5 Things I Learned in 2018

Image Attribution: mrallthingsmoney.com

With the year of 2018 almost in the books and 2019 dawning in a couple of days - what follows are the commercial real estate lessons I learned this year.

If you want to know what’s to come - watch the housing market. Actually, this was a 2008 lesson which unfolded again this year. A downturn in housing metrics can portend a bit of doom in the commercial real estate market. So much of our local economy is tied to housing - loans, brokerage, sub-contracting, construction, legal, accounting, home improvement retail. All of these sectors hire people, lease or own commercial space, and rely upon a robust exchange of homes to fuel activity. When the housing music stops - our engine slows as well. Early in 2018, when I noticed a decline in year over year home sales, rising availabilities, increased time to escrow and unsold builder inventory - I knew the end was near.

Our commercial real estate market can change overnight. We accepted a number of listings mid year. Several are still available. This did not occur in 2017. You dealt with multiple offers before the ink was dry on your Agency Agreement. Although our percentage of available buildings is still at record low rates - greater emphasis is now placed upon quality well priced offerings. The market simply shuns unrealistic owners these days. This phenomenon occurred rapidly from July through now. Prior to this time - the only period historically with as rapid a change was the summer and fall of 2008.

Uncertainty. I wrote a bit about this two weeks ago. When markets are moving - up or down - transactions occur. On the upside - companies require a larger footprint from which to conduct business. Additionally, more folks are needed to sell, fulfill, execute, and manage the burgeoning increase in volume. Operations are acquired. Cultures are melded together. Things are hopping. Commercial real estate advice is needed. Factor in a downturn and a large divesture occurs with people, physical plants, and overhead. Advice of a different sort is required - but still needed. If an air of uncertainty wafts - nothing happens. Lenders don’t lend, businesses don’t expand, employees aren’t hired, and our commercial real estate market freezes quicker than Elsa’s stairway.

Fundamentals matter. After thirty something years plying my trade - I decided it was time to take my practice to a new level. Why now? Why not? So, I hired a coach. Although specific to my business, this lesson can apply to any sales endeavor. If you don’t know where you’re going - how will you know when you arrive? A keen understanding of “where my bread is buttered”, enhanced prospecting, and weekly accountability are now pivotal.

You gotta have fun. One of my tasks in 2018 has been training our new crop of agents. Attrition in the commercial real estate business is horrendous - in some cases 80%. So, we are trying an enhanced program of weekly sessions - from an active broker - to bring the new pups along. Watching these newbies progress has been a blast. Maybe one will become a columnist for his local periodical? Not as long as I’m having fun - however!

Thank you dear readers for a wonderful 2018! May your 2019 be filled with love, joy, and much commercial real estate success!

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

7 Ways to Insure Your Building Doesn’t Sell or Lease

Image Attribution: lewishamhomes.org.uk

My VERY best to you for a Happy Holiday Season! Merry Christmas and Happy 2019! As we forge our way into the final year of this decade, I wanted to share with you the ways you can derail any effort to sell or lease your commercial real estate. So, in no particular order, here goes.

Hire an un-cooperative professional. Remember, that name on the sign advertising your listing for sale or lease is your front man. All inquiries are funneled through his phone or email. If he is tardy with follow ups - refuses to answer texts, emails, or calls or is generally non-responsive - you are sunk.

Ignore the offers below your asking price. Our market is changing. The days of multiple offers and frantic bidding are over. Carefully consider every serious proposal from qualified buyers or tenants. I believe you’ll be glad you did.

Market the building while occupied. Generally, vacant buildings are the fastest to lease or sell. Specifically, spaces that have been vacated, properly staged or have received new flooring and a fresh coat of paint are most desired. If your building has an occupant - sure - you get some marketing time while collecting rent. The downside of this? Showings are challenging, buyers have difficulty envisioning their operation in the building, and tenants have to imagine post occupant refurbishment. Plus, folks who need to occupy immediately are forced to consider readily available choices.

Set a ridiculous price. That is so 2017 of you! Now days, emphasis is placed upon a realistic value and motivation.

Don’t do any investigation. If selling - invest a few thousand dollars for an inspection and possibly an environmental report. You shouldn’t wait for your buyer to discover what issues exist. If leasing - assemble all the maintenance records and expenses. Plans or drawings are essential for either buying or selling. These items should really be accomplished prior to marketing.

Do it yourself. Sure. You may save the fee - but are you prepared to generate interest, field inquiries, arrange showings, negotiate proposals and execute the transaction? How do you insure you’re getting top dollar? Are you keenly in tune with the last few deals that transacted? How will you justify your value with a lender’s appraiser? Suddenly, that 6% looks like a post holiday bargain.

Value the property on projections not actuals. In up markets - sellers look to the future, project the next up-tick in rents - even though there is lease term remaining - and create pricing based upon this dream. Buyers happily play along because of the lack of available buildings. Once the market changes - buyers scrutinize the numbers and are unwilling to buy on “maybes”.

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

What Creates Vacancy? Five Factors

Image Attribution: dominatethegmat.com

Southern California has experienced a nine year run of great economic times which has created a shortage of commercial real estate. 99 of every 100 industrial buildings is occupied. As a result - rents and sales prices have sky-rocketed - through a simple case of supply and demand.

 

The tail end of 2018 has shown some signs of a cooling economy - which have been well documented in this space - a slowing housing market, rising costs of doing business, stock market gyrations, uncertainty.

So, to the question - what creates vacancy? Seemingly an easy answer - someone moves, right? In practice, however, complicated elements underlying the move exist. Indulge me while I describe in detail a few of these circumstances.

The business is sold. Merger and acquisition activity in our market has never been greater. If you talk to ten company operators - three have recently sold and two more are in serious talks to sell. For those keeping score - yep! Half of the small businesses are in play. Frequently, buyers are in the same industry as the companies they court. Therefore, once the sale is complete - excess building capacity exists - thus one or more of the buildings is scrapped.

Right sizing the operation. Automation, advanced material handling solutions - higher racks, electric lift trucks - just in time deliveries, the use of third party logistics providers - all allow an operation to function in fewer square feet. When coupled with a cheaper overall rent - smaller footprint - a move can occur to save costs.

Ownership of the business is different than ownership of the building. Many times a small business will have multiple owners. If the business ownership is synonymous with the ownership of the commercial real estate - great! A nice symbiotic relationship exits. Over time, however, this balance can shift - leaving two disparate parts. The most extreme example I’ve witnessed? A building ownership had morphed into a collection of exes, former girlfriends, a church foundation, the owner’s children, and the occupying business. Unfortunately, no lease existed with the operation in residence and the new improved ownership decided the real estate was worth more vacant. Adios tenant. Time to find new digs.

Another state lures the company. Our business community is the target of several business friendly states touting abundant labor, cheaper taxes, and incentives to re-locate. It’s working.

Closure. Unfortunately, we experience businesses who must shutter their operations. Foreign competition, escalating costs, an obsolete product, the “Amazon” effect, can all spell the demise of once viable companies.

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

Is NOW the Right Time to Sell?

Image Attribution: www.silverlineconnection.com

Wild stock market gyrations. A trade war with China. Housing metrics that would suggest a shift, large corporations announcing dramatic layoffs, rising interest rates combined with record low unemployment, a media touting the booming economy, and a recovery spanning nine years. So where are we headed? Great question. And one that is pondered by hundreds of small business owners every day.

A pall of uncertainty now shrouds our consciousness and permeates our conversations. Uncertainty. The circumstance that can change a robust commercial real estate market to a tepid one in no time.

When folks are uncertain - decisions are postponed. Postponing decisions - adding workers, buying new equipment, expanding into another market, or acquiring a competitor create a holding pattern for new building space needs. Given enough hesitation - our commercial real estate market freezes and lease and sale transactions are delayed.

I am certainly not seeing a rush for the exits as we witnessed in 2008 and 2009. But, the entrepreneurs I counsel are certainly making a note of the exit’s locations.

So, what should you do if you’re contemplating a commercial real estate move? I would make the following suggestions.

If you are a seller. Examine why. Be realistic. Don’t wait. You’ve elected to move your company out of state and determined your California location is excess - a good reason to sell. Your neighbor’s building traded at a record high number and if you can get a similar price - you’re a seller. If not - you’ll hold. Not a good reason. 

Marketing time, variance in ask vs take, number of buyers inquiring - all have morphed from a seller’s advantage to a buyer’s. Certainly deals are transacting - but in more neutral setting. My opinion. We will encounter a much different selling environment at the end of next year than we are seeing today. Sales will occur - but at much more realistic prices. So if your selling for the right reasons - do so now.

If you are a buyer. Be aggressive. Hold firm. Walk away. The era of crazy asking prices followed by multiple offers and feeding frenzies are behind us. In order to sell these days - a seller must respond to the offers he receives - even if they are below his expectations. Sure. Limited availability means fewer choices - but that will change. I’ve seen a shift toward bringing buildings to market NOW vs waiting. A few more availabilities coming on line will quickly balance the supply side and force sellers to come to the table.

If your lease expires next year. Understand your value. Know the market. Be aware of your alternatives. To replace your tenancy costs money - in some cases 20-25% of the total amount of your lease. If you bolt - your owner must now refurbish your space, lay fallow, concede some rent, and pay a broker to achieve a market rent. In a changing environment, the time needed to locate a new resident increases - which is lost revenue. Use this to your advantage to drive the best deal. Finding an adamant owner may generate a compromise in a higher lease rate but for a shorter duration.

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

Commercial Real Estate Advice - When Do You Need It?

Image Attribution: poetsandquantsforundergrads.com

Seemingly an easy retort? Certainly. I need advice when I’m buying, leasing, or selling. These three circumstances would apply to either side of the aisle - whether you are an owner or an occupant of commercial real estate. Ok. Done for this week. Well, not quite and since I’ve a few more words - indulge me as I share a few more situations in which commercial real estate advice may be necessary.

A transition. Twice last week, I counseled occupants that shared this circumstance. Both enjoy the benefit of owning the buildings their companies occupy. When the buildings were purchased - Bill Clinton was president. Ownership of the business and building were synonymous - albeit with different entities. Flash forward. Due to a couple of untimely deaths - the LLC building ownerships only have one common link to the operation’s management. Plus, in one case, the company finds itself with too much space - in other words the building no longer works. Where before both occupant and owner sang from the same song book - now the music is a bit off key. Needed is a careful parsing of objectives and a clear path forward.

Efficiency discussion. How do you get the very most productivity out of your manufacturing location, your suite of offices, or your retail store front? Often, the answer is not a move but a re-tool of the flow of the operation. Countless times I’ve toured a warehouse distribution building with the premise - the operation is out of space. Sure. The floor is consumed but the inventory is only stacked to half capacity. This “cube” space is free if you can utilize it. You see, commercial real estate is billed by the square footage. Simply, you pay for the floor area - not the volume of the building. A better investment - vs a move - might be in a new forklift to reach the heights of the building’s ceilings.

An alignment of motivation. What is optimal? Often, I find an in-depth discussion leads to a solution no one had considered. For instance. If operating capital is needed - why sell a building you own with no debt - only to suffer the consequences of Uncle Sam’s outstretched hand. A better cure may be a re-finance of the building’s equity. Another circumstance. Why hold out for the last dime with your occupant who is approaching the expiration of his lease? A simple math exercise should show you how costly replacing his tenancy will be. Share the savings. If he renews - even at less than a market rate - you both win.

What is ahead. Many of my meetings these days start with the question - how is the market? My response. We are seeing signs of cooling - variance in closed amounts vs asking prices, more time on the market, fickled investors, a more cautious - “let’s wait and see” attitude from occupants. The crazy thing - this slow down in activity hasn’t resulted in a rise in our vacancy - but it will. You heard it here.

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

Five Year-End Considerations for your Commercial Real Estate

Image Attribution: www.lawtechnology.com

A column like this one would normally be reserved for a period closer to Auld Lang Syne. However, with the dawn of December and Black Friday behind us - we will blink our eyes and it will be 2019. So let’s get a jump on those year-end issues - shall we?

Here - in no particular order are the five things I suggest you 

address during the final month of 2018.

Budget for 2019. If you are a tenant, chances are the owner of your building has compiled a projection of operating costs for 2019. Taken into consideration are things such as property taxes, insurance, utilities, landscaping and any repairs planned for next year. These estimates are rolled into a monthly bill which you will receive January 1. As the occupant, you have the right to audit these expenses - which I recommend you do. If you own the building you occupy - I suggest you undertake a similar accounting. Simply take a look at that property tax bill you received in October. Remember the first half is late if not paid by December 10. Next drag out that insurance premium and review it. Finally, will your gardner expect a raise next year? Are you planning to add solar or replace the roof? You now have the basis for billing your occupant.

Locate your lease. Easy, right? Except when it’s not. I’d suggest keeping both a digital and a hard copy. Make sure you have the latest amendment signed by you and the owners. Next take a quick peak at things such as the expiration, options to extend or terminate, and increases in your base rent. Calendar any dates of importance for 2019. Must you give your owner a six month heads up you will be exercising your tight to expand into the suite next door? Yep. How’s the time to note that. No lease with your tenant? No better time than now to commence a new one come January 1.

Check on your loans. Will any of the debt mature in 2019? In our environment of rising interest rates - now may be a great time to re-finance. If you agreed to a variable rate loan - your payment may be bumping up. Plan accordingly.

Tune up those systems. Roofing companies get very busy and very cranky once the rains hit. Doubt what I say? Ok. Just wait until you’ve water pouring onto your computer numeric machinery and need someone to immediately patch the hole. Good luck! During the brief business respite we experience during the last two weeks of the year - why not engage your roofer to complete an annual maintenance? Now that the weather is cooler - have your HVAC company replace the filters and insure all is well with the cooling. Finally, has your warehouse sprinkler system been certified recently? Take care of that while the timing allows.

Project. Will 2019 be business as usual? Or, will next year find you searching for a new building to buy or lease? Remember - inventory is still scarce. Plan for the process to take longer.

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

3 BIGGEST Issues Confronting Occupants of Commercial Real Estate

Image Attribution: www.blog.thebrokerlist.com

As a commercial real estate professional - my travels take me to many cool businesses. You see, close to half of my practice is consumed advising owners of closely held manufacturing and distribution operations on their commercial real estate requirements. A typical week will include three to six meetings with entrepreneurs. Resulting from my outreach is a “pulse” of sorts on the issues facing these companies - the occupants of commercial real estate. 

So, what are these business owners sharing with me? That dear reader, is the subject of today’s column.

Lack of quality employees. Unemployment in Orange County and the Inland Empire is the lowest in history. Doubt what I say? Try this simple exercise. Next time you’re out to visit your neighborhood - you decide - observe the number of “help wanted” signs. They are everywhere! Add a bit of skill or complexity to the position - a computer numeric machine operator, welder, diesel mechanic or heavy equipment driver - good luck. “Poaching” trained workers from competitors is widely practiced these days. What is the solution? In my opinion, a more focused effort on the part of our community college system, trade schools, and vocational training in our high schools to prepare young folks for the skills necessary and the jobs available.

Increasing costs. Minimum wage, rents, tariffs - all add to the up-tick in operating costs. Let’s take your typical distribution company as an example. Defined is a business that stores and ships things - but doesn’t necessarily make the items they ship. Contained in their operating expenses are three main categories - labor, space, and the price of the products that enter and leave the warehouse. See any issues there? Yep. A distributor’s three main cost centers are increasing wildly! Here is a simple example. If rents bump up by 30% - that company must figure a way to absorb the higher cost. He’s three options - raise prices, lease fewer square feet, or take the hit in his bottom line.

Legacy. Countless small business owners with whom I deal are on the back nine of their careers. Many are thinking about the 19th hole. The problem is - too few of them have an exit planned - a family member who will assume the reigns, a sale of the business to a competitor, or what will be done with their commercial real estate once the company is sold. Once such operator finds himself with a building ownership which doesn’t mirror the company ownership. By the way, he is the common member of both. Now he faces differing motivations when it comes to the real estate direction - sell, raise rents, etc.

What issues is your business facing? I’d love to hear from you.

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