S.E.C. Real Estate Observer

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Part I

Note: This is part 1 of a series. Part 2 is here.

In difficult economic times, when the economic news is mostly negative, different skill sets are necessary for commercial real estate brokers to successfully market commercial properties to users and investors. In troubled times, many potential buyers withdraw from the market to “wait and see” rather than risk a mistake, thus the pool of potential buyers for commercial property shrinks and deals are much harder to complete.

A good example of this phenomenon is the current contrived commercial finance crisis affecting Kansas lenders, which was brought about by the good intentions of banking regulators who are causing Kansas lenders to draw tight their lending purse strings. This is in spite of the fact that Kansas is one of the leading economies in the United States right now, and our commercial real estate community never participated in the practices that so injured markets on the west coast, Florida and Arizona.

In order to successfully market commercial property in troubled times, brokers need to expand the pool of investors or commercial property users rather than watch the pool shrink and the deals become increasingly fewer.

Traditional commercial real estate brokers respond to troubled times or a down market by continuing to lower the price of real assets until the pain threshold is reached and a property finally sells. This is what is beginning to happen today. The result is fewer deals, fewer loan requests, a shrinking number of active participants in the market, shrinking equities, lower prices and higher cap rates.

The response of the brokerage community should be to realize that value is in the eye of the beholder and that there are many benefits in real property ownership, only one of which is cash. Usually, if the broker will explore his client’s situation, he will come to an understanding of the client’s “wants” versus his actual “needs.” This is called client counseling, and it is increasingly necessary in troubled economic times.

Questions that must be asked include: what are the benefits the property offers; what are the client’s capabilities to aid a transaction; what is the client’s motivation and what potential solutions will meet the client’s actual needs; and what can be done to enhance the benefits the property offers a potential buyer? The goal is to understand the situation so well that the broker is able to expand the pool of interested parties in any transaction.

If a broker is able to get all the facts of a given situation on the table, a solution will usually come about. Put differently, often there is more than one way to make a transaction happen or to meet the true needs of a seller or user than just cash to the loan.

Examples of creative transactions abound. The discounted for cash sale with option to buy back is a popular transaction in the Wichita area. A sale/lease back is often a good way to raise cash and preserve a preferred location. Owner-provided financing has expanded the marketplace for many investors and has the potential to create an entirely new market for the new mortgages traded at face value or even at a discount on other property. Equity marketing is another potential way to expand the pool of potential buyers for a given property.

Another way to expand the marketplace is to participate in local, regional or national marketing sessions where a property or a client’s situation is offered to other brokers for potential transactions and where creativity abounds. Again, client counseling is of paramount importance in order to present people and properties in such a way so as to optimize client solutions. It is expensive to transact business in other geographic areas, thus due diligence needs to be performed on your listings so there are no surprises after you have carefully crafted a transaction and the prospect arrives for the inspection.

Marketing properties in troubled times requires more from the broker. It also requires more education, more thought, more questions, more research, and more client counseling that was necessary in the previous marketplace. The rewards can be quite advantageous by allowing the creation of better transactions in a marketplace filled with uncertainty.