Hilary and CRE

On Wednesday of last week, the first reports of a tropical storm brewing off the coast of Baja were filed. Over the next few days, the storm gained intensity and at its peak had winds allowing it to claim Category 4 status - one below the largest breed, a Cat 5. Catastrophic flooding, crippling winds and record rainfall were predicted to hit SoCal as the first storm of its kind to make landfall in 84 years barreled toward our coast. As I write this column, Hurricane Hilary is headed up through Northern California, Oregon and Idaho and fortunately not leaving much destruction in its wake. Sure we had some flooding in the Inland mountains and valleys but for the most part very little wind or rain in Orange County. I’ve definitely witnessed more torrential downpours during El Niño storms. 
 
You may be wondering what a freak hurricane has to do with commercial real estate? Indulge me as I draw a few parallels. 
 
Resilience and Preparedness. Just as communities and individuals need to prepare for hurricanes and other natural disasters, businesses also need to have contingency plans and strategies in place to withstand unexpected challenges. Is your manufacturing business able to sustain a power outage? Do you have an alternate shipping provider if UPS or FedEx were to strike? 
 
Location Matters. The path of a hurricane is critical in determining its impact, and similarly, the location of a commercial property can greatly influence its success. Proximity to employees, suppliers, and customers are critical. Businesses must carefully choose their real estate locations to ensure accessibility, exposure, and the ability to weather economic storms.
 
Risk Assessment and Mitigation. Analyzing the potential risks of a hurricane, such as flooding and wind damage track along with the need for businesses to assess risks associated with their real estate. Are you covered in the event of a cyber attack? With so many carriers leaving California, have you had a recent chat with yours to insure your coverage is secure?
 
Adaptation and Recovery. After a hurricane, communities and businesses must adapt to new conditions and work towards recovery. Similarly, commercial real estate ventures might need to adapt to changing market dynamics, technology trends, or shifts in tenant needs.
 
Infrastructure and Facilities Management. Hurricanes can damage infrastructure, and businesses must invest in repairs and maintenance to keep their operations running. I received a call last month from a client seeking referral to a roofer. Mind you, he had no idea we’d have rain in August. He just realized the best time to prepare for roof leaks is before you have one. 
 
Community Impact. Hurricanes impact not only individual properties but also the broader community. Similarly, the state of commercial real estate in a region can affect the local economy and vice versa. Vacancy in a regional mall or a dark big box retailer - such as the one near our house - cause tenants to seek other addresses. 
 
Economic Resurgence. After a hurricane, communities often work together to rebuild and revitalize. This mirrors the collaborative efforts that can occur in the aftermath of economic downturns or changes in the commercial real estate market. I recall an investor telling me in 2010 that we were entering the best buying cycle of a lifetime - and he was correct!
 
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.
 

Evidence the Industrial Market Is Changing

I’d like to flash back for a moment to three years ago. Recall, we were past the darkest days of the pandemic - at least we believed - and headed for freedom. Freedom from our keyboards and the stifling confines of our converted home offices. Commutes to our brick and mortar locations awaited us. Whether we plied our trades in a concrete tilt up manufacturing building, a suite of offices in a high rise or a retail store front - homes away from homes were returning. At least we believe so. Nature had another variant in mind and although Delta was less virulent it was much more contagious. Our staycations continued until the virus found fewer hosts. 
 
During this hiatus, industrial manufacturing and logistics thrived, office floundered and retail shifted to blue vans delivering to our residences. 
 
Now. Three years hence, the class of commercial real estate - buildings used for manufacturing and shipping - is showing signs of a slowdown. So what pray tell are the warning flags that signal said pause? Indulge me as I review a few of them. 
 
More Sublease Space. Three years ago, excess industrial space was non-existent. Fast forward to today, and it's become a common buzzword in the industrial market. It's like finding uncharted territory on a map that was once thought to be fully explored. The increase in sublease space is more than just square footage; it's a sign that the landscape of demand is shifting. Companies that once occupied these spaces are now reevaluating their real estate needs. The surplus of sublease options indicates a change in how businesses perceive their workspace requirements. It's like a reverse game of musical chairs. 
 
Longer Time on Market. Remember the days when a property would hit the market, and within the blink of an eye, it was off again? Or, it never officially hit? Well, those days seem to be fading. Properties are lingering, waiting for someone to come knocking. The extended time on the market isn't just a numerical value; it's a reflection of uncertainty. It's as if potential occupants are standing at a crossroads, evaluating their next move cautiously.
 
Increased Broker Incentives. Brokers used to be like matchmakers, introducing tenants to their perfect property. Now, it's almost as if they've donned a new hat – that of a negotiator. Broker incentives have become a sign of the times. Trips, bonus fees, touring currency are making their way back. They're the conversation starter, the bargaining chip that landlords put on the table to sweeten the deal. It's not just about securing a tenant; it's about convincing them that this space is worth their commitment. The increase in broker incentives is like a neon sign flashing, "Flexibility is the new black." It's an acknowledgment that the market has changed, and everyone needs to adapt to keep the dance floor crowded.
 
More Tenant Concessions. Concessions, such as free rent, moving allowances, special purpose tenant improvements, et al, used to be rare, reserved for special occasions. Now, they're being offered like party favors at the end of a celebration. It's not just about the property itself anymore; it's about what comes with it. Companies aren't just looking for four walls and a roof; they're looking for a partnership. Tenant concessions are a handshake that says, "We're in this together." Landlords are bending, flexing, and shaping their offerings to accommodate the evolving needs of their tenants. It's like watching a jigsaw puzzle being put together, piece by piece, until a harmonious picture emerges.
 
Softening in Asking Rates. The asking rate used to be a non-negotiable declaration, a line in the sand that set the tone for negotiations. Today, it's more like a starting point, a foundation that can be molded and shaped. The softening in asking rates isn't a sign of weakness; it's a sign of realism. Landlords are acknowledging that the script has changed. It's not just about what they think their property is worth; it's about what tenants are willing to pay. The softening in asking rates is like a bridge connecting two sides, a compromise that ensures both parties can find common ground.
 
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.
 

Alaska Journey

Another state got notched into our travel belt this week as we concluded a cruise to Alaska. In a word - amazing! Ketchikan, Sitka, and Juneau were on our agenda. Photos do not do justice to the rugged wilderness of the 49th addition to our union. Hopefully, my words can. 
 
As we traversed the Endicott Arm and threaded through the Tracey Arms-Fjord, several chunks of blue ice were encountered. Akin to a punch bowl at the end of a party, these bobbing blue behemoths bathe in the icy waters - having parted from the mothership Dawes glacier and now headed for the freedom of open waters. I couldn’t help recall a comparison I once made to an iceberg and its similarity to a commercial real estate transaction. 
 
As occupants of commercial real estate, you focus upon a couple of things – the space and possibly the lease payment or monthly debt service. The space: Does it lay out well for your operation? Are there enough private offices for a collaborative work environment? Does the power into the building adequately support all machinery and equipment? Can you afford the monthly payments? If these boxes are checked, boom! You’re golden, right? Maybe not so rapido, my friends. If you focus on the space and the payments, you’re only seeing the tip of the iceberg. Similar to Dawes glacier, more than 80 percent of the transaction’s issues are lurking beneath the surface and can destroy your occupancy if not properly anticipated.
 
As the commercial real estate comparisons continued, I learned on this trip is the undeniable significance of location. In Alaska, remote and inaccessible areas are abundant, offering breathtaking beauty but also posing challenges for development. Similarly, in commercial real estate, the value of a property is often tied to its location, accessibility, and proximity to key amenities and transportation hubs. Just as Alaska's hidden gems require strategic planning to unlock their potential, commercial properties in prime locations can hold the key to successful investments.
 
The rugged terrain of Alaska prompted me to contemplate the importance of due diligence in commercial real estate transactions. Just as I carefully planned my hiking routes to ensure safety and efficiency, investors must thoroughly research properties, assess risks, and conduct comprehensive financial analyses before making decisions. Understanding the lay of the land, figuratively and literally, is crucial to avoid pitfalls and maximize returns.
 
Finally, the sense of adventure and discovery that accompanied me throughout my Alaskan expedition mirrors the excitement and reward in the world of commercial real estate. Exploring new markets, uncovering hidden potential in properties, and forging successful deals can be as thrilling as discovering an uncharted trail or an untouched wilderness.
 
My journey through Southeast Alaska left an indelible impression on my soul, and it also opened my eyes to the valuable lessons that can be applied to the dynamic world of commercial real estate. Whether it's embracing the significance of location, conducting thorough due diligence, or simply enjoying the thrill of exploration, this trip has enriched my understanding of both Alaska's wonders and the intricacies of commercial real estate.
 
So, fellow adventurers, as you set out on your own ventures in the realm of commercial real estate, remember to embrace the spirit of Alaska - wild, resilient, and full of untapped potential. 
 
Happy exploring and investing!
 
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.