5 Benefits of Off-Market Transactions in Commercial Real Estate
Understanding Off-Market Transactions
Misconceptions continue to plague off-market commercial real estate, despite becoming an increasingly popular niche over the last few years. Its attractiveness as an asset is based on 5 key factors:
- Smaller Pool of Qualified Buyers
- Greater Access to Unique Opportunities
- More Time for Due Diligence
- Buyer & Seller Anonymity
- Fewer Deal Killing Roadblocks
We'll dive into those in detail below, but first, let’s start with a quick level-set. What is an off-market real estate transaction? Very simply, traditional public listing platforms (MLS's) do not list off-market properties. Instead, they are typically made known through pre-existing relationships, broker and broker networks, and word of mouth.
Property is marketed and sold off-market for a variety of reasons. An owner could be concerned about anonymity, interested in testing the waters without committing to listing or hoping to create an air of exclusivity around their property.
Off-market real estate is perceived as some amorphous entity, available to only the most well-connected and wealthy individuals. Market analytics suggest that nearly one-quarter of all commercial real estate transactions occur off-market.
So, What the Deal with an Off-market Property, and Why do They Matter?
Savvy investors have been transacting real estate off-market for decades. Until recently, the general investment community has been mostly oblivious to the opportunities, but more importantly, how to source them.
As volatility headlines equity and fixed income markets, more individuals are looking towards alternative assets to house their capital. With increased demand comes a reduction in quality real estate supply; off-market may be the only place to find good deals in the short term.
5 Reasons Investors Should be Looking Off-market for their Next Deal
Transactions off-market afford buyers a few unique advantages. Here are five reasons why investors should be looking off-market for their next deal:1. Smaller Pool of Qualified Buyers: Most sellers have some experience as real estate investors. They are not keen on entertaining offers from every buyer who may have an interest in their property. Off-market deals are heavily marketed, but there will be less competition amongst a smaller buyer pool, and a bidding war is unlikely. This typically results in a property acquisition at a more favorable price.
2. Greater Access to Unique Opportunities: Every seller is motivated by their own unique set of circumstances. Investment strategies can change; market forces may require premature divestment, or a personal situation may require a sale. Regardless of the driving factor, these situations offer unique investment opportunities that may not be captured by public listing services.
3. More Time for Due Diligence: When a property is listed publicly, a larger pool of potentially unqualified buyers can access that real estate. Facing more competition, investors need to quickly make offers on a property before the price becomes excessive or goes under contract. An off-market property affords buyers more time for investment underwriting and due diligence before submitting an offer.
4. Buyer & Seller Anonymity: Privacy is an essential aspect of a commercial real estate transaction. Many investment property owners have established long-term relationships with their tenants and don’t want to agitate them prematurely. Additionally, an owner-occupier signing a sale-leaseback for their business may be cognoscente that a sale could raise going concern questions amongst their employees. An off-market deal helps to keep the transaction out of the spotlight.
5. Fewer Deal Killing Roadblocks: Off-market sellers are generally not in a rush to sell. Nor are they interested in a buyer entering into a contract on the property and tying it up for 60+ days with no closing intentions. These owners typically have a predetermined price and won’t engage in extensive negotiation or retrading. Because these transactions have limited time pressure, a smaller buyer pool, and clear negotiating terms, they typically have fewer hiccups.
How Do You Find One?
Unfortunately, given the relationship-driven nature of commercial real estate, an individual investor would have difficulty finding an off-market deal themselves.
Knowing where to look and how to cultivate the opportunity requires extensive knowledge of the local market and an insight into what drives the timing and disposition of certain asset classes.
It’s more than just sifting through the yellow pages and making a phone call.
The Role of a Real Estate Strategy Consultant
Any real estate portfolio strategy must be carefully crafted and refined to ensure the highest probability of success.
Successful off-market deals require a nuanced approach and skill set that many brokers don’t possess. As the market rapidly evolves, pre-existing relationships with property owners and capital market players put me in a unique position to deliver buy and sell-side value in this niche.
These are harder to source, but when successfully acquired, they can increase a real estate portfolio’s returns exponentially.
If you have questions about the off-market office, retail, and flex/warehouse investment opportunities in Raleigh and the Triangle area, let's chat.