Friday, June 24, 2016

Unrealistic Expectations with Commercial Real Estate...5 MUSTS

Image attribution: www.nobsbb.com
Southern California is deeply entrenched in a commercial real estate owner's market. Currently, 98 of every 100 industrial buildings are occupied.

This is the skinniest vacancy I have witnessed in my four decades as a commercial real estate broker!

Cheap money and lack of available buildings have caused sale values to eclipse pre-great recession highs and lease rates are close to the top as well.

In short, it is a great time to be a commercial real estate owner.

One of the ugly offspring an owner's market breeds is unrealistic owner expectations.

Today, I want to counsel you. If you choose to be unrealistic in your expectations, examine the following to see if they are in your favor.

Staying power. Make sure you can  endure the time necessary to achieve your unrealistic expectations. We recently accepted an assignment to sell a building. More is owed on the building than the market value - even the inflated values of today. A couple of events have caused one of the lenders to commence foreclosure proceedings. The sharks are now circling. Not a good time to be unrealistic. Another owner hired us to lease his building. When we were engaged, the building had been vacant for over a year. We believed the asking rate was inflated by 30% and expressed this concern to the owner. He didn't care. He had staying power. He owned the building - with no debt - and could afford to wait for the right tenant. His gamble paid off. We leased the building at his asking rate - albeit another year later!

A good grasp of the trends. What is the general trajectory of pricing - up or down trending? Are more buildings entering the market than are leaving? What has recently leased or sold and at what price and terms? In the first example above, several new for sale buildings have become available since we commenced our pursuit of a buyer. This submarket is now slightly tilted in favor of buyers. In example number two above, the supply actually decreased during our marketing - which meant we were one of the few remaining buildings available.

A keen understanding of your competition. I know you believe your building is best in class. But, is it really? My experience suggests the highest pricing at the best terms is achieved on the best available buildings - the ones with the most amenities. If your candidate lacks a key amenity, your pricing will most likely suffer. Your advisor should provide you with a steady stream of market intel so you truly understand your competition.

Complete knowledge of your occupant's situation. Before you approach your occupant with an unrealistic lease renewal, I would suggest you ask a few questions. How's business? What are your occupant's plans at the conclusion of his lease? Is your occupant the target of any acquisition activity? Are the owners of your occupant's business getting a bit long in the tooth and approaching retirement age - thus looking to cash in and sail into the sunset? Do you deal directly with your occupant or does he have a commercial real estate advisor? The answers to all of these questions will guide your direction.

An awareness of a vacancy cost. Can you afford to pay for an empty building? For how long? Remember, your ability to outlast your unrealistic expectations is the key. Vacancies are costly! In most instances, originating a new tenancy will cost you 20-25% of your future income. The bulk of that cost is paying for the building while it is vacant and the abated rent that most occupants seek.