Many years ago, I was exclusively retained to sell a 55-unit, rent-stabilized apartment building.
The building was in a great location, had generous-sized apartments and had very low rents due to the rent regulation. From any perspective, this was a wonderful opportunity for any multifamily investor. I called a very active buyer of properties like that, and while he thought the $12.5 million price tag was a “reasonable” amount, he said he couldn’t possibly purchase the property because he was a previous owner of this very building. About 15 years earlier, he had sold the property for $2.5 million. He said to me, “Bob, even though the $2.5 million was a good price at the time I sold the building, I just can’t bring myself to pay $12.5 million today.”
He passed on this opportunity, and the property was sold for something very close to that price. Today, the property is probably worth about $50 million.
In a similar vein, I can’t tell you how many times I have offered a property to an investor for, let’s say, $800 per square foot, and the investor tells me, “Bob, I could have purchased that building years ago (sometimes it may have been decades ago) for $200 per square foot (or sometimes much less),” and passes.
This dynamic is one of the many reasons that investment sales brokers are needed more than ever in rising markets like the one we are experiencing presently. Today’s market is moving very quickly, values are rising to new record levels and new investors are arriving into the market on a daily basis trying to make their mark on the Big Apple.
During the past 30 years, we have seen each new cycle bring yet another value peak, exceeding the previous highs in the market. New investors have an advantage over buyers who have been active in the market for a while, because they are not jaded by past markets during which they may have been able to purchase assets that are for sale today at much lower prices than those being offered now. The new investor has a fresh perspective and may think $800 per square foot for an apartment building, $3,000 to $10,000 per square foot for a retail property and $600 to $1,000 per buildable square foot for land are all par for the course. It is for this reason that with each new cycle, there emerges a wave of new buyers who continue to push pricing.
Clearly, there are hundreds of investors that continue to excel, decade after decade, and those that are most active are those who are able to adjust best to changing market conditions.
As prices surpass thresholds set during a past cycle, potential sellers are surprised by the new levels that are achieved. This causes those who are not following the market very closely to occasionally sell their property for less than it is worth. It is almost always the case that these sellers did not use an exclusive broker when marketing their property. This results in what is called “flipping,” in which a contract vendee simply sells his interest in a contract of sale, making a profit without ever having to take title to the asset. Sometimes the flip occurs shortly after closing. Given the upward pressure on values and the pace with which the market is appreciating, we have seen flipping return to the market, and to a much greater extent than the casual observer would realize.
Additionally, sellers who are not keeping up with changing market conditions may be very familiar with buyers who have been around for years and years, but they may not be familiar with the new buyers who are helping to exert so much upward pressure on values. This is particularly true in the development market today, where we have seen values increase by more than 35 percent in the past six months alone, with many first-time buyers scouring the market for opportunities.
For these reasons, the best thing a seller can do today is to retain an exclusive sales agent to provide access to the widest array of buyers, many of whom aren’t thinking twice about paying prices that continue to hit even higher record levels.