Friday, April 27, 2012

Three Factors that Motivate the Deal

I provide location advice to owners and occupants of industrial buildings in Southern California. I have thought about factors that motivate a transaction. I believe the three factors that motivate the deal are: Attitude, Inventory, and Interest Rates. All can influence the decision but in my opinion, only one factor can cause the decision to be changed...a change in motivation!

I have broadly lumped issues such as uncertainty, timing of a lease expiration, business forecast, market conditions, time of year, age of the business, age of the business owners, etc. into the category of attitude. As CRE practitioners, uncertainty is the attitude that causes the most pain. If a business owner is uncertain about the future, a buying decision will be postponed or a buying decision could morph into a leasing decision or your ten year lease could become a two year lease or your new lease could become a renewal at the businesses present location. In Southern California, the end of 2008 and the beginning of 2009 were particularly painful! We now are told that the worst recession since the great depression began in December 2007 and ended in June of 2009. While we can debate the end of the recession, none of us will argue the beginning. Many of us in the business sensed a "change" was coming at the beginning of 2008. Financing was becoming more difficult to originate, values were at an all time high, the market was feeding off an exuberance that many of us believed was unsustainable. Our worst fears became reality in the fall of 2008 as the financial industry imploded, values plummeted, and many real estate deals cratered. The uncertainty that resulted carried into the early part of 2009 until after the Obama inauguration.

The market's supply of suitable alternatives can affect the timing, and viability of the transaction. We have all experienced "seller's" markets. In these times, the demand for space far out strips supply. As a result, a seller can afford to be bullish and often is. You must carefully review the inventory each day and put your buyer or tenant in the best position to make a deal. Currently, the market is changing from a  "buyer's" market to a "seller's" market. Because the number of suitable alternatives is quickly dwindling, there is a continuing firming of prices in the market. A location advisor must employ creative strategies to find enough alternatives to make a "market" for an occupant requirement. Specifically, the advisor must convince the occupant to expand the geographical search area, building square footage, transaction structure (lease rather than buy or vice versa), etc.

Interest Rates:
A wide swing up or down can motivate a deal. We saw double digit interest rates in the early eighties and have experienced record low interest rates for the past couple of years. If our interest rates were to spike by even a point or two, my belief is that you would see a spate of buying activity like no other.

Any combination of the above can cause a change in motivation. In my experience, this is the one thing that can cause a real estate transaction to collapse. Let's hope for good attitudes, a balanced inventory, and affordable interest rates!!