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Why Perception Creates a Disconnect Between Price and Value in CRE

April 14, 2021

scale showing the difference between price and real value

In the end, what something is truly worth is what people are willing to pay for it.

Pretty much everything on the planet has a cost. When you head to the supermarket, items on the shelves have price tags telling you what you need to pay. However, that doesn’t necessarily mean that a box of cereal is worth $2.50 or a loaf of bread’s actual value is $1. Those are merely well-researched numbers that represent what consumers are willing to pay.

Prices on staple consumer goods tend to be similar, but you could visit another store up the street and find the same cereal for $2 and the exact loaf of bread for $1.50. The difference between the prices—and a successful sale—reflects the seller and potential buyers’ perceptions.

The same concept applies to any goods or services exchanged for money, especially as the price tag increases and the reasons for buying them become more diverse. Consumers will pay the price if they perceive that cost as the commodity’s true value.

Here’s a look at why perception creates a disconnect between price and what an item is genuinely worth, particularly as it applies to real estate.

From where does value emanate?

In short, value is a human construct. People with a vested interest in a product, be it an item at the grocery store or a commercial building on Brickell Avenue, assign a value to it. If you want to own that item, you’ll have to pony up the money to meet a price that matches this perceived value.

Even a commodity like gold, which is traditionally used as a bulwark against volatile currencies, has an arbitrary value assigned to it via the market. That doesn’t necessarily mean that its price equals its actual value. According to billionaire investor Mark Cuban, the price of gold is based entirely on narrative. Sure, it’s used in jewelry and manufacturing, but other, more useful commodities don’t hold the same prestige. 

Cuban argues that this perception doesn’t mean that gold is worth more than other precious metals; the narrative has simply convinced consumers and investors that this is the case.

The role of perception

Is a piece of commercial property in downtown Miami genuinely worth more than a similar-sized building in Davie? It will cost more, but that doesn’t mean it has more value to a specific investor or tenant. However, since Miami is a more prestigious location, it’s perceived as being more valuable and, therefore, is more expensive.

Even the same properties can fluctuate significantly in price based on their perceived value. Take Lee County, FL, for example, which saw its median home price reach $322,300 in late 2005. Real estate speculators were driving much of this perceived value, as they were buying homes and flipping them to people who couldn’t really afford them.

By 2009, after the Great Recession, Lee County had a 13% unemployment rate. Mass foreclosures followed, and by the end of the year, the median home price was only $90,000—a precipitous 72% reduction. You could get many homes for far less than that, too. These homes hadn’t changed at all in a material sense; there was just no one left who was willing to pay $322,300 for one of these properties.

Today’s median home-sold price in Lee County, Florida, is about $186,000. Buyers are willing to pay that number, so that’s the perceived and current actual value of a home in that region. 

The median list price is trending up by over 7% per year, as well. So, the narrative is that Lee County’s economy has recovered and that real estate in the area is once again an attractive buy. The pandemic and urban unrest in other parts of the country have also contributed to a surge in southwest Florida (and most suburban) home prices. The same properties that many buyers wouldn’t touch 12 years ago are now viable investments because of perception.

This concept applies to CRE, too, of course. The price of a particular space comes down to buyer or renter perception and the narrative that those who stand to make money on the deal create.

Commercial real estate value

When investing in commercial real estate, it might tempt you to jump at properties in a prestigious location with a higher price, assuming that they’re the most valuable. And choices like this can certainly pay off. However, it’s important to remember that the narrative assigns some of those numbers. And the underlying aspects of a location and your individual needs are what should drive decision-making. 

These figures don’t take into account what’s best for you. Do you really need to buy a high-profile office on Brickell Avenue? Will it make you more money? Or would converting an abandoned big box store or mall in Sunrise into an office provide a better return?

Only you—and a set of economic and need-based considerations—can come up with a good answer. By researching the fundamentals of a property and applying them to your situation, it’s possible to find investments that are more valuable in the real world than their market prices suggest.

Finding value in CRE

Value and price aren’t the same because changes in perception can alter a commodity’s cost without changing its true worth. Since every organization and investor is different, identifying properties that are valuable to you and/or potential tenants—rather than merely relying on market comps—can provide better returns.

Morris Southeast Group works with commercial real estate investors to expand their portfolios and find exceptional value in the market. To learn more, call us at 954.474.1776. You can also reach out to Ken Morris directly at 954.240.4400 or kenmorris@morrissegroup.com.

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