Corona Virus - Winners and Losers

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Just when things were cruising along nicely this year and the most spirited water cooler debates were upon whom would win the Batchelor this season or Democratic presidential hopefuls - WHAM! The reaction to COVID-19 has disrupted our world akin to the terrorist attacks of 9.11 or the financial meltdown of 2008. The new Marvel Incredicoaster at California adventure has nothing on our E-ticket stock market ride of late. Descending into bear market territory - the markets have been in free fall attempting to price in the future impact of economic uncertainty today.

The Losers. Our global economy depends upon the flow of goods and services. Read. People consuming. When the music stops as it has this week - folks put the kibosh on spending. Imagine the carnage of lost dollars from cancellations of sporting events, concerts, amusement park attendance, conventions, and travel. Our city coffers partially rely upon sales tax revenue generated from hotel beds, restaurant meals, and souvenir shopping. With the suspension of events such as the Big West Basketball tournament, visits to Disneyland, Long Beach Grand Prix, and postponement of NHL hockey games and the MLB season - revenue is lost - in some cases forever. Strained municipal budgets result. Will city layoffs follow? Businesses that rely upon conventions, concerts, and live sporting events as their lifeblood will suffer. Think about operations that build exhibits, printers who create banners and advertising collateral, companies who provide security or suppliers of temporary power for open air gatherings such as Coachella and Stagecoach. I’m aware of a local enterprise that rents lighting for large outdoor venues. Wonder how he is feeling about the future of his business? With students at CalState and UC schools now attending classes on line - the campus proximate coffee hangout now has no customers. You get the idea.

The winners. In my experience - with every economic downturn there are winners. Entrepreneurs who benefit - either by brilliance or dumb luck. So just who will find the silver lining? Because of a decrease in global demand and the Saudis and Russia playing footsie with supplies - oil is less than $30 per barrel. Petroleum based raw materials will become cheaper. Therefore anyone manufacturing with them such as molding plastic - medical devices, trash containers, kitchen items, coat hangers, and auto parts will all bring finished goods to market with less expensive components. Speaking of petroleum. Gasoline prices will tank - sorry - making that trip someplace more economical. Trucking can reap rewards as can driving your car - albeit to fewer places that are open. Delivery services should see an uptick in business as people avoid shopping in person in favor of on-line ordering. How about video conferencing providers such as “go to meeting” or Zoom? Zoom stock is up 60% as they fulfill record demand for their product. The biggest winner could be the mortgage industry - ironically the biggest loser in the 2008 slide. With a declining stock market - money seeks a safe harbor - such as treasuries and precious metals. As demand for T-bills increases - so does the price. Lower yields result - last week less than 1% - making that 30 year loan the cheapest ever! My sense is refi fever is stronger than the symptom associated with COVID-19.

In this author’s humble opinion - we are going to be OK. Sure. We must weather some short term pain - for some excruciatingly bad pain. But we’ve overcome tougher obstacles - a Great Depression, two World Wars, Orange County bankruptcy, 9.11, 2008 Great Recession. We are a resilient nation. We got this!

What Blackjack and Commercial Real Estate Have in Common - 5 Things

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I love to play blackjack I should say, I love winning. The losing, not so much. That is why I don't gamble anymore - the losing! Regardless of my mathematical methods of manipulating my money, the result was too often predictable - the house ended up with my hard earned wages.

Painfully reminded of my aversion to losing was I on a recent weekend. We traveled to Las Vegas for "Mike Madness" - a term we coined (like that?) for the celebration of our middle son's birthday. Countless hands of blackjack were played and lost by my wife and daughter. Fortunately, they are small time gamblers - twenty bucks is a huge loss - so we had gas money for the trip home and the equity in our home is untapped.

So just what did playing blackjack teach me about commercial real estate? Allow me to deal you a few hands and we will see.

You gotta stack the odds in your favor. When I played, I would search far and wide for a single deck table. Rarely would I sit down with a shoe wielding dealer (multiple decks for those of you who prefer to visit Florida). The reason is simple. The odds are better for you with fewer cards. Working with control is a way to tilt the odds in your favor in a commercial real estate transaction. There is still no guarantee, but at least if a deal is made, you are involved.

Don't play if your stake is too small. You have to be willing to watch your pile of chips dwindle as the deck turns in your favor. Generally, things will rebound if you're adequately staked. Too many newbies (and vets for that matter) enter the commercial real estate game with improper staying power. If you can't withstand a dry spell, you're forced to work on deals that are quicker and smaller or worse - you compromise your ethics to close a sale.

Play the percentages. Always split aces and eights or double down with an eleven if the dealer is showing six or fewer. You can occasionally hit a twelve if the dealer is showing seven or better - but I prefer to stand pat. Work on high percentage commercial real estate deals - not the airport runway that is purportedly for sale that you eavesdropped at your kid's baseball game.

Avoid playing with amateurs. How incredibly mad are you when the last guy to the dealer's right hits with a two up and the dealer showing four? Invariably, the guy busts with a ten rather that let the table benefit from the dealer exceeding twenty one. Too often, in the world of commercial buildings, we are on opposite ends of a broker who isn't a pro - and the deal suffers.

Cut your losses. Sometimes, in blackjack and commercial real estate - you just gotta move on to the next transaction. I'm guessing if your client is ducking your calls, you shouldn't spend the fee.

Just remember, that squeal of delight that you hear when the blackjack dealer busts or your colleague closes a nice deal probably started with the above points in mind.

Allen C. Buchanan, SIOR, is a principal 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.blogspot.com.

What Does the Coronavirus Mean to Commercial Real Estate?

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According to Wikipedia - “Coronaviruses are a group of viruses that cause diseases in mammals and birds. In humans, coronaviruses cause respiratory tract infections that are typically mild, such as the common cold, though rarer forms such as SARS, MERS and COVID-19 can be lethal. Symptoms vary in other species: in chickens, they cause an upper respiratory tract disease, while in cows and pigs they cause diarrhea. There are no vaccines or antiviral drugs to prevent or treat human coronavirus infections.

OK, “so what?” you might ask. How will the potential COVID - 19 pandemic affect commercial real estate? Indulge me while I review a few ways.

Uncertainty. When the stock market gyrates wildly as it has for the past few days - some people get nervous. After all, trillions of dollars in paper wealth have evaporated. As folks glance at their diminishing 401 K balances - an air of uncertainty balloons. If resulting angst causes consumers to hit the pause button on spending - a ripple forms in the ocean of economic activity. When attendees avoid concerts, sporting events, movies or their favorite restaurants - businesses suffer a decline in sales. Operations who supply these enterprises - trucking, food, linens, security, novelties - then feel the pinch as the ripples become waves of lost opportunity. All of these rent or own commercial real estate. You get the idea.

Supply chain disruption. As mentioned last week - steel production is down 90% in China. Auto sales in Asia? Off a whopping 95%! One of the Port of LA’s largest exports is auto parts. Couple these factors with the typical container cancellations during the Chinese New Year and you create a lag in product delivery.

Travel. Hotels, airlines, rental cars, tickets to Disneyland, Knott’s or Universal - yep! Much of Orange county’s economic vitality is reliant upon tourism. Postponing travel equates to lost revenue for all who depend on customers to serve.

Interest rates. If there is a bright side - it may be favorable interest rates - as commercial real estate financing becomes more affordable. Mass stock market sell offs generate a load of proceeds which must be invested. Typically a safe harbor for this wad of cash is short term instruments such as Treasuries. As the demand for T-bills increases so does the price. Price increases cause returns to react inversely. According to CNBC - “The 10-year U.S. Treasury yield plunged to a fresh record low on Friday as investors dumped riskier assets and searched for safer options amid the coronavirus outbreak. The benchmark rate traded around 1.16%, marking the first time ever it traded below 1.2%. The 2-year rate slid to 0.95%, its lowest level since Nov. 2016. Yields move inversely to bond prices, which are rising as purchases surge. The 10-year yield has tumbled 25 basis points this week alone as the massive sell-off in stocks intensified.”

Well, at least surgical mask sales are on the rise.

Recessions - Ugh!

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This week, I enjoyed a group meeting featuring key note speaker Robert S. Keebler of Keebler Associates, LLP - a public accounting firm from the Midwest. Actually, he hails from Green Bay, Wisconsin. However, since I grew up a Dallas Cowboys fan - it’s tough for me to write the city name lest I harken back to the 1967 Ice Bowl - which broke my heart as well as low temperature records. But, enough of that.

The topic of Mr. Keebler’s talk was “strategies for getting the most profit to the bottom line.” Quite compelling and interesting was the subject and ensuing discussion.

Preceding the lecture was a brief outlook for 2020 by our host - Northwest Mutual. The Cliffsnotes? We should be OK through mid year when the outcome of our presidential election will permeate the air waves and suck the collective oxygen from most conversations.

Mentioned during the preamble was a check of five factors which cause bear markets - inflation, recessions, commodity shortages, crazy market valuations, and uncertainty. Since I’ve plied my trade since 1984 - I’ve experienced a number of commercial real estate bear markets - 1991-1993, 2000-2002, and 2008-2010. So, I decided to do a bit of unscientific noodling to check the five factors against my experiences with the down markets and if any of those factors might be in play today. Full disclosure - I’m not predicting a buyer’s market anytime soon.

1991-1993. Kuwait was invaded by Iraq in August of 1990. We experienced amazing growth in commercial real estate values beginning in the mid eighties and the Reagan “trickle down” policies. Savings and Loans - remember them? - were de-regulated and money was flowing freely into properties - causing a spate of new development. With the collapse of the S & Ls, Gulf war, and dramatic overbuilding - the economy plunged into recession. Global uncertainty, a shortage of capital, and unsustainable values were the culprits. Turn around didn’t hit full throttle until 1995.

2000-2002. Also known as the dot.com age - we witnessed commercial real estate investors purchase old, obsolete, warehouse buildings with proximity to phone infrastructure to house the burgeoning technology needed to power telecom - precursor to e-commerce of today. With the election year of 2000 came a burst of the dot.com bubble. No longer were the buildings needed for telecom applications. Given the obsolete nature and high prices paid - many were foreclosed. Terrorist attacks of 2001 created enormous uncertainty as the world adjusted to new travel security measures. So crazy valuations and uncertainty were villainous.

2008-2010. The Great Recession! Liberal lending policies, securitization of bad loans and government guarantees of their performance caused the housing market to crater. With the failure of Bear Stearns, Lehman Brothers, Country Wide Mortgage and others plus the ensuing government bailout - asset values plummeted, lending froze, uncertainty prevailed and those of us in the commercial real estate business reverted to survival mode. Commercial real estate went on sale in early 2009 and buying activity commenced in earnest. Mountains of investment dollars poured into industrial, retail, and office buildings. The music continues today. I’ve stopped predicting when it will stop.

Today. Recessionary fears are in our rear view mirror - or are they? Storm clouds. The Corona Virus is wreaking havoc on the Chinese economy - causing a major disruption in our supply chain. Steel production in China is down 90%, automobile purchases in China down 99%, visits to movie theatres down over 90%. Look at the resulting prices in oil - $52 dollars a barrel at last check. Silver lining. Interest rates are low - with the Fed possibly taking another cut soon. Domestic consumer confidence is high. Net, net, net - I believe we’ve another six to nine months before the uncertainty of an election year is upon us.

Allen C. Buchanan, SIOR, is a principal 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.blogspot.com.

Do YOU Resemble YOUR Commercial Real Estate Deals?

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I am penning this as I sit in an emergency vet clinic. Our Labradoodle, Hank, ingested some Sago Palm seeds yesterday. What ensued was all manner of Hell as depicted in the Exorcist - vomiting, periods of lethargy, and terror for the owners - my wife and me. Little did we know that Sago Palms are toxic and in many cases fatal to dogs that graze on their walnut sized seed pods. In times past, Hank's snacking choice would have resulted in sure death - but in today's world of veterinary care, he has a chance. For the record, Hank seems fine to me, but we are told liver damage may be in our dog's future - but enough of that.

The scene at the vet this Saturday is a study in humanity - comical! Enrolled are the aging, overweight red head - and her owner with the same diet and stylist, the plastic crated Pomeranian and his plastically enhanced master, and a wide assortment of licking, yapping, sniffing canines, felines and their apologetic tour guides. But with that preamble, what amazes me is HOW MUCH THESE PETS RESEMBLE THEIR OWNERS! Ok, with full disclosure - Hank's rangy gait, highbrowed nature, and stately manner have caused some to opine of our similarity - but I digress.

So, with the premise that dogs are like their owners, does the same relationship exist with you and your CRE deals? I choose to believe so. Indulge me while I provide three quick examples.

One of our top producers has as his client one of the largest home health care providers globally. He is extremely organized - as are his deals. Consistency, his hallmark - the typical transactions with his client, methodically consistent. Slow and steady, his MO - the transactions are plentiful and profitable.

Think about "that guy" whose office appeared on a recent episode of Buried Alive. ALL CRE offices sport one. You want a copy of the May edition of Site Selection - from 1994? - it's there beneath the rubble. This guy's deals are executed in a similar fashion - sloppy, with an awful lot of clutter.

I generally enjoy some complexity in a deal - keeps me motivated and feeling valuable. I can also justify the outrageous fees if I know I've solved a problem, created a winning strategy, or walked the transaction gauntlet with my client un-scathed. Does this make ME complicated? I'll leave that to you to decide.

Look in the mirror. Is that a commercial real estate deal you see?

Allen C. Buchanan, SIOR, is a principal 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.blogspot.com.

Options in a Commercial Real Estate Lease

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By definition - an option is a right contained within a commercial lease which allows you to do something as the occupant. Generally, an option enables you to extend the term of your lease, cancel your lease, or purchase the building. Simple! Oh, I wish that were the case. In practice - option language and exercise can be much more complex. Let’s explore a few of the tastier ones - shall we?

Options are personal. If your company has successfully negotiated an option with the owner of your business address - the option is “personal” to only you as the occupant. It cannot be assigned. Consequently, if you’ve a right to buy the building at a number dramatically below market today - prohibited is passing this along to someone else. We’ve seen cases whereby an occupant exercises their purchase right only to quickly flip the property to another. However, there are tax consequences and logistical challenges to this approach. I should also mention - options completely benefit an occupant. An owner derives little if any benefit from their grant.

Strike prices. On the scale of most valuable to least valuable - an option right with a set price is the most attractive. Conversely, an extension with a price at “market” would be a bit better than worthless. A “market” option - an extension which computes the lease rate or sales price at the time of option exercise - is fraught with peril. Unless a specific mechanism is outlined to calculate market rates - left to opinion is the price. Here’s the rub. Let’s say you have a right to to extend your lease for five years at the prevailing market rates. Cool. You signed your lease in 2015. It’s time. But there is a problem. You and your landlord have a different view of the market and reach an impasse. Now what?

Time frames. Typically - an option - whether to extend, purchase or cancel will have clearly defined time frames from which your right may be exercised. IE: no sooner than twelve months or longer than six months before the expiration of your lease term. These periods are sacrosanct! Strict adherence must be observed or your right may be extinguished. So, what happens if you blink and miss the window? Should you start looking for a place to move? Not necessarily. You’ve simply limited your leverage as now you have no “right” to extend. Your owner still may want to keep you in residence - but at terms more favorable to him.

Method of exercise. Options must be exercised in writing by you. Remember that “options are personal” description? Yes. YOU must send a letter to your owner - unless another method - electronic exercise - is specified in your lease agreement. I discussed this issue with a prospect the other day who shared with me a horror story. Let’s call him Al. At Al’s prior location - Al wanted to renew his lease, avoid a costly move, and had an option to do so. Al’s owner paid Al a visit to discuss Al’s intentions. Clearly stated was Al’s desire to stay. Al assumed all was groovy. After all, Al made his pitch directly to the owner. In person! Imagine Al’s surprise when his notice to vacate arrived in the mail a few weeks later. You see, the option was not exercised in writing. Extreme? Maybe. But don’t fall victim.

  

Allen C. Buchanan, SIOR, is a principal 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.blogspot.com.

Poverty, Homelessness, and Commercial Real Estate

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Well. This is a tough column for me to write! But one that’s direly needed as the wealth disparity of our county has widened drastically since Orange County became our home in 1988.

The Southern California News Group in conjunction with the SoCal Policy Forum hosted a panel discussion last evening to bring awareness to the issues of poverty and homelessness. Moderating the discussion was Todd Harmonson, Orange County Register Senior Editor. On the dais were four voices of diverse perspectives - Joel Kotkin, a Fellow in Urban Studies at Chapman University; Shelley Hoss, President and CEO of the Orange County Community Foundation; Mary Anne Foo, Founder and Director of the Orange County Asian and Pacific Islander Community Alliance; and Lucy Dunn, CEO of the Orange County Business Council.

Once the orange grove studded bedroom community of Los Angeles - Orange County has sprawled to be 34 disparate cities with a population elevating us to the fourth largest in the United States if counted collectively. No longer are we the Los Angeles employment feeder to the aerospace, textiles, and entertainment industry. The Orange County economy is robust - boasting one of the lowest unemployment percentages in the nation coupled with one of the highest median annual incomes - $89,759. We lead the country in medical device manufacturing, real estate related jobs, construction, and finance. So where’s the issue?

The unemployment numbers are misleading. According to Professor Kotkin, roughly 8 of 10 new jobs created in California since 2010 have been below the median income level of the county. 4 in 10 are below $40,000 annually. These incomes make it difficult to survive as an income of roughly $66,000 is needed to afford the $1800 per month average rent for a two bedroom apartment in the county. Underemployment is rampant as well says Lucy Dunn. A Disneyland ride operator serves as a great job for a high school student learning their chops. Not so much for a head of household supporting a family.

We’ve done a poor job educating our youth. Most of my practice centers around family owned and operated manufacturing and logistics businesses. Ask any of them what their biggest concern is - the lack of skilled employees. Welders, CNC machine operators, and equipment repair technicians are in short supply. Our high schools and community colleges have taken a dim view on vocational training. Look. A four year degree is awesome! But, it’s not for everyone. Especially if it means beginning your career saddled with a load of student debt to service and the inability to find a well paying job. Starling numbers of our educated youth are bailing for progressive states such as Texas, Tennessee, and North Carolina. Sure. The weather is brutal. But, you can enjoy an affordable family home.

Housing starts have woefully lagged employment growth. Lucy Dunn, formerly the Director of the California Department of Housing and Community Development, outlined the metrics. Until recently, our state has added approximately 500,000 new residents each year since 1950. Our need for new housing annually? 200,000 units. We’ve not achieved this since 1989! It doesn’t take a doctorate in economics to realize that’s a huge disparity in supply and demand. Consequently, our median price for a family home has eclipsed $720,000 and average rent for an apartment - $1800 per month.

Our state has not been our friend. I could write an entire column on this subject - maybe I will someday. Suffice it to say - burdensome regulation, crippling taxes, anti growth policies, job killing attitudes, unsustainable public employee pensions, ALL have contributed to the pickle in which we find ourselves.

Is there hope? OF COURSE! We are one the most innovative and entrepreneurial counties in the world. Shelley Hoss pointed out most of the wealth in Orange County is first generation - unlike the East Coast with its seven or eight generations. Additionally, most of our wealth was created here and by folks who benefitted from public education, a scholarship from the Cal State or UC system, or public assistance. Many of our wealthy benefactors emerged from poverty to their current prominence. We are a generous community!

Bravo to the Southern California News Group and SoCal Policy Forum for bringing awareness to our issues and generating a platform from which to converse! 

Allen C. Buchanan, SIOR, is a principal 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.blogspot.com.