Advice I’m Giving These Days

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.