A Price to Pay for Too Much Focus on Price?

In navigating the cross currents of the Cape Cod commercial real estate marketplace it seems many commercial real estate participants are missing the big picture by focusing too much on price levels. Much like an adept physician seeking to develop a timely and supportable prognosis by probing, prodding and questioning a patient, reliably deciphering market factors requires looking well beyond the leading indicators or “gimmies” such as price levels. Along with the seasoned physician, this is where the commercial real estate market participant’s cognitive skill comes fully into play!  

Certainly recent prices paid for similar Cape Cod commercial properties will always be relevant indicators. However, the most important thing to remember about real estate prices — like cherished school photographs taken in early September and eventually passed on to relatives months later at Christmas – much can change in between! Since real estate transactions often take many months to consumate, report and be acknowledged by the marketplace much can and will change in between. It’s no wonder real estate prices are what economists call a classic lagging indicator. Couple this fact with the forward thinking and “not at real time” nature of real estate markets, the inherent limitations from an over reliance on price levels are apparent. 

In a market cycle where the number of commercial real estate sales are trending down, price levels are in a state of flux,  and the supply of available properties is abundant, it’s no wonder the real estate market is an imperfect marketplace.

But given the current scenario where do we turn, beyond price levels, for more answers in this imperfect or unstructured marketplace? In short, I suggest back going to the basics where greater reliance is collectively placed on four additional key market indicators:

1. Contract prices for properties currently under agreement.
2. Regularly updated figures on transaction volume with demand ranked by property sector.
3. Familiarity with sensibly priced comparable listings with a sharp focus on the number of days-on-market, any history of price changes, and possibly the number of showings and feedback.
4. Most importantly, obtaining from a reliable source the who, what, where, when, how and why surrounding any pending or closed transaction. Sources may include the Buyer or Seller, an attorney, broker, tenant or other party.  And in the current tight credit market, consider the perspective of a trusted local commercial banker to be invaluable.

Clearly seeing the big picture beyond price levels, understanding all the moving parts and applying sound investigative skills will separate you from the pack in the coming market cycle. Over reliance on one piece of information such as price levels is essentially reaching for the low hanging fruit and a sure sign of hanging on to 2004-2007 market thinking. The times (and the market), they are a changin!