As
I’ve written before - we as commercial real estate brokers generally serve three
types of clients - investors, tenants, and owner-occupants. Unlike our
residential colleagues who represent buyers and investors - and the occasional
tenant - many in our industry do quite well only servicing folks with leases.
We
can be on either side - the owner side or occupant side. So our days are filled
in one of six pursuits - three types of clients but working on either side.
Clear as mud? Allow me to provide details. Number one and two. Investor
hires us to find them something to buy or to fill a vacant building. Number
three and four. Tenant engages us find them a location to lease or to
sublease excess space. Number five and six. We work to locate a parcel
for an occupant to buy or they ask us to sell their company’s address.
With
that as a backdrop - you can appreciate we have our “ear to the ground” and are
a great source for what’s happening. I’ve distilled this down to one thing for
each genre - investor, tenant, and owner-occupant.
Investors. Our industrial market crossed a
pivotal point in the middle of 2020. For the first time I can remember, the
occupant premium disappeared and investors started paying more for offerings
than those who bought them to house businesses. Deep pools of capital, a rabid
appetite for return in a stable asset class, and skimpy supply caused pricing
to hit a crescendo in May of 2022. With all the world happenings - inflation,
recession, global strife, and rising interest rates - investors, especially
institutional investors, have hit pause. Private folks are proceeding quite
cautiously. Many require debt to acquire income properties. As rates have now
eclipsed 5.5% - the resulting capitalization must be north, lest negative
leverage will occur (return on invested dollars less that cap rate). So with
fewer buyers and higher rates - yep. Prices have started declining.
Tenants. The period between 2016 and 2019
found record numbers of leases originated or renewed. These are typically 3-10
years in length. Baked into the agreements are annual increases. Up until 2021
- these hovered between 2.5% and 3% per year. Around July of 2021 - we saw a
big push for increases to proximate 4%. We even saw a couple of deals with 5%
yearly kickers. But even with the hefty adjustments, lease coupons didn’t keep
pace with inflation. Consequently, come renewal time - many tenants are greeted
with rate increases of 50% -100%. Folks who lease industrial buildings are
concerned with how their bottom lines will be affected and how to counteract a
whopping bump in rent.
Owner-Occupants. Distinction is drawn between two
commercial real estate owners - occupants and investors. The difference?
Occupants also own the operation residing in the facility. Before June of this
year, many owner-occupants received unsolicited offers from investors seeking
to deploy capital. In general - these offers were at eye popping numbers and
included a provision to avoid a costly move. Many carpeyed the diem and sold.
But others got tangled in the two issues that arose - Uncle Sam and sky high
rent.
The
balance of 2022 should prove interesting as we navigate this changing market.
As an aside, I did see a Santa display in a Lowes yesterday. Earliest I can
recall. Merry Christmas!
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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