Why Would a Seller Sell Today if They Didn't Have to?

 Regular StreetWise reader, Jason Bartlein, suggest I address the question posed in the title of this piece. And it is a great question. Values are well off of their peaks, fundamentals are stressed, capital markets are erratic and participants generally feel that market conditions are difficult. Why would someone sell a property now, under these circumstances? The first thing I always tell a potential seller is that I guarantee that their property will be worth more at some point in the future. Worth more yes, but when, is the question. Is the seller willing to wait for that point in time when the property is worth more? And when it is worth more, how much more will it be worth? And how much more will alternative investments be worth? And what are the costs to wait until the value increases? The answers to these questions are all guesses (some more informed than others) and those guesses make the market.There are always people who have little choice but to sell. The quintessential reasons for this forced selling include death, divorce, tax obligations, insolvency, partnership disputes and the like. These reasons exist in good times and in bad times with a clear propensity for the obvious ones during down markets.We have seen some of this forced selling in this cycle but not nearly as much as we anticipated. Normally, discretionary sellers feed the supply chain of available properties. As market conditions become more difficult, discretionary sellers leave the market and the supply is normally fed by distressed sellers. During this cycle, we have not seen distressed sellers swoop in to fill the void.  For this reason, supply constraint rather than waning demand, the volume of sales has been miniscule ( I discussed this acute imbalance between supply and demand in last week’s column which is keeping values higher than economic fundamentals would dictate).So why would a seller sell today if they didn’t have to? There are several reasons. Portfolio repositioning is a big one. If you wait to sell when prices are high, the properties purchased with the proceeds will be priced highly. If properties are sold when prices are low, replacement properties will be priced lower. From this perspective, the timing of a sale is all relative.We have several clients using current conditions to realign their portfolios. Some are selling smaller properties and purchasing larger buildings. Others are selling non-core assets and acquiring additional core assets. We have clients selling properties so they can move from class c product to class A and B. Some are selling properties in the boroughs and using today’s market conditions to buy in Manhattan. This realignment is something that is often better done during a downturn than when things are booming. This is due to the fact that the price deviation between the high end and the low end is widest during the boom.Another reason to sell today is to create a reserve of equity available to purchase opportunities which may arise. Sellers who have healthy equity cushions in some buildings may elect to sell in order to be ready for, what they perceive to be, better opportunities tomorrow.Clearly, the distressed asset recycling and deleveraging process has not occurred to the extent that it must and when it does, excellent buying opportunities are likely to present themselves. Some sellers who believe prices will fall further are positioning themselves to take advantage of this.A motivation closely associated with the one above, is that due to the economic uncertainty in the U.S. today, some people just want to sit on cash. We have several clients who are selling, paying the taxes, and sitting on the cash so they can sleep at night. All of the non-sense the country is going through today with runaway government spending, deficits, taxes, probable inflation, healthcare, etc, induced one client to sell his portfolio in order to move to another country to escape what he believes is a disastrous environment for those of means. He is actually becoming a citizen of his new country.Some of our clients are looking at their portfolios and identifying properties which they feel have been “maxed-out”. These are properties which have gone through a value-added process and there remains little upside potential other than letting the value trend in tandem with the market. These assets are being sold in order to take advantage of the sell-low / buy-low dynamic as the seller looks for properties with imbedded upside potential which they can tap with some elbow grease.Many clients are selling today to take advantage of the supply / demand imbalance that I mentioned earlier. Supply is currently very low and the demand side has seen extraordinary growth. High net-worth individuals and families have been the most active buyers in the past two years as institutional capital was sidelined when we tangibly started to feel the credit crunch in the summer of 2007. We have witnessed a resurgence of institutional capital recently as distressed buying funds have been formed and are actively seeking opportunities.Additionally, foreign demand from high net-worth individuals has risen sharply to levels not seen since the mid-1980′s. All of this demand, in conjunction with little supply, has led to relatively strong prices. Some sellers are taking advantage of this condition as they believe supply could be increased greatly when distressed ostriches either decide to pull their heads out of the sand or are forced to. If supply were to increase greatly, it would exert significant downward pressure on prices.Other discretionary sellers are concerned about interest rates. The inevitable inflationary pressures, which will result from the doubling of the money supply in the U.S., will push interest rates up. Also, when the Fed exits the market, it is likely that interest rates will increase. As rates increase, there will be significant pressure for banks to increase mortgage rates which will drive prices downward.Expectations of increases in the capital gains tax rate is another reason why sellers may elect to sell today. The current federal rate is 15%. If the Bush tax cuts are allowed to sunset, the rate will go to 20%. If either of the House or Senate healthcare bills are passed, the rate would increase by another 5.4%. The administration has indicated that an additional 5% increase may be put on the table. In aggregate, this could result in a capital gains tax rate of around 30%.There are no clear directions for any of these policies at the moment. Within the past two months, we have heard the Bush cuts will not sunset, they will sunset and that they will not sunset for some of us but will for others. Who knows what will actually happen? Those who think the rates will rise significantly (not a bad bet as capital gains are perceived to be only pertaining to the rich) may elect to sell at today’s historically low rates.  The last reason a seller might decide to sell today is simply due to a lifestyle change. Some property owners spend all of their time dealing with the many issues that come with owning commercial real estate. Property management can be a time-intensive endeavor dealing with headache after headache. Years of headaches later, some owners decide they have had enough.If retirement or a significant lifestyle change is contemplated within the next couple of years, an owner might decide to pull the trigger today. It is easy to surmise that things will not get appreciably better in the short term, as we will need substantial job creation over an extended period of time for our fundamentals to be sustainably enhanced. Most economists believe that the recovery will occur slowly and, likely, in a jobless manner. Sellers who are impatient may not be willing to wait.Notwithstanding the seemingly poor market conditions today, there are many reasons why a seller may decide to sell today. Timing is such an important part of commercial real estate investment and sometimes there are externalities which create motivation to act. Given today’s lack of product, anything that would add to the supply of available properties for sale would be welcomed. We expect supply to grow as distressed sellers realize that working through their problems is inevitable and discretionary sellers may decide to sell for any of the reasons given above.   Mr. Knakal is the Chairman and Founding Partner of Massey Knakal Realty Services in New York City and has brokered the sale of over 1,050 properties in his career.