Friday, November 16, 2018

The Downside of a Move out of State


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Yesterday, I concluded a meeting with a local manufacturing and distribution company. Family owned and operated by two California born and raised principals - the business has experienced exponential growth over the last couple of years.

That seven year lease signed in 2015 - which was to adequately house the operation - has now become a liability - as the operation is bursting at the gills. All measures have been taken to efficiently use the space available - creative material handling, automation, storing product off-site, outsourcing - but the fact remains. The company will have to move before the lease terminates in 2022.

Three options are now on the table - a relocation down the street to a space 50% bigger or a move out of California - to either of two business friendly states. Moving a mile or two down the road is a simple fix with measurable benefits - more space, less disruption, employees retained, done! However, this ownership has seized the opportunity to consider another - more forward thinking and long term solution - a move east - like well east of the 57 Freeway.

As previously described - a move out of California carries significant upside - a more business friendly environment, fewer regulations, cheaper housing, no state income taxes, and utility subsidies.

But with the ying of reasons to move - there is also the yang of negatives. That downside - dear reader - is the subject of today’s column. So, before you load that moving van - please consider the following.

Lack of available buildings. Even with the desperately low availability of commercial real estate these days - we still have created a base of existing buildings which totals billions of square feet. Anaheim alone has close to 100,000 million square feet of existing industrial buildings. A visit to Allen, Texas or Greenville, South Carolina and you’ll find acres of vacant land - but very little standing inventory. The oweness is placed upon you to build your own facility. Even with a land gift and streamlined permitting - you’re looking at 12 to 18 months of construction. Don’t forget the land freezes in certain places east of here. Oh, yes, and consider other delays - such as rain.

Skilled labor shortages. If your operation requires a level of expertise to operate computer numeric machines or tool medical devices - you may be sorely disappointed in the pool of employees. Granted, states are working with community colleges to train people with the necessary chops - but you’re still looking at a deficit.

It’s difficult to move back. Once you decide to sell that home in Corona Del Mar and move to Nashville - the barriers for re-entry are akin to an Apollo spacecraft returning from Lunar orbit. Sure, you can keep your place here - but our golden state will want a taste of the company’s profits - which defeats the purpose of an out-of-state location.

Cultural differences. There is no place quite like California - even with its warts. This from a man who lived his formative years well south and east of here. It’s said in the South - “folks will treat you nicely - but, won’t trust you unless they trusted your grandfather.” Where do you think the “old boy network” originated? My 85 year old mom still refers to her neighboring Cooper Rubber execs as the Yankees up the street. The family moved there in 1965! Just sayin.

The WEATHER! Folks who have never experienced six weeks of sleety ugliness each year take for granted the 300+ days of sunshine we enjoy. What’s overlooked is the loss of employee productivity where weather is a factor. Sure, four seasons are cool - unless you have to live through them. If you want to see leaves turning - or snow - just make a weekend jaunt to Oak Glen. There! Seasonal fix administered.

Allen C. Buchanan, SIOR is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com  his website is allencbuchanan.com

Friday, November 9, 2018

What I Learned from this Year’s Conference Season

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I just returned from a tsunami of travel. Traveling for business is rare for me - which is one of the reasons I chose this profession - as most of my clients are within a short car ride.

October is the exception as this time of year is conference season. Most commercial real estate companies host their annual meetings in the fall and generally all of our professional organizations - SIOR, CCIM, ICSC, CORENet, etc. follow suit. So after six flights, eight Uber rides, and dozens of “what market do you serve?” - today is a recap of my takeaways.


Our industry hasn’t changed - EVER. Largely dominated by old grey haired white guys - we have been slow to adopt new technology and hire women and minorities. I did notice more women and youth in our gatherings - which is awesome. Our European affiliate even noted “most global corporations are looking for diversity when granting assignments.” It’s stunning to me how few of us capitalize on the cool techno tools available to us these days, however. Most still don’t employ a CRM such as SalesForce to track our activity.

Most professionals miss an opportunity. To travel many miles only to hang out with folks from your local office makes little sense to me. Sure. I get it. There is familiarity there. But seriously. Stretch your boundaries. Make new contacts. Put it out there. How else do we learn new “best practices” and build new relationships?

A slowdown is coming. The elephant in the room was the potential softening of the commercial real estate market. We’ve all greatly benefited from a solid ten year run. We know a dip is imminent - we just don’t know when. Most I spoke with believe we will sense a slowdown late in 2019 or early in 2020.

Networking is a contact sport. You gotta press the flesh. I met people from all over the US, Canada, and the UK. My network expanded exponentially. Follow up is critical - thanking and then staying connected. I use old fashioned thank you notes plus an occasional article, email, and call to remain top of mind.

How did we survive before Uber? I am astonished by how this start-up has revolutionized travel. Walk off the plane, quick schlep to the “smart phone app ride area” - yes - airports have them now, whip out your device, boom. You’re off. No more creepy cab rides, endless rental car lines, or expensive long term parking. I’ve even started Ubering to meetings in LA. I get a couple of hours to dial the phone or answer emails. Amazing.

Is Blockchain our disruptor? I listened curiously as one of our keynotes explained blockchain technology. Simply, blockchain is a summary of transactions - the block - linked to numerous de-centralized computers - the chain. Allowed is a seamless exchange of business between parties. Underlying the crypto-currency - such as bitcoin - is blockchain technology. 

So, if your industry has a data set of deals - procurement, logistics, yep - commercial real estate leases or sales - your role of middleman could be vulnerable. I’ve not retired my license just yet - but I wonder where I’ll return my Kenmore tools?

Allen C. Buchanan, SIOR is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com  his website is allencbuchanan.com

Friday, November 2, 2018

Catch the First Wave - There may not be Another!

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As a market cools - we begin see a lack of activity on listings for sale and lease. Imperative in a transitioning period is pricing. You see, if an offering is priced at a crazy high level - the active buyers and tenants will simply wait until your pricing is more realistic.

Generally, you will get a “first wave” of interest. If you’re fortunate - one of these first responders will submit an offer. Don’t be shocked if the proposal is well below your asking price! Now, the tough part - take it. Certainly, your tendency is to stall until something better rolls along - but currently - that first wave is followed by a sea of tranquility.

So what should you do if you find yourself paddling in a placid pool? These five suggestions should help.

Take a look at the competition. Enlist your commercial real estate professional to take you on a physical tour of your completion. Sure. You can accomplish this on paper but if you get in the car and look at other things available - you will see the market through your buyer’s perspective. Carefully notice how you stack up - amenities, asking price, time on market.

What else has leased or sold. Have other buildings - similar to yours - traded? You’ll want to key in on a similar time frame - simply, competitive offerings marketed at the same time as yours. Why did they sell?

Have your first responders transacted elsewhere? Chances are your offeror has not made a deal. The weird thing about this evolving market is availability is still low yet buyers are proceeding cautiously. However, if that interested party leased another property - figure out the motivation.

Offer a time sensitive bonus. For a deal completed by the end of the year - rebate the cost of an environmental report. Give an abated rent schedule to a tenant willing to make a lease by the end of the month. Many times these “incentives” will jump start your activity.

Create a broker incentive. First, start with a gift for showing the space to a qualified prospect. Next, reward an offer with a better gift. Finally, offer a full commission or a two week cruise to the selling broker. With thus simple three step process - you generate showings, encourage offers, and reward success.

Allen C. Buchanan, SIOR is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com  his website is allencbuchanan.com

Friday, October 26, 2018

If Your Building Sells - What Happens?

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This week our team was contacted by an owner. Desired is to sell his building and re-deploy the equity into a college education for his children. A noble cause - to be sure - but one with some considerations.

Are you taxed? Yes! You see, once the sale closes, the Federal government will tax the long-term gain - appreciation of more than a year. Taxed at a higher level will be the depreciation re-capture. Don’t forget the new Affordable Care Act tax for any asset sold for more than $250,000. Oh yeah, and then our Golden State will want a taste as well. For those keeping score, all of the taxes can amount to almost half your gain! Ouch!

Outlined above is the first thing which occurs once your building sells - you’re taxed out the wazoo - unless of course, you employ some tax deferral strategy - which defeats the use of the equity for a college education.

What happens to your tenants? In our example, the real estate is occupied by three businesses - two of which have leases and one that doesn’t. The easy answer is - so long as the tenants with leases continue to pay their rent and abide by the terms of their contract - no interruption in their occupancy occurs. Assumed is the role of landlord by the new owner. Simply, he must adhere to the terms and conditions of the lease agreement(s) in place - the rent, term, increases, extension rights, etc. 

A much different story unfolds for the poor dude without a lease, however. You see - he is vulnerable. His rent can be jacked up or he can be asked to vacate. Best case, the new owner allows him to stay and offers a new lease with the same rent he enjoys - highly unlikely in today’s super-charged market.

Gotchas? Sure. Again, the tax man. Upon sale, the real estate is re-assessed for property taxes. Generally, property taxes are re-booted to the selling price. So who pays the increased amount? Yep. Generally, the tenants - assuming of course the leases allow for this “pass-through” - which most commercial leases accommodate. Who cares? Well, you should! You’re strapping your loyal occupants with an increase in their monthly out-flow. Or, short of the “pass-through” provision - the buyer pays you less because he must swallow the new property tax.

Special circumstances? Certainly. Before racing out to the market with that sale package - carefully consider your tenant(s) extension rights - options to renew their leases, ability to take over additional space, or ways to cancel. ALL of these circumstances can affect the value of your building. Did you agree to allow your occupant to buy the building through an option to purchase, a right of first refusal, or a right of first offer? If so - you must follow a protocol tantamount to a NASA launch sequence before openly marketing your holding.

Is your tenant the BEST buyer? Quite possibly. Short of any “rights to buy” you may have granted - the company who pays you rent each month could surprise you - and offer you the most. After all, they “live“ there and have for some time. In many cases, your tenant knows the building better than you do. Faced with a move vs converting their lease to ownership - buying can make sense.

Allen C. Buchanan, SIOR is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com  his website is allencbuchanan.com

Friday, October 19, 2018

If Commercial Was More Like Residential - 7 Ways From Sunday!


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Commercial real estate professionals differ from our residential colleagues in many ways - which I have enumerated in this space. But, how would our industry change if we adopted some of the practices of our residential brethren? Well, to coin an old phrase - “seven ways from Sunday” - here goes.

We would share our inventory with a Realty Board. Residential agents belong to Boards of Realtors. Many fine things are accomplished with this connection. Houses available for sale are readily accessible through a common multiple listing service. Status - Active, Pending, and Closed - are required of each listing. No such clearinghouse exists for commercial real estate.

We would be more consumer facing. Once a Listing is published through a Realty Board - the information flows to consumer websites such as Realtor.com, Zillow, and Redfin. That transparency enables you to search for a house in your bathrobe - from the comfort of your kitchen table. You can see commercial listings on Loopnet - but the process is flawed, the information incomplete, and the goal is to point you toward a commercial broker for details.

We would track “real metrics”. Because the multiples are consistent - the number of houses on the market, number of houses solid, market time, and new sale escrows - can be tracked and give residential agents a true look at what’s happening. We are forced to react to our “gut feel” for activity or to rely upon global stats such as vacancy factors or absorption.

Our use of technology would be much greater. Wow! This topic alone is column worthy. Commercial professionals have been slow to adopt technology. We are an aging industry stuck with 1980’s methodology. Doubt this? Some in my office still use a Rolodex!

The majority of our deals would be sales not leases. Generally, 8 of 10 deals we do are leases. Our counterparts transact just the opposite - with many residential agents never doing leases.

Most of our transactions would be owner based. Many in the commercial trade only represent occupants. Known as “tenant rep” firms - a specialty is placed upon companies who seek to occupy buildings as owners or tenants. Shunned are assignments which require sourcing a tenant or buyer for a vacant building on behalf of the owner.

Standardization would be encouraged. Boards of Realty have strict codes of conduct and forms for everything. Agents “toe the line” lest they be ousted from the Board and lose access to available inventory. A death sentence of sorts - the potential ouster creates a cooperation among agents and firms.

Friday, October 12, 2018

Where is our BREAD Buttered?

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Today, I will share with you two of the ways I look at my business - the source of transactions and the reasons. Although not terribly scientific - these two metrics can recap where marketing time has been expended - source. And where future deals might lie - reasons. I’m only talking about deals we’ve completed - not our pipeline of future business. And as I’m fond of saying - if it happens once, it’s an exception, twice a trend, and three times an epidemic.

So far this year, our team has completed twenty-three transactions with an aggregate consideration of over $43,000,000. Projected for the balance of the year is an additional $10,000,000 in closed deals.

Sources of Closed business.
Prospecting. That knock on your door or that annoying mailer you receive is probably from me. Yes. I still prospect. Generally, our calling surrounds an initiative - a general trend we see and touches that result or to make neighbors aware of activity - a new availability or a recent sale. 1 deal.

Social media. Linked-in, Facebook, Twitter, and YouTube - are our team’s go-to media sources. We have found consistency, authenticity, and targeted content are the keys to generating visibility. 2 deals.

Sign calls. Folks still drive-around and call us - and we love it! 1 deal.

Referrals from brokers. Our single biggest source of business! These come in two forms - cooperation on a listing or an occupant requirement or a colleague requesting our involvement to secure an assignment. 7 deals.

Referrals from clients. If you do a good job - these follow. 2 deals.

Other referrals. Critical to our success is networking with those who talk to business owners yet don’t compete with our services. Our network is filled with CPAs, attorneys, insurance brokers, commercial bankers, and wealth advisors. 6 deals.

Repeat business. Probably the finest validation we receive - when that group calls you years after your deal - to do another deal. 6 deals.

Reasons folks are transacting.
Expansion. As you would expect in a robust economy - close to half our closed transactions were caused by the need for additional space. 10 deals.

Contraction. An emerging trend recently discussed was the utilization of a third party logistics provider. Achieved is the need for less space with minimal disruption to the operation. 2 deals.
Re-allocation of portfolio. Some would suggest we are close to the top. If not, we can see it from here. Consequently, several of our clients have “taken chips off the table” and sold some buildings. 3 deals.

Merger or aquisition. The “Brady Bunch” of business activity causes commercial real estate activity. Period. 2 deals.

Renewals. Many of our clients are disappointed to discover the deficit of available buildings. Worse, their owner understands choices are limited and jacks up their rent. Our involvement results in a win for both sides - vacancy and move avoided. 6 deals.

Allen C. Buchanan is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com  his website is allencbuchanan.com

Friday, October 5, 2018

Is the Commercial Real Estate Market Cooling?

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In my humble opinion - yes. I read with great interest - in this publication - the residential real estate trends published by my colleagues - Jon Lansner, Leslie Eskildsen, and Jeff Lazerson. For weeks now - we have noticed more houses for sale, a greater supply of un-sold new homes, longer times on the market, and a departure from a seller’s market into a more normal give and take environment.

So what do residential swings have to do with commercial real estate, you may ask? Plenty! You see - what happens residentially portends the haps in my world - generally by 12-18 months. As an example - our residential peers experienced a dip in 2006-2007. The commercial music stopped in 2008. So, if the theory holds - expect a slow-down commercially sometime in late 2019 or early 2020. Full disclosure - I’ve been wrong before. 

Unfortunately, with commercial real estate - our metrics aren’t as defined as they are with houses - such as the number of new homes available, year over year sales, and time on market. We track gross activity, net activity, vacancy rates, and average lease and sale prices - by product category - retail, office, and industrial. Therefore, most commercial real estate professionals rely on a “gut-feel” of where we’re headed in their respective specialties.

So what is my “gut” telling me about our dealings? Indulge me, while I share.

Listings are hanging around longer. Smart owners are meeting the activity - regardless if the interest is below their expectations. As an example - we recently brought to market a beautifully well located building with complete updates and awesome features. Our pricing was aggressively high. Bang! We got two offers right out of the gate - albeit at a significant discount. Fortunately, our seller chose to deal. Those two were the ONLY buyers that emerged.

Folks aren’t making stupid buys. Two years ago - no asking price was too high. Now - establish a nutty ask - crickets!

Renewal activity is healthy. Companies aren’t moving. Traded is a relocation in favor of - “we will just stick around for another two to three years.” Consequently, a shadow market has emerged - which is difficult to track. If a lease is transacted - we can generally discover the terms. With a renewal - not so much - as this deal occurs with an owner and his occupant - without any published availability.

Pent-up demand is waning. In a down market, a new offering is met with a collective yawn. An up market will snatch the same building whenever there is a sniff it may be for sale. Now, when something new hits, we receive a few inquiries and a small percentage result in tours or offers.

The Labor Day bump. Generally - calls, inquiries, and requests to tour all take a hiatus in the summer months. Once the kids are back in school and the calendar adds an “ember” - things heat up. Not this year. Labor Day has passed - right?

Certainly in-exact. But I’m willing to trust my gut. It’s not mislead me to-date.

I’d love to read your comments. What are you experiencing?