Hello friends! I’m penning this
on the balcony of my stateroom on a ship somewhere in the Caribbean. With
Nassau in our rear view mirror and steaming toward San Juan - the weather is
slightly overcast, mid seventies with a mild breeze blowing. Well not really, but a man can dream.
Actually, I’m just pecking away at my dining room table in Orange. But I
digress. Today, I go deep on the advice we’re giving to a client of ours who
wants to purchase a building. They’re woefully short in space and have placed a
bandaid on their growth by adding 3PL pallet positions.
Based
upon our direction in early 2024
We’re early. Which is good if we
can get seller capitulation. Which we have. We’ve actually found someone
willing to sell to us. Problem is, our idea of value differs. But, remember
2021? We couldn’t compete with the number of buyers in the market with deep
pockets and a rabid desire to own. In my opinion, those times return this year
as rents stabilize and interest rates decline.
The real soft spot in the market
is the rental market. I believe a financially qualified tenant could make an an
unbelievable deal today. Not quite to 2019 pricing - but close. Waiting to
purchase costs money. Let’s say today’s value is $358 per square foot and we
can strike at $350 per square foot and every month you rent costs $1.00 per
square foot. If you wait twelve months, you must buy the same building at $338 per
square foot.
So
based upon this - their alternatives appear to be.
Stay
put. By striking a short term deal with
his current landlord, we can watch the market and react when pricing becomes
more favorable.
Positives:
+
avoid moving twice
Negatives:
·
space is smaller
·
already racked
·
3PL is costly
Strike
a short term Sublease. Similar to staying put
but different in that the space need is solved. All of this money is sunk. The
client builds no equity and potentially misses out on market opportunity as the
two year sublease term is a long time.
Positives:
+
cheapest space alternative
+
racked
Negatives:
·
no equity
·
racking RE-config
·
uncertainty after 22 months
·
two moves
Buy
the deal we found
Positives:
+
certainty
+
size
+
divisibility
+
one move
Negatives:
·
price impasse
·
expensive
Lease
with an option to buy.
Positives:
+
lowers his basis
+
rent is equity
+
one move
+
time to ramp up operation
+
speed of move.
Negatives:
·
absolute non-starter with the
ownership
·
difficult to peg an option price
Strike
new lease.
Positives:
+ preserves operating capital
+ cheaper
Negatives:
·
no generational wealth creation
·
expense at the end of the term?
·
Over 120 months no equity build-up and loan pay down.
What will the client do? You’ll
have to stay tuned as this saga is just now unfolding.
Bon Voyage!
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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