outside demand you might expect to see in Chicago.
There is an influx of new and first-time buyers coming into these secondary markets, and owners who have tried to sell at some point in the last few years can attest to the fact that this is a relatively new phenomenon. With opportunities scarce in “premier” cities like New York, LA and Chicago, investors are motivated to look to Midwest cities to find quality opportunities.
Consider the recent sale of a 95,000-square-foot office building in Troy, Mich. (a town with 20-percent-plus vacancy rates). The highly competitive bidding process began with 12 initial offers—many with hard deposits, alleviating the need to perform extensive due diligence—and ended with prospective buyers still trying to up the ante, even after “best and final” offers had been made. In the Midwest (especially in B & C markets), that competitive dynamic is rare.
Tactics and strategies
Anyone who has lived through a down cycle understands that it is not a good idea to become a collector. In the context of today’s marketplace, owners should look closely at their portfolios and perform an honest assessment of their properties. Odds are, there is product that you are not happy with — and that someone else might think of as a gem. Things change quickly in the real estate market, often due to factors beyond our control, and disposing of salable assets now limits your exposure and gives you the chance to increase your liquidity and be able to capitalize on opportunities that are squarely in your wheelhouse. And, when the economy inevitably takes a downward turn, you will have cash available to spend on bargains and turnaround opportunities.
Owners have a tendency to fall in love with their properties, but that is not something you can afford to do in this business. Unlike with your home—where some sentimentality or overspending is forgivable—losing perspective on investment properties is a recipe for trouble. Experienced commercial real estate professionals have all learned hard lessons about what can happen in this cyclical business when a down-cycle comes around and you are left holding on to properties you could/should have sold.
It is noteworthy that this seller’s market is a trend that transcends all property categories. Industrial is not necessarily booming, but is doing well in Detroit thanks to a resurgent automotive sector. With limited new apartment construction in the past few years, owners are getting optimum cap rates right now. With more new construction picking up, rates that are now at their peak are unlikely to stay there. As new units hit the market, that wave will start to crest, and ultimately to fall.
With many balloon loans coming due in the next few years, turnaround specialists and value-enhanced operators will want to make sure they have cash on hand. Consider selling some assets off to someone looking for cash flow—there are plenty of people who want passive income deals and if (when) the wind starts blowing in the wrong direction, you will be able to mobilize capital to do what you do best. Along those same lines, be sure to think strategically and look ahead. If you have turned a property around and have it up to 90 percent occupancy, do not hang on to it—sell to a passive income buyer so you move on and can fix what is broken in the next property that other buyers are leery of.
Farbman Group is a full-service real estate firm based in Southfield, Mich. The firm manages more than 25 million square feet of office, retail, multi-family and industrial space across the Midwest.