Why Off-Market Deals Leave Money on the Table

A common misconception in CRE is that off-market deals earn a seller more money: A buyer must surely wish to pay a premium for an exclusive acquisition opportunity. However, does this exclusivity actually translate to higher sale prices? Does exclusivity surpass buyer competition as an upward pressure on price?

In our experience as a Midwest multifamily brokerage, the answer has been NO.

In 2017, Chicagoland multifamily deals over $25 million had an almost 5:1 on-market to off-market ratio.

Given the sizable differences between suburban and core submarkets across the nation over the past two years, and particularly in Chicago, let’s take a look at the deals within these areas separately.

Given buyers’ current reluctance to the high price points in downtown areas nationwide, certain sellers may believe that the exclusivity of an off-market deal can bypass sluggish interest. However, Chicago’s on-market deals averaged a 23% price premium over off-market deals. This suggests that perhaps the growing allocations toward real estate are still driving a sufficient pool of investors into bidding for downtown product.

Meanwhile, in the suburbs, there has been a rapid rise in multifamily transactions as buyers enter value-add frenzy. If there were any submarket in which buyers would pay an exclusivity premium, then this it. So, it comes down to whose perception is accurate: Can a buyer convince the seller that their price is better than what a bidding war could generate? In Chicagoland suburbs, we have seen a 19% price premium between off-market and on-market deals.

At KIG, we’ve seen the effectiveness of buyer bidding firsthand. In the transactions brokered over the past two years, we’ve seen a 3.92% average increase from LOI to the second-round bid. Going from second round to best and final resulted in a further 2.34% average increase in value.

Ultimately, moving deals from a glimmer in the eye to money in your pockets requires a continuous discipline to ensure that an asset’s value is translated into an accurate price. On the one hand, this involves marketing materials, connection to a network of potential buyers and the asset itself. On the other hand, it comes down to something quite simple — the push and pull of competing buyers, not a black box of value generation from a quick backroom deal.