3 BIGGEST Issues Confronting Occupants of Commercial Real Estate

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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

The “Brady Bunch” of Facilities

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Our week was highlighted by two meetings which were of particular interest - thus my desire to share. Common among both operations with whom we met was the recent acquisition of a competitor.

Akin to the comedy sitcom of the 1960’s - The Brady Bunch - where two families were melded into one - both companies now find themselves with the task of managing the excess or inefficient capacity.

As you know, if you’ve watched reruns - Marsha, Greg, Bobby, Cindy, Peter, Jan, Mike, Carol, and Alice ultimately co-habituate peacefully - although five seasons and 117 episodes were consumed telling “the story of a man named Brady.” A similar saga occurs when two businesses are joined at the hip.

In the first case, growth had occurred organically - with great products marketed to a number of customers who saw the value and bought more. With an increase in sales and the need for more space - each operator looked to proximate buildings to house the explosive up-tick in orders. Each enterprise functioned - albeit a bit clunkily.

Flash forward. Packaged were two groups that essentially served the same buyers but from different operating facilities. The “marriage” created a behemoth of inefficiency - with receiving, manufacturing, storage, shipping, sales, marketing, accounting, and management essentially quintuplicated. 

Now considered is a consolidation into one facility - essentially moving the Bradys into a house in Studio City. Carefully vetted in the weeks ahead will be the disruption of production, moving costs, future needs, available buildings, disposing of the existing lease obligations, and return on investment. Should be fun!

Our second group achieved its size through acquisition. Consumed was any competitor in its path. Awesome. But the wake is similar to the Brady union - you’ve two sets of kids - pairs of whom are the same age. In commercial real estate parlance - the business has duplicated its distribution footprint serving the same geography. Complicating the equation - a trend in logistics - higher ceilings and larger truck courts. Allowed is the occupation of fewer square feet - stacked higher with product and accessed by longer trucks containing more inventory.

 Ultimately, a distributor can occupy fewer square feet and store the same amount of stuff. We now must figure out where the employees live, proximity of the centers to their customers, and the right sizes for the mirrored buildings. Just a simple puzzle to solve!

Stay tuned in the week’s ahead for an update on our progress.

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 Move?

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In a word - actually two - it depends. Today, I recap a week of meetings, situations, and the counsel we provided to businesses who believed a move was imminent.

What’s prompted the need. We met with a group last week that recently signed a two year lease extension on their space. Well entrenched are they in the building - as 35 employees arrive each day to go to work. As their product is purchased off-shore and subject to a large tariff - they pre-bought a year’s worth of inventory - which arrives in January. They now have a short term warehouse need. Rather than disrupt the entire operation, the solution appears to be an auxiliary space - in addition to the mother ship. Stay put and lease a unit close by.

Moving expenses. Most will under-estimate this cost! Depending upon the complexity - the figure can easily eclipse six figures. And, this is a stiff cash outlay day one - not an expense paid over a number of years - like a lease or mortgage payment. Faced with a rent increase of 45% - we encouraged a client to put a pencil to the new monthly rent times the number of months for the lease. The increased rent consideration was smaller than the moving costs. Even though a larger monthly outlay is coming - avoided is the moving van. Renew.

Your current situation. Under-utilized. That describes a footprint we toured this week. Changes in the stock on hand and and lagging caused a surplus of space. The easy fix? Downsize. The issue? Nothing is available that would fit the requirement. Plus, because the company benefits from a lease rate that commenced in 2012- a space 40% smaller would figure in the same monthly rate as their larger space. No move here.

Extension rights. Many companies transacted in 2011-2014. Five to seven year leases are expiring this year and next. Contained in many of these contracts are favorable extension rights - options to renew at pre-set rates, rights of first refusals on adjoining spaces, or options to purchase the premises. We encountered such a gem, recently. Origination of their seven lease happened in 2013. Guess what? If they want to stay come 2020 - they can. No negotiation needed! Why would you move?

Ways to stretch your space. We encounter so many situations where a tweak here or a tuck there can postpone a move for months or even years. Advanced material handling solutions, the addition of a production mezzanine, or the use of a third party logistics provider are three such ways.

The cost of your alternative. On deck next week is a conversation with a local distributor. Serviced is the entire SoCal basin from one owned and one rented location. Neither fit the operation anymore. So, do they sell one building and buy two? Renew their lease in one and sell the other. Sell the building and replace it with one more central to their customers? The options abound! Should be a fun conversation. Stay tuned.

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

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

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

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

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