Friday, July 3, 2020

The BIGGEST Deal Ever! AKA Deja Vu all over again

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We are confirmed! Three words that live in every commercial real estate advisor’s lexicon. Confirmation means a deed - transferring ownership - has recorded. Whether spoken, written, texted, emailed, or smoke signaled - trumpeted is the completion of a transaction and a payday which follows. You see, as commercial real estate professionals - our livelihood depends upon earned commissions. No salary, stipend, advance, grant, draw, or lifeline exists. We eat what we kill - similar to that sergeant of the Serengeti. Therefore - we must close deals in order to survive.

The words “we are confirmed” - in April 2010 - were particularly sweet - as they culminated the largest commercial real estate deal of my career to that point - which eclipsed four decades. Seven years of work preceded the close. During this itch - in California - we recalled a governor, elected a Terminator, relaxed mortgage qualifications, burst a housing bubble, and witnessed the largest collapse of our financial system since the 1930s - and the demise of our commercial real estate market. Sound familiar?

So why the reflection? I see many similar characteristics in today’s 2020 environment.

Budget woes. As 2003 dawned in Southern California, our state government of California was not forward thinking with their budget. As I surveyed the business landscape in Southern California - several troubling things were observed. Our legislature seemed hell bent on driving manufacturing businesses out of California. For a commercial real estate advisor - who relied upon industrial companies to acquire real estate for their operations - this was an uncertain time. Short sighted policies which increased public pension costs - placed a greater burden on cities to generate revenue. Targeted were employers - especially those who made things. Vehicle licensing fees tripled. Diesel fuel costs doubled. Suddenly delivering goods became costlier. Driver’s licenses for undocumented workers became a thing. Air Quality Management Districts tightened the noose - through regulatory fines - around operations that generated any pollution. Worker’s compensation insurance rates quadrupled. Bottom lines for companies narrowed. Neighboring southwest states of Nevada and Arizona served as catcher’s mitts of organizations fleeing California. Because of our recent business shutdown - California faces a 54 Billion dollar budget hole. Will this shortfall increase the costs of doing business? Hmmm.

Some sectors are thriving others are not. In 2003 an emerging dichotomy across commercial real estate assets in Southern California was occurring. Large manufacturing concerns we’re getting crushed but smaller, lighter uses were finding favor. Investors and developers – flush with capital - were seeking industrial buildings in which to invest. If an investor could purchase a large manufacturing campus, scrape the improvements, and build smaller light industrial facilities - substantial profit could be made. Cities loved the new building permit fees that were generated. Consequently, we witnessed substantial appreciation in land values. New construction flourished. Today, large retailers face the same pressure that large manufacturers encountered in 2003. Investors are skimming the landscape looking for distress. I suspect we will se many regional malls converted into an more favorable asset class - such as apartments.

Exodus from the state. So in 2003 - when California was in a world of hurt with worker's comp rates, employers leaving the state, driver's licenses for illegals (which all lead to Governor Gray Davis being terminated by the Terminator), we saw a huge amount of sale/leaseback activity from national corporate occupants. Numerous large Orange County employers including Aquatics-Lasco Bathware, Akzo Nobel, Johnson Controls, Smurfit Stone, Parker Hannifin, Illinois Tool Works, Limbach, Boeing, Beckman and many others sold manufacturing locations in Southern California and leased them back from the new owners. Occupied by these companies were mammoth facilities - many built in the fifties and sixties - on large swaths of land. The two main reasons in 2003-2005 that many national (multi location) companies sold their locations and leased back, were real estate values and the business climate in Southern California. By selling the locations when the market was at its value peak and leasing back for a three to five year time frame, the companies maximized their real estate equity and could decide at the lease expiration whether to stay in California or consolidate into another location. Some stayed, but many left. Today, companies are employing the same means to generate cash.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.

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