Allen LomaxPrivate Investment Coach, Royal Legal Solutions · Capital Allocator | Empowering Professionals to Transition From Earned Income to Asset-Generated

Navigating the Complexities of Commercial Real Estate Deals 1

6 Nov 2024 · 2 min

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1:32

In this segment, the speaker explains the current pricing impasse in commercial real estate by likening it to a bid‑ask spread. Buyers face a high cost of capital, which forces them to bring more equity and consequently submit lower bids. Sellers, anticipating that capital costs will fall in the coming years, are reluctant to accept low offers and choose to wait, hoping property values will rise. The speaker highlights that the market will only reach equilibrium when either property economics improve to match the high capital costs or capital costs decline enough for the two sides to meet. He notes that rates remain elevated, sustaining the challenge.

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It's basically the bid-ask spread, right? Between where sellers want to sell and where buyers want to buy. And the difference between buyers and sellers is, you know, you have buyers who on the one hand have a very high cost of capital. And at the end of the day, commercial real estate is just a math problem. If the cost of capital is really high, you have to come in with more equity. And that's, that can be really difficult. And so, realistically, what that ends up translating to is, you know, lower bids on their side where they can actually make these these deals work with what is in place today. On the flip side of that, you have sellers who are saying, well, what, you know, the cost of capital is going to come down significantly over the next year, and the value of my property should be higher this time next year or 2 years from now than it is right now. So if I want to sell, you know, if I'm not forced to, I'm gonna I'm not going to take some lowball price just because a buyer needs, would need to come in for more equity. They'll just wait. So you have that kind of cat-and-mouse game going on. At a certain inflection point, either the underlying economics of the properties are going to catch up to where the cost of capital is, or the cost of capital is going to lower to where the economics of the properties are to have these 2 parties meet in the middle. But right now, there's, you know, we're still, you know, the rates are pretty high. They came down a little bit, but they're still pretty high. And that's where the challenge is, really.