Pricing - Steps To Anticipate

Recently, we discussed price reductions and the factors which cause them. In short, when supply exceeds demand, a shortage occurs - also called an imbalance. This imbalance is like a seesaw - it’s hedged toward either side with one side up and the other down. In our industrial market, the number of occupants needed to fill our vacancies is surpassed by the addresses available. Ok. One of the ways to absorb the excess is through price reductions. Today, I’ll take an in depth look at the steps you can anticipate when lease rates soften as outlined by the stages of an economic cycle. 
 
The Economic Cycle Stages:
1. Vacancies Narrow: Initially, as the market tightens, available spaces get leased quickly. Businesses expand, new companies move in, and the surplus of vacant buildings decreases.
 
2. Rents Grow: As vacancies narrow, landlords gain pricing power. Increased demand leads to higher rents. Businesses are willing to pay more due to the scarcity of available spaces.
 
3. Developers Build: Seeing rising rents and low vacancies, developers enter the market. New projects are initiated to capitalize on the high demand and favorable leasing conditions.
 
4. Leasing Activity is Robust: With new developments and a thriving economy, leasing activity peaks. Companies scramble to secure space, often agreeing to higher rates and fewer concessions.
 
5. Developers Over-Build: Eventually, enthusiasm leads to overbuilding. Developers, eager to take advantage of the booming market, construct more spaces than the market can absorb.
 
6. Vacancies Increase: As the new spaces come online, the market shifts. The supply of available buildings starts to outpace demand, leading to increased vacancies.
 
7. Time on Market Expands: With more options available, properties take longer to lease. The average time a building sits on the market extends as businesses take their time to choose the best deal.
 
8. Concessions Appear: To attract tenants, landlords begin offering concessions—such as free rent periods, tenant improvement allowances, and other incentives. These concessions aim to make properties more appealing in a competitive market. By the way, this is where we are. 
 
9. Prices Soften: As vacancies continue to rise and concessions become standard, lease rates start to soften. Landlords adjust their pricing expectations to align with the new market reality.
 
10. Demand Returns: Over time, the lower prices and favorable leasing terms attract new tenants. Businesses take advantage of the softened market to expand or relocate.
 
11. Vacancies are Absorbed: As demand picks up, the surplus of vacant buildings gradually diminishes. The market starts to balance out, with supply and demand reaching equilibrium.
 
12. Rents Start to Grow: With vacancies absorbed and demand steady, rents begin to rise again. The cycle comes full circle as the market moves back toward a landlord's market, setting the stage for the next economic cycle.
 
Conclusion:
Understanding these stages helps businesses and investors gauge the ever-changing industrial real estate market. By recognizing where we are in the cycle, you can make informed decisions—whether it’s the right time to negotiate a lease, start a new development, or make strategic investments. In today’s market, with lease rates softening, it’s essential to stay informed and adaptable. The key to success lies in anticipating the next phase of the cycle and positioning yourself to take full advantage of the opportunities it presents.
 
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.