An Investor Briefing

I consume a ton of economic news each day, week, and month. Maybe it’s my degree. After all, I do have a Bachelor of Arts in economics. It could be I’m smitten with numbers. Or possibly, I believe having knowledge of the broader economy - not just what’s happening locally makes me a better resource to my clients and prospects.
 
Recently, I delivered a briefing to my investors which I believed was column worthy.
 
Macro economy. If you watch CNBC, attend conferences, read this publication or the Wall Street Journal - you know the Federal Reserve is on a tear to tame inflation. Their only hammer to tamp down the nail is to systematically raise the rates banks pay to borrow. For years this rate was next to nothing but now hovers around 3.5%. Plans are for this rate to eclipse 5% by year’s end. The hope is that by doing this the supply of money will be choked - causing it to be more expensive. How does this trickle down to the pump and the grocery checkout line? With less money circulating, the theory is competition for purchasing will also lessen thereby causing downward pressure on pricing. In short, this takes time. Consumer interest rates have also risen. A mere year ago, you could originate a thirty year mortgage of around 3%. Now it’s over 7%. Still historically cheap money but not compared to last year. And finally, we have an economy poised for recession - some believe we’re already there.
 
Commercial real estate asset classes. Folks continue to buy and consumer confidence is bustling. Certainly the way in which dollars are expended was forever changed by the pandemic. Savvy retailers who provide an experience are thriving. Those who simply sell things are struggling. Thus the state of retail.
 
If our economy should truly recess in 2023 - a return to the office might be the unintended consequence. Getting more from fewer and having them close could stem from a downturn. Expect headcount to reduce in 2023. Look at big tech such as Twitter, Meta, Alphabet, and Apple - preemptively planning for a reduction by mass layoffs.
 
The drivers of the huge uptick in industrial demand are cooling. Because we’re back to work and not strumming our keyboards means less on hand inventory is needed. The big retailers have commenced the purge. Third party logistics providers - especially that cater to folks who sell things - need less space.
 
All asset classes are experiencing a rise in capitalization rates - the percentage that defines your return on an all cash basis. The question is - what’s causing the bump? Some opine as the cost of borrowing increases - cap rates must climb lest there be negative leverage. You’ll find a school of thought believing it’s all about fear and greed. As interest rates rise, uncertainty is created which causes some investors to tap out - fear. With the buyer universe smaller - less competition - pricing must be reduced to generate activity - greed. I believe it’s a combination of both. We’ll see less equity selling in 2023.
 
Commercial real estate micro trends. Manufacturing and logistics buildings are still in extremely short supply. 99 of every hundred buildings is occupied. Rents for class-A industrial are now over $2.00 per square foot. For context - those rents were only $1.00 in 2021. In Orange County, many exhausted manufacturing campuses have been retired. Once bustling operations such as Kimberly Clark, Beckman, Schneider Foods, Kraft Heinz, Boeing, and National Oilwell Varco have been replaced with monster boxes to fill the pressing need for the new purchasing paradigm. Repurposing aging research and development campuses has found favor with many developers. Examples include Ricoh, Bank of America, OC Register, and locations along Imperial Highway in Brea.
 
What are tenants thinking. Companies that occupy buildings and pay rent are bracing for impact. As mentioned before, class-A industrial rents hovered around $1.00 per square foot only a year ago. They’ve since doubled. Operations whose lease payments comprise a small percentage of their overall cost structure are taking the increases in stride. But, closely held businesses are realizing increased rent will reduce their margins and may not allow for hiring, equipment purchasing, or acquiring a competitor.
 
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.
 

Another Week in October

This last week of October was highlighted by two key events - an inaugural episode of a new webinar series and participation as a commercial real estate panelist at the Cal State Fullerton Economic Forecast conference.
 
The webinar series is entitled Trendsday Wendnesday and features interviews with service providers that advise small businesses. My idea in hosting these was to give a spotlight to my network while providing actionable ideas for business owners. The first episode featured my friend and colleague, Allan Siposs of Keystone Capital Markets. Formatted to highlight three trends currently experienced in the merger and acquisition world along with a bit of Nostradamus mixed in with a prediction of what’s to come in the next six months - my goal is to produce a number of these throughout the year. Our maiden voyage was epic as Allan didn’t disappoint. You may be wondering what mergers and acquisitions have to do with commercial real estate? Just this. Anytime a company is sold or a competitor acquired a real estate requirement occurs. You see, if an enterprise is bought - two families of facilities, culture, employees and customers must be merged into one. Frequently, a duplication of buildings causes one or more to be jettisoned. Consider the bank consolidation during the financial meltdown of 2008. World Savings was acquired by Wachovia which in turn was swallowed by Wells Fargo. Imagine a neighborhood center where all three former groups had a branch location. Yeah. You get the idea. Allan’s three trends were - recessionary fears, interest rates, and because of the first two - folks with urgency. Allan does believe we’ll head into recession sometime in mid 2023.
 
Cal-State Fullerton’s annual Economic forecast, hosted by the Orange County Business Council, was held at the Disneyland Hotel. It was nice to return to the “happiest place on Earth” albeit for some not so happy predictions. Dr. Anil Puri along with Dr. Mira Farka narrated the journey through the European energy crisis, recessionary definition, consumer confidence, banking, corporate growth, inflation, fiscal spending, outlook for a soft landing, hard landing, or something else. There were some bright spots - our economy grew in the third quarter of 2022 and the pinched supply chain seems to have eased. I must admit, my eyes were bleeding after the fantasia - sorry - of charts and graphs. Rest assured, dear readers, I’ve kept you quite informed about the economy of things.
 
Jeff Ball, the new CEO of the Orange County Business Council, spun a new twist to this year’s forecast by moderating a panel of commercial real estate experts - Jeff Manley of Savills, Michael Nguyen of Banc of California and me. Discussed were our perceptions of the CRE environment, lending world, and our predictions for the future. We all agreed. Industrial has been the darling, rising rates will nudge cap rates higher and limit buying power and offices are tough assets to own these days.

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.

Conference Season

It’s October! I love this time of year - the weather cools, leaves crunch underfoot, pumpkins abound and for many of us in the commercial real estate trade - it’s conference season! I’ve often wondered why all of us flock to this month in particular. After all there are only four meeting weeks. But maybe it’s because the year is far enough gone to think about 2023 and we’ve not entered the crash of holiday festivities. Challenging, however is scheduling lest you are traveling the entire month. This year, I chose two - SIOR Create 360 and MassimoCon. I’m penning this from SIOR in the Big D - AKA Dallas - Fort Worth. Yesterday was a glorious fall day with early morning gems in the thirties but quickly warming to the mid sixties. Akin to a desert winter day - you just feel alive.
 
As I’ve attended sessions, my Remarkable is close by for copious note taking. Educational is the goal of this column as I review what the best in our industry have to proffer.
 
Technology and Innovation committee. When my career started in 1984, the only technology we enjoyed was a switchboard with multiple lines. Hand written notes were taken when a caller failed to connect. That’s right. No voicemail. Bliss! PCs on every desk was a distant dream of Silicon Valley visionaries named Jobs and Gates. And the business was much more local. It had to be because tracking markets was left to each of us individually. Nowadays, with a stroke of a keyboard I can search properties globally and communicate virtually. George Jetson indeed. All we need is a flying car and a dog named Astro! Will we see a time when tenant searches are fulfilled via the meta verse? By that I mean you receive a link and through your virtual headset you’re able to walk the spaces, ask questions, see the neighborhood and transact with your avatar. Think I’m crazy? Well, you can try on clothes virtually. So, it’s not that far fetched.
 
General sentiment around is we’re headed for a rough patch with finicky capital, rising cap rates, and the rising cost of borrowing. As I preached here in this space - tenant demand is still strong and vacancy scant.
 
America’s Team. I can now say I caught a pass from Roger Staubach - legendary quarterback of the Dallas Cowboys and even legendarier commercial real estate visionary. Roger’s key to success was hard work. I’m surprised he didn’t mention the fact he created the tenant rep concept! Humble as always. At almost 80 years young he still sports - sorry - an upbeat attitude and uncanny ability to fire a spiral. Fortunately, the one I cradled was more of a lateral so I didn’t fumble it. Mark Whicker would’ve approved.
 
That’s all from Big D! Buchanan out.
 
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.

What do We Believe is Important

I heard an interesting comment on a webinar this week. My goal is to tune in to at least twelve a month and supplement those views with listening to three podcasts a week. If successful, I consume between 288 - 300 hours of content each year. During every episode, I want to glean a minimum of one new idea or concept. Annually, I then learn 288-300 new things - a simple way to expand my knowledge to become a better resource to my clients and more interesting to our family and friends. 

My take away earlier was - we spend 99% of our working time each day in endeavors our clients spend 1% of their working day accomplishing. As I considered our clientele, family owned and operated manufacturing and logistics businesses - this rang true. Many only lease or buy one piece of commercial real estate ever. Certainly those “in the business”, such as investors, are more active. But perspective was gained with that in mind. Therefore, our advice must be straightforward and on point. After all, they don’t do it every day. We must learn to communicate complex concepts simply as if they were educating us in a manufacturing process. 

Although a scant amount of time is spent - 1% - my focus today is on that small percentage, as I’ve seen many great things transpire. 

Generational wealth. Those business that adopt a strategy of owning the building from which they operate use their 1% most effectively, in my opinion. The majority of the time is in the acquisition, fit out, and move. I’ve witnessed many groups who purchase a location and then never relocate. All the while, the real estate appreciates, tax benefits are enjoyed, and depreciation accrues. Equity in the buy can be tapped for business expansion - buying a competitor, purchasing new equipment, or hiring employees. When it’s time to sell the workhorse - the enterprise paying the mortgage - direction can vary. Some choose to sell the company, retain the building and originate a long term lease with the new owner of the business. Still others prefer to sell the real estate and deploy the equity into one or several income producing real property assets. Regardless, enormous wealth is created which can be passed to heirs. My most extreme example came through such a story. A family founded a manufacturing business during the go-go years of the mid sixties. Lifestyles were supported. Real estate was bought to house the expanding operation. When the patriarch and matriarch died - their children decided to sell the company and retain the real estate. When the family realized the new operators were cutting corners - a decision was made to liquidate the companies home and diversify into other locations. Six years later the holdings have doubled in value and cash flow has as well. Meanwhile the purchaser of the business is bankrupt. Apparently, their strategy was sound. 

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.