Trends

Over the past three years we experienced changing markets. By that I mean the dynamic between buyers and sellers that sets stage for negotiation and results in transactions. 
 
At the beginning of 2021 - as we slowly awakened from the ether of pandemic lockdowns, two trends emerged - rampant on-line shopping and hybrid work forces. Both of these affected commercial real estate and the three asset classes - office, industrial and retail - in different ways. Owners of industrial spaces - especially those equipped to welcome logistics providers - saw a rabid increase in demand. Fulfilling on-line orders quickly and efficiently required more on hand inventory - read. A place to receive, stage, store, and distribute said goods. 
 
Conversely, as our shopping experiences turned from visiting our local retailer in person to surfing the web - foot traffic to brick and mortar stores lessened and spaces became ghost towns. On the office front, tenants choreographed a thoughtful dance of safety of work forces vs in-office appearances. We realized we could ply our trades from most anywhere - our home, from the front seat of our cars, or abroad - and many did. Therefore, office and retail tilted toward tenants and industrial spaces were heavily slanted in owner’s directions. 
 
As we dawn 2024, the aggressive pursuit of available inventory by industrial tenants has ebbed, investor activity has been reduced to a trickle, and we’re seeing signs of lease rate softening. 
 
In light of changing markets, how should you - as an occupant of industrial space - tender your offers? That, dear readers, is the focus of the balance of this column. 
 
Know the trends. At the beginning of 2023 we counseled  our industrial occupants to watch lease rates. Our prediction was significant softening would occur by the end of the year - and therefore, to transact at the beginning of the year might result in a rate higher than anticipated. Our gamble proved prescient as we experienced a declination of rates - in some cases by 25%. 
 
Know the metrics. A simple review of how many available properties within a certain size range exist versus how many similar properties have leased or sold, is a good way to measure the velocity of a market. As an example, if during the past year three buildings between 25 and 35,000 ft.² have leased or sold, and presently there are 15 available, one could surmise that five years of supply exist. This, of course, assumes everything stays the same, pricing is not reduced in order to spur demand, or something outside our economy causes the need for space to increase - i.e. a pandemic.
 
Understand the owner’s situation. If an owner is currently carrying a vacant building, it’s important to gauge how willing she will be to accept a deal. For someone who purchased the building at the peak of the market with the appurtenant increase in operating expenses, and potentially debt service, her willingness to strike at a number less than her carrying costs might be difficult. By the same token, if an ownership has existed for many years with low operating expenses, and little to no debt - any deal might look appealing. 
 
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.