It’s
been said March comes roaring in like a lion and leaves like a lamb.
Metaphorical for the weather patterns experienced - this can be said for our
commercial real estate market this year.
Shaking
off the cobwebs of a post pandemic hangover, 2022 started with great momentum -
only to be cooled mid year. We received some decent economic news of late with
the consumer price index not increasing as fast and some major retailers
posting better earnings than expected - but our path forward still remains
murky.
So
what advice are we giving to tenants, investors and occupants who own? Allow me
to categorize each.
Tenants. We recently recommended a
client of ours renew for a short period of time - six months - to gauge the
market trajectory. Our tenant is faced with a lease expiration at the end of
this year and we’ve been watching what’s become available for several months.
His options to relocate were limited and we’d even created a plan B to stay put
if we didn’t see some loosening. Low and behold - we noticed a trickle of new
buildings hitting the market in October. Now it’s running about three per week.
If you’re looking for space - this is a vast improvement versus six months ago
when we were lucky to see one every three weeks. Another interesting metric is
the asking rates have declined. Gone are the days when a new avail was swept up
before it was widely marketed. Every new deal was a new high. Not anymore. Our
advice centers around our belief of future softening. Tenants are becoming
valuable again - especially if they pay on time and are easy on the building -
which our clients is. What’s causing the increase in supply? Some businesses,
faced with the new rent structure are headed out of state or out of business.
What’s left in their wake are vacancies.
Investors. We see two sets of
motivation these days - tax deferral and non. Unless motivated by tax reasons -
it may be wise to put your money in short term treasuries - two years - and
wait for the right opportunity to come along. Institutional capital is largely
sidelined and occupants are priced out. Private investors rule. If belief
suggests a softening of rents in the face of rising interest rates - values can
only decline. Will there be better deals mid 2023 than today? Our opinion is
yes. Certainly, if your investment is dictated by tax deferred timeframes - you
either transact or pay the gains taxes. But remember, the impetus of those buys
was a sale. Our sense is they’ll be fewer equity sales as values have declined
or the market’s evaporated - leading to fewer tax fueled purchases.
Occupants
who own. We
saw a voracious appetite from institutional capital targeting these
arrangements. Their pitch was a sky high purchase price in return for a
leaseback of two-ten years. This activity peaked in June. With the uncertainty
of recession, inflation, and rising rates - these deals weren’t as attractive.
With more lease deal hitting the multiples - our prediction is some of these
owners will need to sell - especially if faced with a refinance bullet or a
shortage of dollars necessary to refurbish the building into rent ready
condition. Once again. Patience is key.
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