August
2022. Wow! What an amazing 2 and 1/2 years. I’ve written, in this space ad
nauseam, what we’ve experienced since the ball dropped on December 31, 2019. I
won’t bore you with a recap. Instead, today I’d like to offer an opinion on
where we are and what potentially lies ahead.
Industrial
has hit pause from its meteoric rise in values, office suites abound with
goodies for those willing to sign a term, and retail - especially Wal-mart,
Target, Ross, TJ Max, Tuesday Morning, Bed Bath and Beyond, and Burlington Coat
Factory are taking their lumps. With gasoline and food prices soaring - few can
afford discretionary spending like before. Consequently, earnings have suffered
as evidenced by Wal-mart’s 14% decline. Foot traffic in their stores is also on
the wane. For us, it harkens back to the deal. Are folks still transacting?
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!
Attitude:
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 commercial real estate 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. Today, CEOs deciding to bring back a workforce into the office are faced with employees who are quite comfortable working from their kitchen table and $6.00 gasoline doesn’t motivate them to commute. With logistics buildings packed with holiday merchandise and squeamish retailers - the situation is akin to constipation. Something is needed to get things moving!
Inventory:
The market's supply of suitable alternatives can affect the timing, and viability of the transaction. We all have experienced a "seller's" market since 2019. 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 "seller’s" market to an "equal" market. Meaning, the halcyon days of multiple offers and TBD pricing may be ending. I saw my first “broker premium” for a deal done by September 30th since 2014. What is that owner seeing and trying to avoid? A costly vacancy - that’s what.
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 decade. Since interest rates have spiked recently by a point or two, many buyers have taken a “pencils down” approach to pursuing purchases.
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!!
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.
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 commercial real estate 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. Today, CEOs deciding to bring back a workforce into the office are faced with employees who are quite comfortable working from their kitchen table and $6.00 gasoline doesn’t motivate them to commute. With logistics buildings packed with holiday merchandise and squeamish retailers - the situation is akin to constipation. Something is needed to get things moving!
The market's supply of suitable alternatives can affect the timing, and viability of the transaction. We all have experienced a "seller's" market since 2019. 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 "seller’s" market to an "equal" market. Meaning, the halcyon days of multiple offers and TBD pricing may be ending. I saw my first “broker premium” for a deal done by September 30th since 2014. What is that owner seeing and trying to avoid? A costly vacancy - that’s what.
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 decade. Since interest rates have spiked recently by a point or two, many buyers have taken a “pencils down” approach to pursuing purchases.
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