The continues to be a significant gap between buyers and sellers on pricing. So far, sellers continue to hold onto pre-pandemic pricing, and many buyers are expecting a significant discount to take on extra risk and market uncertainty. Sabal Capital Partners has been in the market bidding on distressed properties, and has seen a significant discrepancy in pricing, however, sellers are starting to face the music on the market adjustment—particularly those under pressure to sell.
“The sentiment is that sellers are still looking at values in a rearview mirror, and buyers are looking at values on a going-forward basis,” Pat Jackson, CEO and founder of Sabal Capital Partners, tells GlobeSt.com. “Until you get that kind of acceptance that sellers need to get rid of assets and it is what it is, trades won’t start happening. At some point, they will because they won’t have a choice, either because of obligations to special servicers or they have liquidity issues. Those kind of things will force a reality check where desires and expectations will be adjusted.”
While sellers have an interest in keeping prices high, buyers are looking at the market reality, according to Jackson. This includes understanding current rent collections, rent decreases and the severity and length of the recession. “I am the reality portion of it. We are looking at these assets strictly through the eyes of the investor on a forward-look basis, not what the asset was worth,” says Jackson. “That is irrelevant. The uncertainty of when the market will recover adds to the risk that we are taking when we make an investment as to when we can expect a recovery and when values can get back to a normalized basis, and we have to factor that into our bids. Time is a key component to IRR.”
While Jackson believes that sellers will have to eventually adjust to this new reality, he adds that it might take longer than it has in past cycles. Banks are better capitalized than in 2008 and most asset have solid underwriting. This could help banks hold out for better pricing. “Banks are better capitalized today, so they have time to wait it out a little longer, but we do think that banks are going to be selling,” says Jackson. “It isn’t going to be the same urgency that we saw in 2009, when banks were in imminent threat of failure. This has happened faster than in 2008, which was a slow rolling wave. I think in that respect, the defaults are going to happen a lot faster. That is why we are out in the market ready to execute with sellers that are willing to move assets at a price that we can get comfortable with.”
Quality underwriting could also help to prop up pricing somewhat. “There was some bas underwriting leading into 2008 and 2009,” adds Jackson. “Fundamentally, the underwriting was lousy. By and large, we are looking at assets today that have better underwriting. That means that the assets, fundamentally, are supported by the debt. That is going to help a lot to at least see a recovery at some point in the future.”