Nick Totah, first VP investments, The Totah Group | Courtesy The Totah Group within Marcus & Millichap

Why Buyers and Sellers Can’t See Eye to Eye

Carrie Rossenfeld Finance & Capital Markets

There’s a distinct discrepancy between buyers’ and sellers’ expectations in the SoCal commercial real estate market, Nick Totah, first VP investments of The Totah Group within Marcus & Millichap, tells SoCal Real Estate. When this occurs, the market tends to slow down, fewer deals are closed, and properties take longer to sell.

“I believe we have squeezed most of the speculative growth out of the inventory we have,” Totah says. “At this point, sellers will need to adjust their expectations to meet the market if they want to sell.”

Additionally, Totah says interest rates have played a major role in slowing down transaction time. “The first movement in rates didn’t affect pricing much. The most recent jump did have a major effect on pricing.”

We spoke with Totah about what is causing the discrepancy between the two groups’ expectations, how it affects the market and how he sees it playing out in the months ahead.

SoCal Real Estate What is causing the discrepancy between buyers’ and sellers’ expectations?
Totah:
In a rising market, the brokerage industry becomes a more attractive career path for new agents. The influx of agents and outreach to owners creates an influx in activity and noise. The owners are more informed than ever. This noise and activity are partly responsible for the discrepancy between sellers and buyers. Additionally, the market actuals are organically appreciating, creating significant equity and opportunity for most owners.

How does this discrepancy impact the market and the volume and velocity of transactions?
There is always a discrepancy between sellers and buyer’s expectations. This is a byproduct of the open market and illustrates how brokers play an instrumental role in maximizing value and helping to bridge the gap between the two. When the discrepancy widens, transaction velocity slows. In my experience, it takes time, consistent effort, and feedback demonstrating to the sellers that their property may not be price appropriately. Generally, at these times, the gap usually shrinks between the two parties.

How do you see this playing out in the months ahead?
Most assets that were priced during Q1 and Q2 are requiring repricing. We are seeing and experiencing a high level of price reductions throughout the industry. My guess is in Q3 and Q4, we will see a much higher transactional velocity levels, but this will most likely represent a lower total sales volume than last year.

What role are interest rates playing in all these dynamics?
Interest rates play a significant role in asset valuations and pricing. The 10-year Treasury has moved upward 100 basis points since September. This reflects a 50- to 75-basis-point adjustment in rates. The market has a certain amount of elasticity it can withstand, but pricing will adjust accordingly. Lastly, as we move towards the end of this (in my opinion) extended cycle, rental-growth speculation has mostly dried up. Due to this, cap rates need to reflect appropriately.