Overlooking Opportunity

By Noah Klika, McQuaid Associate Broker

A pricing expectations gulch continues to exist in the Seattle multi-family market today that began almost two years ago. Sellers are reluctant to list and sell their property because they cannot get the 4% cap rates once offered to them a couple years back by condo converters and town home developers. Buyers continue to keep large amounts of cash or capital on the sidelines to pounce on the 8-10% cap rate trophy property underwritten properly in an A+ Seattle neighborhood that becomes available (supposedly). This disagreement over what buildings are worth has resulted in an extraordinary reduction in sales. The number of buildings sold year to date and now in the fourth quarter stands at 60 properties (5-75 unit properties or non-institutional grade for the purposes of this conversation). Compare this to an average of over 300 buildings sold annually from 2005-2007 or what many consider the peak of the market. Let us also look at the number of buildings sold after the last time a regional recession took place (dot com bust). Between 2000-2003 over 200 buildings on average sold during each of those years.

Despite an ever increasing amount of mixed or negative news revealed each day about the fragile economy and feeble pace of growth there exists a rare opportunity that benefits both sellers and buyers who are willing to participate in the market today. For buyers, interest rates for commercial loans have finally become commensurate with the ultra low rates available for residential real estate. We are working with buyers getting 4% or lower rates for commercial multi-family loans. For those who believe cap rates are still too low I feel you should consider this: When was the last time you were able to get positive leverage on A+ properties in the most coveted Seattle neighborhoods? And if so in many cases upwards of a 1.5-2% spread looking at cap rates of buildings we have recently sold or have in escrow currently. Not to mention the other corresponding metrics to determine your return on investment. Sellers, historically speaking and relative to other parts of the country currently whether it be a coastal urban market like San Francisco or New York or middle America, when has the opportunity to sell your property for a sub 6% cap rate become an unappealing opportunity?

I do not have a crystal ball to say whether the market will get better or worse. However, I did just read a report I always enjoy reading which is done annually by the Urban Land Institute and PricewaterhouseCooper ranking Seattle the sixth best metro in the country for commercial real estate investment with the spotlight on the multi-family sector. It even speaks about new development and construction for multi-family picking up, a leading indicator. Will better pricing opportunities exist moving forward for buyers or sellers?

My goal in writing this is to make both buyers and sellers think hard about their decisions to participate in the market today. All the negativity and uncertainty in the news can lead to flawed conclusions. Everything is easier in hindsight and the dynamics of the marker today benefit all parties involved.

For those who think the market is dead, we have had multiple offers in the pricing discussed above on multiple properties sold in the recent past or currently under contract. Sellers interested in an opinion of market value or buyers looking to find a great multi-family investment opportunity please feel free to call McQuaid Commercial Real Estate at (206) 270-8880 or visit our website at www.mcquaidre.com.

We look forward to helping you in any way we can.