Friday, March 8, 2013

The Market...they are only opinions, but they are all mine



I provide Location Advice for owners and occupants of industrial buildings in Southern California. I am frequently asked this question by owners and occupants that I meet and with whom I connect...how is the market? Here is what I tell them.

Almost an owner's market: We are not in an owner's market but we are close. So what does that mean? Our industrial inventories are at historic lows and with a few exceptions, we have not seen any new construction since 2007. A few new projects are planned and a few are under construction but they to date have been large warehouses north of 100,000 sf. The projected asking rents for these big boxes is $.50 NNN plus...a very expensive rent for a commodity. My experience has been that as rents on these big boxes approach or exceed $.50 NNN, occupants seek cheaper environs...in our case east of town in the Inland markets or beyond. Smaller, newer inventory (20,000-50,000) that hits the market these days is gobbled up quickly...sometimes with multiple suitors. Incubator space (fewer than 10,000 square feet) has rebounded nicely with absorption at a blistering pace. We haven't seen a great deal of rent growth or price appreciation to date although the latest round of transactions (that are in escrow) should evidence some upward change.

Occupants have very few choices: During the depths of the depression...anyone who calls it a recession did not sell or lease commercial real estate for a living...an occupant could "write his own ticket" as to lease rate, terms, concessions, etc. These market conditions are a mirage in the rear view mirror today. At this stage in the cycle, there is disbelief by the occupants that the market has rebounded as quickly and thoroughly as it has. Occupants should prepare themselves for fewer alternatives, fewer concessions, and be in a position to react when the right alternative hits the market. Gone are the days of touring endless buildings (with new ones becoming available each day), picking the most aggressive owner and making a deal.

The cost of money has to increase: Interest rates (since 2009) have been at lows not seen since the Eisenhower administration. Occupants in some cases can purchase a location and have the resulting payment be less than that of a rent payment...a great motivator to own your location...if, your company is of a stable size, the daily need for operating capital is not crushing (allowing for a down payment), and the business has been profitable for the last two years. In my opinion, these days of "cheap money" are numbered as logic will tell you that if the economy heats up a bit so will the cost of money.

So, what should we do? If you are a tenant and signed a lease after 2008, congratulations! You have benefited from cheap rent for the past five years. Potentially, you can renew for a slight increase. If your owner is savvy, expect a big rent increase. Should you venture into the market to look at alternatives, be prepared for a shock...not many available buildings and less motivated owners. If you can buy your location...do it! This cheap money won't last. If you are a tenant and signed a lease prior to mid 2008, approach your owner now about an extension. Chances are you can save some money on your rent payments. If you are considering selling your building and can wait...wait. The prices are increasing and will be better a year from now. If you are considering buying a building and your lease arrangement is flexible or expiring, do it now! Be prepared before you survey the market. Hire a competent broker and engage him exclusively (he will bust his hump for you). Get yourself pre-qualified for financing. When the right alternative comes along, you will be ready!