Transaction volumes have frozen across asset classes during the pandemic, and it isn't hard to see why. Simple steps like viewing a property, completing due diligence, pricing and securing debt have all become significant hurdles. El Warner of Colliers International, however, has not only managed these challenges but has opened and closed new retail deals during the pandemic
How? For Warner, the answer is all but obvious: you split the risk between the buyer and the seller. While it doesn't feel like it, at some point, the pandemic will come to an end and the market will rebound. Warner's goal is to protect the operating income in the interim through a seller guarantee. In other words, if the buyer expects the market will rebound in 12 months, the seller will guarantee the property income for 12 months. "If a tenant does not pay rent, the seller will be responsible for the rent and the buyer will send the tenant an invoice," says Warner, an EVP at Colliers International and a member of the firm's capital markets board of advisors, tells GlobeSt.com.
This deal not only protects the operating income for the seller, but it also props up the price and cap rate during a time of extreme uncertainty—and above all, it eases concerns. It's a true win-win deal. "That navigates the risk between the buyer and the seller, and calming both sides down to the reality that there may be some lost rent but the price won't drop significantly," says Warner.
Most sellers expect the market to rebound by the end of 2021, making these deal structures a realistic option during the recovery. Warner's team conducted a sentiment survey with its top 200 clients to better understand investment expectations following the pandemic. The survey asked when clients expected asset stabilization in commercial real estate. 3% of respondents expect stabilization in the 3Q20; 20% expect stabilization in 4Q20; 31% in 1Q21; 23% in 2Q21; and 23% in 3Q21. "More than 75% of investors said the market will stabilize in the next 12 months," he says. "That is the perception in the market."
This sentiment is the foundation of Warner's ability to close deals even as the pandemic rages on. "We are able to get deals done because we understand how to work with motivation," he adds. "Ultimately, we are converting the buyer's risk into shared risk between the buyer and the seller."
While details of the individual deals are not available, it is worth noting that these are not grocery-anchored retail centers. "We have shopping centers that have traditional retail where 80% of the tenants are not open for business, and some will go bankrupt," says Warner. "The deals are still getting done."
Warner has closed six deals since the start of the year, ranging in six from $7.8 million to $29 million.
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Kelsi Maree Borland
