Commercial Magazine

George Ratiu, National Association of Realtors

Tight inventory could mean a challenging year for sales

By Victor Whitman

It was another solid year for commercial real estate sales in 2018. This year, however, started with some uncertainty that was fueled by a government shutdown, global trade tensions and extreme volatility in the U.S. stock market.

George Ratiu, a former economist for the National Association of Realtors (NAR), discussed the commercial real estate outlook prior to leaving NAR and transitioning into a new position at Move Inc.

What is your impression of how the market is doing?

The market continues to attract investment, but the common thread that I hear in discussions with Realtors is that inventory is still extremely tight on commercial properties. Just as importantly, there is a lot of cash on the sidelines chasing these deals, in part because there’s a lot of private-equity money still looking to be placed in commercial real estate, and there is a lot of money on the debt side. A lot of this is still driving the investment volume.

Why is there a shortage of available properties for sale?

Landlords have looked at price appreciation during this cycle and they obviously expect much higher compensation for their properties. However, investors and buyers look at the cash flows from these properties. They look at the net operating income. They’ve seen cash flows [that are] positive, but they have been slowing down a little bit across the core property types.

We saw interest rates actually pick up during the latter part of last year. Normally, with rising rates, buyers are going to offer a lower price. And, interestingly, when we look at the data, the No. 1 concern for Realtors [in the fourth quarter of 2018] was the inventory shortage. The second-largest category was a pricing gap between buyers and sellers. So, it’s clear that there is a gap right now in the market.

NAR has seen an uptick in off-market sales. Could you explain what that is?

Everybody right now is contacting landlords and asking if they are interested in selling before the property goes on the listing platform. So, suppose you own 10 apartment buildings and someone approaches you and they want to buy one of your properties.

It’s not for sale, but they know who the owner is. They contact you [and] say, “Hi, I’m Joel. I’m a broker. I have a client who was interested in purchasing a building. Would you be interested in selling?” A lot of deals actually end up taking place that way in the commercial market.

Would a potential seller be taking a risk by assuming that property values will keep going up?

The real risk for a landlord or a seller right now is not so much that they might miss on further price appreciation. The real risk for them is the tax implications. Once they sell the property, generally a lot of commercial landlords tend to use like-kind exchanges, the IRS (Internal Revenue Service) section to defer capital-gains taxes. But the thing is, with such tight inventory, they have only 180 days, according to the IRS, to locate and close on the next transaction.

So, the big risk for them is that, once they sell a property, they have nowhere else to park their money and they could end up possibly with a capital-gains tax bill. So, that’s what’s actually causing a lot of landlords to also pause a little longer.

Do you have concerns about an economic downturn?

There is very little to indicate that. If we look at last year, a lot of the nervousness in the economy was driven by things outside of the economic fundamentals. We were looking at geopolitical risk. We were looking at the continuing trade escalations, which we saw last year with China and various other trade partners. From my perspective, barring a shock from Washington [D.C.] or an international shock, I see very little in the economy — at least at this moment — to justify concern over a recession hitting in 2019.


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