We currently have an excessive demand issue in the commercial real estate marketplace. There is an aggressive appetite across the board in almost all sectors and there is a very low supply of available properties for sale. Some products, such as multi-family and quality retail and mixed-use properties, have the most current demand due to the low vacancy along with the plentiful and attractive financing available for most buyers. Overall on just about all asset classes, there are multiple offers to be had.
To illustrate this lack of supply when a desirable product does come available you have such pent up demand that it drives the pricing through reasonable fundamentals and attracts buyers whom may not typically entertain such an asset. Recently, I put into contract a residential development site in Bayside a few blocks from Bell Boulevard. It is a site in which you can build approximately 18,000 SF and is under contract for $110 per buildable square foot. Most of the past trades of similar properties sold for 30% lower than this site. We were able to attain close to 30 offers within one month of marketing which drove pricing up. After discussions with most of the bidders they conveyed they were willing to pay more because they have not seen any similar sites available for the past several months and didn’t know when another would be available. We even had several bidders from surrounding areas look at this site since there was no supply in their neighborhoods.
I expect this dynamic to change. The supply is normally fed by discretionary sellers who willingly decide to sell their properties. During the turbulent market over the past few years the sellers decided to withdraw from this option. With the increasing stabilization of pricing along with the upcoming increase in capital gains taxes and the next leg of distressed properties coming through the pipeline, I would expect an increase in supply over the next year. On average the turnover of properties has been 2.6 percent a year of the total stock in which we have been anemic running less than half of that figure of the past few years. While I don’t believe we will return to that average number in the near future I do believe we will begin to steadily increase from current levels.
