Building owners: Plan and decide before your lender does - by Nate Nickerson

Talk to any active industrial buyer between Boston and Worcester and you’ll hear the same thing: they have capital access, they want product, and they can’t get owners to meet today’s pricing. Talk to owners and you’ll hear the reverse: buyers are lowballing, and it makes more sense to wait.

Both are being rational. But the gap between them won’t close evenly. Buyers price off today’s cost of debt, and unless interest rates fall meaningfully, their numbers aren’t going to move much. That means most of the movement over the next two years will come from owners. The question is whether each owner makes that decision on their own timeline or on their lender’s.

The math at maturity
Consider a typical example. In 2021, an investor buys a I-495-corridor industrial building for $10 million at a 5% cap rate, or $500,000 of net operating income. They finance it with a $7 million loan at 3.75%, amortizing over 30 years, due in five.

The building performs. Rents grow and NOI reaches $550,000 by 2026. By any operating measure, it’s a success.

Then the loan comes due. At a 7% cap rate, the building is worth about $7.9 million. A lender at 65% loan-to-value will offer roughly $5.1 million. The remaining loan balance is about $6.3 million. To refinance, the owner has to bring roughly $1.2 million in new cash, and the $3 million of original equity is now worth around $1.6 million on paper.

Nothing went wrong with the real estate. The capital markets simply repriced it. The owner is left with three choices: write the check, bring in outside capital, or sell.

Extensions aren’t a strategy
Many owners assume the bank will simply extend, and often it will. Most of this debt in Massachusetts sits with community and regional banks, and they generally prefer an extension to a foreclosure.

But a first extension is not the same as a second. Each round tends to come with a required paydown, a higher rate, tighter covenants, or a shorter leash. An extension buys time. It doesn’t change the math, and every month it runs, the owner’s options narrow.

What waiting actually costs
The case for holding rests on one hope: that values will recover. It’s worth testing that hope with numbers.

Suppose the owner writes the $1.2 million check. They now have about $2.8 million of equity in the building. After debt service on the new loan, the property throws off roughly $150,000 a year. That’s about a 5.5% cash-on-cash return. It’s acceptable, but it’s a modest reward for fresh capital put at risk to protect an asset that has already lost value.

Now assume a good outcome: NOI grows 3% a year and cap rates compress by half a point over the next two years. The building would be worth roughly $9 million in 2028. That’s a real improvement, and still below the 2021 purchase price. Recovery to the original basis may take years, and in the meantime the owner carries the roof, the HVAC, the lease rollovers, and the interest-rate risk on the next maturity.

Holding may still be the right call for some owners. But it should be a decision made with a spreadsheet, not a default made out of attachment to a number from 2021.

Meeting the market isn’t the same as giving in
When owners hear “meet the market,” they hear “take a lowball offer.” But the gap between buyers and sellers usually isn’t about any single bid. It’s about where an owner anchors.

Owners who price off 2021 tend to follow a predictable path. The building goes to market too high, serious buyers pass, and the listing sits. After a few months, buyers start asking what’s wrong with it. By the time the price comes down, the property has lost its momentum, and it often trades below where it would have if it had been priced right from the start.

Owners who price off today’s market see the opposite. A building priced where real buyers can underwrite it draws multiple offers, and competition does what one negotiation can’t. It pushes price and terms up. Certainty of close, the quality of the buyer, and a clean timeline often matter as much as the headline number, and a competitive process is how an owner gets to choose among them.

Owners should also make the right comparison. An offer shouldn’t be measured against what the building was worth in 2021. It should be measured against what holding will actually produce after the refinance check, the capital projects, and the leasing risk. And for owners doing a 1031 exchange, a soft market cuts both ways. Selling at today’s pricing usually means buying at today’s pricing too.

Timing is leverage
The single most important variable is how much runway an owner has. A seller with 18 to 24 months before maturity can run a real marketing process, choose among buyers, and walk away from a bad offer. A seller with 90 days left cannot, and buyers can tell the difference.

If your loan matures in 2027 or 2028, now is the time to run your refinance numbers against today’s rates and cap rates, and to compare them honestly against what a sale or restructuring would produce. The owners who do that work early will have the most choices. The ones who wait for the market to come back to them may find that their lender decides for them first.

Nate Nickerson is owner and advisor of Fieldstone Commercial Properties, Inc., Littleton, Mass.