Stressed Properties a Harder Sell Than Distressed Ones

Stressed Properties a Harder Sell Than Distressed Ones

By Jack Rogers 

The wide bid-ask gap during the first half of 2023—as CRE transaction volumes plunged in the steepest cliff dive since the Great Recession—appears to have narrowed in the third quarter. 

According to Steve Jacobs, CEO of online auction leader Ten-X, the “flex”—the difference between a seller’s initial asking price and a price that leads to an accepted transaction on the platform—has increased to 11% in the third quarter from 6% in Q2 2023.

Jacobs told that Ten-X is experiencing a huge surge in transaction “opportunities”—opportunities to bring properties onto the auction platform—which are the highest they’ve been in 12 years, he says. 

These include “stressed” office properties—those with values dropping, loans not in default—and multifamily campuses in markets where rents are flattening.

However, Jacobs told us, the company has turned away $4.5B in potential transaction volume because it rejects opportunities it doesn’t think will trade.

“That $4.5 billion (was made up of) properties where the seller wants $10 million, we think it’s worth $7 million and we’re not going to take that on because sellers are not flexing that much,” Jacobs said. “They have to come out of pocket and they won’t.”

“As soon as they come in the door, we ask them, what are you going to do? Are you prepared to give up your equity?” he said.

“If we took on $3 billion of the opportunities we’re talking about, our trade rate would be 30%,” Jacobs added. Ten-X markets its auctions as having a 60% trade rate and 95-day list-to-closing times, which are much higher and faster than the offline market, respectively.

Opportunities now are trending toward what Jacobs calls “stressed” properties—properties that have a loan that equals or exceeds the current value of the property but is not in default—in which an expansion of flex opens up the possibility that deals can be reached.

“The seller wants $10 million, they have a $9 million loan and we think the property is worthy. This is a stress situation because they haven’t thrown it into default. The lenders are involved in the conversation, so they sell it for $9 million,” Jacobs explained.

With 6% flex in H1 2023, the wiggle room on a $10M trade was only about $600K; the 11% flex rate Ten-X has calculated based on its third quarter transactions means more than $1M was in play in a $10M trade—closing juice for stressed transactions.

Jacobs defines flex as “what a seller is willing to trade from reserve to accepted winning bet.”

Ten-X is seeing more opportunities in the multifamily sector as sellers are motivated by flattening rents, but to Jacobs it all comes down to the math—another way of saying some sellers still are holding out for unrealistically low cap rates.

“We have sellers that want 4 caps when the debt at Fannie Mae—a low-cost provider—is at 6.5%,” he said.

Jacobs told us that Ten-X continues to see an upswing of institutional buyers on its platform who are attracted by the speed to closing and the successful trade rate it offers. According to CoStar data, the average Ten-X list-to-close speed of 95 days is twice as fast as the CRE industry average.

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