Commercial envy

Commercial envy

Commercial envy

Right about now, some residential brokers may be casting a covetous eye at their commercial brothers and sisters, given cooling home sales and hopes for an early spring put on ice.

But it may be a mistake to assume the grass is all summery greener over on the other side.

"With all the headwinds that continue to plague our industry,” writes commercial giant Avison Young in its latest forecast for the Canadian commercial sector, “what we have been advising for the last three years will continue to be our mantra: stay patient, risk-manage your strategy on the buy-side, and take advantage of off-market and distressed opportunities when they present themselves."

In other words, say a growing number of commercial real estate investors and, indeed, their brokers, the grass ain’t so green on their patch of ground. They are struggling to ferret out deals in a market where demand for existing quality properties far outweigh the supply.

In fact, an increasingly meagre inventory of properties on the market will likely translate into fewer deals for commercial brokers in 2013, outside of the harder-to-come-by new builds.

According to the Avison report, in Canada, the shortage of product and very low current vacancy rates suggest there remains a real challenge for investor-clients looking to buy and that directly translates into fewer opportunities for the brokers arranging their mortgage transactions.

Still, some commercial players are now doing something about it, helping smaller investors locate properties that are increasingly off-grid.

Investors fishing for commercial properties will increasingly have to cast their nets wider than MLS and troll the websites of a growing number of "private" listings on the sites of real estate brokerages and others.

There’s such demand for multi-residential units these days that these properties practically sell themselves,” says veteran investor Paul Kandakos, the Toronto player witnessing an increase in the number of sellers opting for private listings. “It’s always been a tactic, but it’s becoming more prevalent because these properties are in such high demand.”

Others are echoing that analysis, arguing that as the demand for commercial properties grows, an increasing number of Realtors are asking sellers to play ball by taking those listings off of traditional directories such as MLS or CLS. Instead, they’re opting for listings within their own online networks. That effectively keeps fast-moving properties exclusive to those Realtors who can then claim commission on both ends of the transaction.

“Typically you would look on the MLS or CLS to find these commercial properties, but what you’re not aware of is that a bunch of independent brokerages are listing these as well," he tells CMP. "So these are properties that investors aren’t even aware of.”

The trend represents a shift in the market, with many commercial brokers taking note and actively steering more-novice clients off the MLS.

For some Realtors, it means that long-time clients are dumping them as they play ball with these “seller’s-buyer’s” agents. Brokers are anxious not to see themselves shut out the equation, one of the reasons they’re actively moving to serve clients above and beyond mortgage originations.

There are, in fact, entire agencies set up to list “confidential” real estate for sale, popular fixture for sectors such as hospitality where even the hint of a building being put on the market could hurt business and worry existing tenants.

Still, brokers should know the benefits to private listings as well as their drawbacks.

For investors selling a commercial property, they skip paying commission to both a selling and buying agent. That makes it easier to negotiate a reduced rate with the one real estate agent handling both ends of the deal. Still, other sellers prefer to list on their own sites, do a bit of advertising and keep the commission for themselves, knowing the property will sell without a prolonged listing. For an investor looking to buy a commercial property, Kandakos notes that knowing is half the battle. Looking beyond conventional listing sites will give savvy investors the competitive edge, he says.

For their part, brokers are increasingly ready to take advice as they struggle to make sure they don’t get stuck in the same boat as many residential mortgage professionals.

Compounding the difficulty is the growing number of owners deciding to hold onto commercial property longer, or indefinitely, giving, among other market realities, the spike in rents.

Another trend likely to hurt Canadian brokers is the spate of investors now going south to take advantage of the kind of distressed opportunities Avison points to. While U.S. markets have started to claw their way back from recessionary lows, commercial properties are still being snatched up at foreclosure auctions and other default-initiated proceedings.

Still, there is potential even there for Canuck brokers to help investors access equity in their existing holdings in order to pump that money into property on the other side of the border – where the grass may or may not be greener.