Today we present another guest post from Dean Macaskill, Senior Vice President at Lennard Commercial Realty. Dean has worked as a commercial realtor since 1980 and has years of industry insight into the Toronto real estate market. Having been through three cycles in the business, he has seen the highs and lows. He shares some of his insider information and insights with UrbanToronto on a semi-regular basis.

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When I walk into my office each morning, there is a metal file organizer that holds broker letters of commercial properties that are for sale divided into Land, Office, Retail and Industrial. This file organizer is a foot thick of listings. I regularly cull the files to get rid of duplicates and when the same listing comes in a month later, I just erase the email. 

 How Is Real Estate Priced Today? Toronto skyline, image by Forum contributor Norm

The key to my point is in that last sentence – “when the same listing comes in a month later…”. We are in the longest bull run in the commercial real estate business that I have ever witnessed in my 38 years as an agent, yet the backlog of listings is astounding. Now let’s add another ingredient to the list. I daily receive emails from agents looking for properties to purchase for their clients seeking office, industrial, retail, and land product. Why aren’t these agents lining up with each other on the listing and needs sides? And why isn’t listed product moving off the shelf?

In the past, commercial MLS was the last place you looked for “deals”. Most of the listings were overpriced and, no disrespect intended, were listed by residential agents usually acting on behalf of a friend who owned the property and supplied the price. Forward to today and we now find the big commercial houses are taking on overpriced listings that are continually churned via email on a monthly basis to the commercial brokerage industry. Every once and a while you get a “Price Reduced” listing that gives the agent some hope but things don’t seem to change.

So when an investor sees some of these listings, the first sentence spoken to the listing agent is, generally, “How did you arrive at this price?”. Have seasoned commercial agents lost their way in valuing properties? The problem is twofold. Firstly, it is likely that the agent provided an opinion of value but now faces an owner who says they think it’s really worth broker value x 2. Now the agent is faced with a dilemma: does the agent stand his ground and disagree or does the agent shut up, sign the listing, and move forward? The lure of a listing is often too enticing to not walk out with a signed agreement.

I’ll let you in on a secret, as an agent you take on the overpriced listing as experience has shown that an owner will stick with you through the months and hopefully you wear them down to the point of reality and they accept an offer closer to your original valuation. This is when you refer to Einstein’s Theory of Stupidity – doing the same thing over and over again and expecting a different outcome. 

Your other option is to go out unpriced but then your agent is faced with the first question being - “what is the vendor seeking?” which leads to the next question a buyer asks, which is the same one asked if you had a listing price - “How did you arrive at this price?”. The benefit of no asking price is that gives both the agent and vendor an out if they disagree on an asking price; you let the market decide. But what if the offers don’t meet the vendor’s expectations? Have you wasted the market’s time proving to the owner that they missed the mark? I feel unpriced listings are best left for those situations where the vendor agrees that they will let the market speak and will accept the best offer. This is, generally, how large transactions are handled where there is a full data room to access with all the property files and an Argus valuation analysis or development analysis which can be tweaked by potential buyers using their own assumptions.

The second issue is the fickleness of the market. I have often written an opinion of value such that I would say the value using realistic measurements of, say, comparable sale cap rates, price per square foot, and the covenant of the tenant to conclude a value. Then there is the unknown aspect – that one buyer who comes out of nowhere and pays a price that you would never think possible. That happened recently on a property that I had pitched but did not list. I looked very closely at the terms of the lease for this single tenant, street retail building. I concluded that the rents were over market and that there was risk in the near term as the long-term lease would soon expire. I concluded a best case scenario of a 5% cap rate but I also said that there may be that one buyer that comes out of the woodwork that has to have it. And that’s what happened; a buyer came forward at less than a 4% cap rate.

It would be interesting to see that stack of broker letters shrink in size on my desk but the psychology of pricing is quite a process. As an agent, I really can’t tell you that your opinion of value for your property is wrong even though my gut may say otherwise. I’ve always said to vendors that I am happy to go out at their pricing expectations but only for two weeks. That may seem short but you actually know within days of a listing whether you hit the mark or missed it. If I’m hearing crickets, then it’s time to talk. The hurdle you have to get over is the desire of the owner to wait it out a little longer, then a little bit longer but, by then, you’ve missed the market.  The tough thing for an owner to get over is the belief that the agent is just looking for a commission. A good agent doesn’t work that way; they are there as an advisor and are looking after your best interests. 

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