The Many Implications of the Narrowing Bid-Ask Gap

Things are starting to shake loose a bit in a CRE market, says Jones Lang LaSalle.

“JLL’s proprietary Bid Intensity Index shows improved market trends since year-end 2022, despite the late summer run up in bond yields,” the company wrote. “Bidding activity was on the rise in late 2023, with the average number of bids per deal increasing by 16%, narrowing the bid-ask spread.”

“This reset in values will both challenge capital and catalyze liquidity,” said Richard Bloxam, CEO of capital markets at JLL, in prepared remarks. “There is absolutely uniform understanding that pricing has changed. Given the quantum of dry powder, there will be a considerable first-mover advantage for capital that can deploy quickly and mobilize around opportunities as market fundamentals improve.”

The industry has been starving for price discovery and stumbling in the gaps between bids and asks. The bidders either expect a bargain at this point or are more realistic about how far valuations have fallen. The sellers understandably don’t want to give up value they think is there. Many are waiting for values to normalize. Some might be apparently putting something on the market when they’re really trying to see how valuations have changed and if they are starting to return.

Although JLL reported that the increase narrowed the bid-ask spread — and recognizing that it’s impossible to know from the outside how representative the company’s index is — it is worth considering exactly what a narrowing of the bid-ask spread means and whether that is the important information, or the recognition of the first-mover advantage and the interpretation.

A narrowing of the spread could mean one of three things: sellers are recognizing reality and lowering their asking price in an attempt to move a property, sellers are lowering the asking price but under increasing pressure by adverse circumstances, or buyers are starting to admit that the level of bargain they want isn’t achievable. Also, the increase in the number of bids could mean a greater sense of an attainable deal or well-capitalized investors that have wanted good deals think that valuations have nearly hit bottom and that it’s time to pick up the distress prizes.

Again, from the information JLL released, the answers to what is actually happening isn’t available — and, realistically, it’s likely a mix. But the increasing number of big CRE players planning for opportunistic buying suggests that the distress raiding may have begun.