The Expectation Gap: Why are Buyers and Sellers So Far Apart?

The Expectation Gap: Why are Buyers and Sellers So Far Apart Matt Kulbe


As we begin the 2023 year in Commercial Real Estate and look back on the fourth quarter, it has become obvious that we are right in the middle of a recession. Whether leases are being signed or buildings are being sold, transaction volume has dropped, specifically in the Office sector. There are several factors that play into the drop in volume. The obvious factors to consider are economic factors such as inflation and rising interest rates in addition to a slow post-pandemic recovery. A less discussed factor is a significant gap in expectations between Landlords and Tenants and Sellers and Buyers.

2022 showed a negative absorption of 592,000 SF in office. Vacancy rates didn’t drop much in 2022 as expected and seem to have plateaued at 14.9%. However, an incredible amount of sublease space hit the market in 2022 – There is currently 6.3 million square feet of sublease, nearly double the amount seen at the start of the pandemic. Downtown Denver suffers the most. Many of the Tech companies that were large absorbing users of office space have recently listed hundreds of thousands of square feet. Not only has the “remote work” model affected the occupancy and users of office, but the expectation of price from a tenant or buyer’s perspective has been significantly lower than that of a landlord or seller. Of the office tenants and buyers looking for and needing office space, many tenants and buyers in the marketplace have been under the assumption that pricing should be 50-75% of pre-pandemic pricing. Meanwhile, landlords and sellers have only dropped rates and/or pricing by less than 10%, if at all. When it comes to leasing, certainly concessions have grown, such as free rent or tenant improvement allowances, but overall rates have not declined. In fact, rental rates grew .7% on average in 2022 over year 2021. As for sales, sellers are reluctant to drop pricing and instead just either pull it off the market and/or just continue to be patient to get the price they want. Sales of office averaged $265/SF and a 6.1% cap rate with an average of 13% vacancy at the time of sale in 2022.

So, the question is why are the expectations of buyers and tenants so different than that of landlords and sellers? Buyers and tenants assume that owners are “bleeding” due to the pandemic. They believe buildings are 50% occupied. Unfortunately, they haven’t considered that the commercial real estate market, inclusive of office, has been very strong for quite a long period of time. Rent growth, value add investments overperforming and tremendously low interest loans have provided landlords the “patience” to land the right tenant that will pay the rate they expect. As for sellers, similarly, many own with very strong financing in place if not owned debt free. Until the fall of 2022, tenant and buyers that ultimately needed or wanted space would ultimately be the party that “lost” the negotiation, especially in high quality, class A suburban space. In late 2022, we started to see some tenants get more favorable deals and rates. Since interest rates have climbed and inflation experienced, a new development from the buyer and tenant side is emerging – capability. Once a buyer and/or tenant no longer has the capability to purchase or lease at the market rates, only one thing can happen, prices must come down.

The reality is that we are in the middle of the expectation gap diminishing. Landlords will only be able to sit on vacancy for so long and sellers will ultimately understand that market pricing will drop. We have already seen some tremendously low sales prices in Denver, such as the Denver Club building downtown selling for $52.80/SF in November 2022. That price is the lowest an office building has fetched in many years. So, is 2023 the start of distressed sales beginning to occur? Is 2023 the year that loans are called on commercial office buildings? Are we quickly moving into a Buyer/Tenant market? I believe so. Rising interest rates, increased vacancy and low demand are all in full force when it comes to office space, there is no denying it.

Fortunately, as we all know, it will be temporary. Real Estate has always been and will always be on a growth pattern. Each valley is still better than the previous and each peak is also better than the previous. Trust in appreciation of value and trust in the market we live and work in. Colorado continues to be a place where many out of state investors and businesses continue to be bullish about. Attractive rental rates and increased vacancy will afford many out of state and local businesses the ability now that they have been wanting in recent years. 2023 and 2024 appear to be years where perhaps we don’t call it a recession, but more of a correction. Deals will continue to occur, both leasing and selling, they are merely changing. Deals will take more time again. They will take more creativity and more strategy. A much more cautious approach will be taken from all parties. Be prepared and educated in real estate transactions. Real estate is a long-term investment. Allow the experts at NavPoint Real Estate Group with long-term experience to help you in your real estate endeavors.

Written by Matt Kulbe

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N Academy Blvd
Sale Transaction

$10M Luxury House Sale in Denver

Jansen, Kaufman & Groothuis PC leased 1,524 SF of office space at 7901 Southpark Plaza, Suite 201 for 2 years. Jeff Brandon and Matt Kulbe of NavPoint Real Estate Group represented

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NavPoint Real Estate Group (“Broker“) has been retained as the exclusive Broker regarding the sale of the property located at the address noted below.

To receive an Offering Memorandum (“Offering Memorandum“) please read this Confidentiality Agreement and agree to the terms. The details and information contained within the Offering Memorandum were obtained from sources deemed to be reliable. Verification of the information contained within the Offering Memorandum are the sole responsibility of the Potential Purchaser. No representation is made to the accuracy of the information by Seller or Broker. THIS AGREEMENT is made and entered into by and between NavPoint Real Estate Group and “Potential Purchaser” and shall become effective when executed by Potential Purchaser or Potential Purchasers Broker.

A. Commencing with discussions held between their respective representatives the parties have pursued and expect to continue to pursue discussions (the Discussions) relating to the potential sale of:

In the course of these discussions, Seller has disclosed to Potential Purchaser and may continue to disclose to Potential Purchaser certain information of proprietary and confidential nature (“Confidential Information”).

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  1. Potential Purchaser shall maintain the Confidential Information in strictest confidence and shall not disclose to any third party any Confidential Information received from the other party. In addition, Potential Purchaser shall ensure that its officers, employees and agents likewise maintain the Seller’s Confidential Information in strictest confidence and that such persons do not disclose such Confidential Information to any other party. Potential Purchaser shall not have the right to use, duplicate, reproduce, copy, distribute or disseminate Confidential Information except for purpose of the discussions and negotiations as needed.
  2. Potential Purchaser agrees to limit access to Confidential Information received from the Seller to its own officers and employees on the absolute need-to-know basis solely for the purpose of the Discussions, and to use the same degree of care in reserving the secrecy of the Confidential Information furnished by the Seller and/or Broker as it uses in preserving the secrecy of its own Confidential Information.
  3. Notwithstanding the conclusion or termination of the Discussions, Potential Purchaser shall continue to fulfill its obligations hereunder for a period of one (1) year from the date of disclosure. Upon termination of the Discussions, all Confidential Information, including all forms of Documentation shall be returned to the Broker, including any copies or adaptations made by the receiving party.
  4. The obligation of Potential Purchaser under Paragraphs 1 and 2 above shall not apply or shall cease to apply to any information which Potential Purchaser can demonstrate by reasonable documentary proof- (a) to have been in the possession of Potential Purchaser at the time it was first disclosed by the Seller and/or Broker; (b) was in the public domain at the time it was disclosed to Potential Purchaser; (c) entered the public domain through sources independent of Potential Purchaser and through no fault of Potential Purchaser; (d) was lawfully obtained by Potential Purchaser from a third party who is free to disclose such information to Potential Purchaser; (e) to have been at any time developed by Potential Purchaser independently of any disclosure from the Seller; or (f) has been in the possession of Potential Purchaser for more than five (5) years.
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