Friday, January 4, 2019

What Creates Vacancy? Five Factors

Image Attribution: dominatethegmat.com
Southern California has experienced a nine year run of great economic times which has created a shortage of commercial real estate. 99 of every 100 industrial buildings is occupied. As a result - rents and sales prices have sky-rocketed - through a simple case of supply and demand.

 
The tail end of 2018 has shown some signs of a cooling economy - which have been well documented in this space - a slowing housing market, rising costs of doing business, stock market gyrations, uncertainty.

So, to the question - what creates vacancy? Seemingly an easy answer - someone moves, right? In practice, however, complicated elements underlying the move exist. Indulge me while I describe in detail a few of these circumstances.

The business is sold. Merger and acquisition activity in our market has never been greater. If you talk to ten company operators - three have recently sold and two more are in serious talks to sell. For those keeping score - yep! Half of the small businesses are in play. Frequently, buyers are in the same industry as the companies they court. Therefore, once the sale is complete - excess building capacity exists - thus one or more of the buildings is scrapped.

Right sizing the operation. Automation, advanced material handling solutions - higher racks, electric lift trucks - just in time deliveries, the use of third party logistics providers - all allow an operation to function in fewer square feet. When coupled with a cheaper overall rent - smaller footprint - a move can occur to save costs.

Ownership of the business is different than ownership of the building. Many times a small business will have multiple owners. If the business ownership is synonymous with the ownership of the commercial real estate - great! A nice symbiotic relationship exits. Over time, however, this balance can shift - leaving two disparate parts. The most extreme example I’ve witnessed? A building ownership had morphed into a collection of exes, former girlfriends, a church foundation, the owner’s children, and the occupying business. Unfortunately, no lease existed with the operation in residence and the new improved ownership decided the real estate was worth more vacant. Adios tenant. Time to find new digs.

Another state lures the company. Our business community is the target of several business friendly states touting abundant labor, cheaper taxes, and incentives to re-locate. It’s working.

Closure. Unfortunately, we experience businesses who must shutter their operations. Foreign competition, escalating costs, an obsolete product, the “Amazon” effect, can all spell the demise of once viable companies.

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