The Trades

Today takes on a personal note from several perspectives. First, on my industrial deals, I’ve worked with general contractors and their sub contractors for over four decades. Secondly, my neighbor Rudy - my biggest fan and occasional column critic - made a great living working for Arciero Brothers. Their specialty was concrete work for massive tilt ups, multi family buildings and office towers. Rudy managed projects for them until his retirement. And finally, my wife and I are on the home stretch of completing a remodel of our house - a much needed freshening of a forty year old structure. Freshening is a bit like saying - some moisture recently - to describe the deluge of rain we’ve received this month in California. Yeah. We took the exterior down to the studs and replaced aging siding, drafty windows and cracking doors. We added square footage and remodeled interior finishes. The end result is amazing - but oh what a journey! Rudy suggested I write a column about the contractors - trades - that brought the completion forward. Jobs such as ours - tiny in comparison to the construction of a project of new logistics buildings - employs so many people. Allow me to elaborate.

Let’s take one of the new developments in the Inland Empire as an example. First, a land owner must be willing to sell. Then a developer must be willing to buy. Their dance is choreographed by folks in my profession - commercial real estate brokers. Generally, both seller and buyer have representation.
Once the points of the transaction are hammered out, an attorney or two enters the fray to insure the writings match the letter of intent and any verbal agreements.

A fully signed contract now transfers to an escrow company for execution. Title is involved to issue a preliminary report of things such as loans, liens, and easements affecting the ground.

So far, I’ve counted four professions in addition to a buyer and seller who’ve touched this deal - and it’s just underway.

Architects, soils engineers, civil and structural engineers, environmental people, city personnel in planning, building, police, fire, and council members all have a part in the opening acts. Six more professions and city employees are involved and the property hasn’t changed hands.
Someone must be willing to finance said project during its acquisition, construction, and hold period if leased. Loan brokers, banks, insurance companies, and lenders complete the encumbrances. Another profession gets a taste.

Once escrow closes, entitlements are completed and a building permit is issued. Now the fun begins as our project can go vertical. A general contractor is engaged to build and he deploys legions of sub-contractors including concrete, electricians, plumbers, carpenters, structural steel erectors, crane drivers, pavement, glass, roofers, heating ventilating and air conditioning, framers, drywall, landscapers, flooring, and many more. The number of jobs created by just one new industrial project is in the dozens. And that’s just one example.

Imagine the number of families supported by new construction. Thousands! And I’ve not mentioned the trades needed for day to day repairs and installations.

By the way, these are good jobs - capable of options for those employed such as saving for retirement, purchasing homes, sending their kids to great schools, and sponsoring awesome vacations. Many are unaware of the career opportunities available in the trades. It seems some believe college and management positions are the way. Certainly nothing against that path as it rings a familiar tone. But, you’ll know I’m right next time you need a plumber on Sunday or that faulty breaker trips. The helpless feeling of “whatever it costs - just restore my electricity” will resound. We once were a society that built stuff and lauded those who swung the hammers. I for one would enjoy a return to those days.

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.
 
 
 

2023 Predictions

Yes. I’m feeling the pressure - as last week proved I was quite prescient in my prognostications for 2022. My crystal ball was in fact clear. Good thing it dropped before 9:30 this year as I was snug in bed by then. But I digress. So akin to those holiday goodies you gorged and now have resolved to avoid - here is yet another prediction column for commercial real estate.
 
Industrial real estate. Third party logistics providers will give back space. If you’re unfamiliar with the term - 3PL or third party logistics provider - allow me to explain. Simply, a 3PL is an outsourced warehousing service. Say you’re a company that needs to get your product distributed to Walmart but don’t have the space or inclination to do so yourself. Enter the 3PL who will charge you - by the pallet - to receive, store, re-package, and ship your goods for you. For the past three years - to keep up with the demand of online shopping - 3PLs thrived and leased hundreds of thousands of square feet of logistics boxes. With the “de-inventorying” currently occurring, these providers need fewer square feet. But there’s an issue as many signed term leases which still have time to go. Therefore look for much of this excess to enter the market as sublease space.
 
Recession? I vote no. How’s that for contrarian thinking! Here’s how I read the tea leaves. The Fed came out with guns blazing last year with three .75% and one .5% rate bumps. As we’ve discussed, this increase affects the rate in which banks borrow. The theory is more expensive money will cool a white hot economy as businesses will re-think borrowing for expansion. If you look at Gross Domestic Product or GDP for the third quarter of 2022 - it actually increased over Q2. By the time you read this, we’ll have a glimpse as to how the fourth quarter fared. Now couple that with core inflation which has declined for several months. Finally, retailers are shedding inventory as mentioned above. In fact this is deflationary as things are on sale. Now some might counter by opining - we’ve not felt the full impact of the Fed rate increases, folks are spending that idle cash left over from the pandemic, and massive layoffs await. We’ll see. I choose to believe in the resiliency in the US economy. Plus. Did you visit a mall, restaurant, or attempt to book a flight during the holidays? Bedlam!
 
Return to the office. Much has been written on this subject. We’re starting the third year since all of us were forced to return to our spare bedrooms. Remember that fateful day in March of 2020? Like yesterday! Fortunately, our team had spent the previous few months figuring out how to duplicate our desktop mobily. Did we have insider scoop? No. We just wanted the flexibility to do stuff in a client’s lobby, our dining room, or the front seat of our car without losing productivity. We were lucky. When the order came - we simply unplugged, drove twenty minutes home and plugged back in. Many were not so lucky and found themselves grappling with how to remain viable. Others simply ordered a bunch online and ate alot. I heard this from a friend. 😎I predict workforces will return to the office this year. Sure, a hybrid model will be employed where - as an example - Tuesday-Thursday will be office days and Mondays and Fridays will be optional work from home.
 
Retail. A continuation of the experiences that brought us back to brick and mortar stores in 2022 will continue. As examples. On a recent visit to Main Place, we were serenaded by era dressed carolers, and our grandsons thrust into a cube of stuffed animals as human claw machines. I’ve never seen the place so packed! My wife and I commented - what recession? Sans these experiences, however, I’m afraid the on-line shopping is easier. What’s avoided are out-of-stocks, surly clerks, crowds, and no parking. Speaking of Main Place. Our favorite parking spaces are now consumed with a multi family building which is under construction. Providing your own customer base and foot traffic - once the units are fully occupied - is always a great idea. But how cities choose to eliminate tax basis while at the same time increasing police and fire service remains the tug-of-war.
 
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.
 

Advice We’re Giving These Days

It’s been said March comes roaring in like a lion and leaves like a lamb. Metaphorical for the weather patterns experienced - this can be said for our commercial real estate market this year.
 
Shaking off the cobwebs of a post pandemic hangover, 2022 started with great momentum - only to be cooled mid year. We received some decent economic news of late with the consumer price index not increasing as fast and some major retailers posting better earnings than expected - but our path forward still remains murky.
 
So what advice are we giving to tenants, investors and occupants who own? Allow me to categorize each.
 
Tenants. We recently recommended a client of ours renew for a short period of time - six months - to gauge the market trajectory. Our tenant is faced with a lease expiration at the end of this year and we’ve been watching what’s become available for several months. His options to relocate were limited and we’d even created a plan B to stay put if we didn’t see some loosening. Low and behold - we noticed a trickle of new buildings hitting the market in October. Now it’s running about three per week. If you’re looking for space - this is a vast improvement versus six months ago when we were lucky to see one every three weeks. Another interesting metric is the asking rates have declined. Gone are the days when a new avail was swept up before it was widely marketed. Every new deal was a new high. Not anymore. Our advice centers around our belief of future softening. Tenants are becoming valuable again - especially if they pay on time and are easy on the building - which our clients is. What’s causing the increase in supply? Some businesses, faced with the new rent structure are headed out of state or out of business. What’s left in their wake are vacancies.
 
Investors. We see two sets of motivation these days - tax deferral and non. Unless motivated by tax reasons - it may be wise to put your money in short term treasuries - two years - and wait for the right opportunity to come along. Institutional capital is largely sidelined and occupants are priced out. Private investors rule. If belief suggests a softening of rents in the face of rising interest rates - values can only decline. Will there be better deals mid 2023 than today? Our opinion is yes. Certainly, if your investment is dictated by tax deferred timeframes - you either transact or pay the gains taxes. But remember, the impetus of those buys was a sale. Our sense is they’ll be fewer equity sales as values have declined or the market’s evaporated - leading to fewer tax fueled purchases.
 
Occupants who own. We saw a voracious appetite from institutional capital targeting these arrangements. Their pitch was a sky high purchase price in return for a leaseback of two-ten years. This activity peaked in June. With the uncertainty of recession, inflation, and rising rates - these deals weren’t as attractive. With more lease deal hitting the multiples - our prediction is some of these owners will need to sell - especially if faced with a refinance bullet or a shortage of dollars necessary to refurbish the building into rent ready condition. Once again. Patience is key.

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.
 

A Conversation with Jeff Ball, CEO of the Orange County Business Council

Recently, I had the privilege of participating in a panel of Commercial Real Estate professionals at the Cal State Fullerton economic forecast luncheon held at the Disneyland hotel.

Moderating the panel was Jeffrey K. Ball, CEO of the Orange County Business Council and former CEO of Friendly Hills Bank.

Our conversation was followed by my invitation for Jeff to attend a group meeting of business professionals with whom I network. We meet monthly and discuss trends in our respective fields of commercial real estate, banking, law, human resources, information technology, accounting, peer to peer coaching, investment banking and fractional C-suite interaction.

You might wonder why the meetings? In my experience, my clients (owners of closely held manufacturing and logistics businesses) are touched by all these professions and yet we don’t compete, we complement. I’ve found great value in understanding their worlds.

But in this meeting, Jeff was our guest to describe his mission at the Orange County Business Council. If you’re unfamiliar with OCBC, here’s a brief overview I curated from its website:

“Orange County Business Council works to enhance Orange County’s economic development and prosperity to preserve a high quality of life. For more than 125 years, it has promoted economic development and served as the voice of business in America’s sixth-largest county. OCBC serves pro-business interests so that the region’s vibrant economy continues to expand, bringing the benefits of prosperity to every corner of the county.”

Jeff is quite engaging and passionate about his role. He described the tenets of the group: advocacy, research and networking events — of which the economic forecast was one.

With economic development serving as an overarching umbrella from which our county grows and prospers, we spent time discussing the retention of business within the county, attracting new companies and expanding existing firms here in Orange County.

Some of what Jeff chatted about includes showcasing Orange County during the upcoming Olympics by offering a tour package including beachfront hotel stays, amusement park and museum passes.

We also talked about how the 34 cities within our county can use the council and its available data as a repository for available manufacturing and warehousing space.

Finally, Jeff said he plans to place much emphasis on the council’s role in economic development through leadership, strategy and execution. 

All of this doesn't come without its share of challenges, he noted.

He shared how the county faces a housing shortage which causes affordability issues. In order to keep the best and brightest of our young people, he said, the council and the county will have to figure out how to add new housing while dealing with NIMBYism, CEQA, and the regulatory maze of getting new housing entitled and built.

OCBC and Jeff will help with these efforts by focusing on pro-business candidates. Advocacy in the areas of clean water, cutting edge technology, safe streets and highways are just a few ways Jeff said OCBC is taking charge.

Our business roundtable found Jeff to be knowledgeable, resourceful and well qualified to set the vision and execute the strategy of the OCBC.

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.

An Investor Briefing

I consume a ton of economic news each day, week, and month. Maybe it’s my degree. After all, I do have a Bachelor of Arts in economics. It could be I’m smitten with numbers. Or possibly, I believe having knowledge of the broader economy - not just what’s happening locally makes me a better resource to my clients and prospects.
 
Recently, I delivered a briefing to my investors which I believed was column worthy.
 
Macro economy. If you watch CNBC, attend conferences, read this publication or the Wall Street Journal - you know the Federal Reserve is on a tear to tame inflation. Their only hammer to tamp down the nail is to systematically raise the rates banks pay to borrow. For years this rate was next to nothing but now hovers around 3.5%. Plans are for this rate to eclipse 5% by year’s end. The hope is that by doing this the supply of money will be choked - causing it to be more expensive. How does this trickle down to the pump and the grocery checkout line? With less money circulating, the theory is competition for purchasing will also lessen thereby causing downward pressure on pricing. In short, this takes time. Consumer interest rates have also risen. A mere year ago, you could originate a thirty year mortgage of around 3%. Now it’s over 7%. Still historically cheap money but not compared to last year. And finally, we have an economy poised for recession - some believe we’re already there.
 
Commercial real estate asset classes. Folks continue to buy and consumer confidence is bustling. Certainly the way in which dollars are expended was forever changed by the pandemic. Savvy retailers who provide an experience are thriving. Those who simply sell things are struggling. Thus the state of retail.
 
If our economy should truly recess in 2023 - a return to the office might be the unintended consequence. Getting more from fewer and having them close could stem from a downturn. Expect headcount to reduce in 2023. Look at big tech such as Twitter, Meta, Alphabet, and Apple - preemptively planning for a reduction by mass layoffs.
 
The drivers of the huge uptick in industrial demand are cooling. Because we’re back to work and not strumming our keyboards means less on hand inventory is needed. The big retailers have commenced the purge. Third party logistics providers - especially that cater to folks who sell things - need less space.
 
All asset classes are experiencing a rise in capitalization rates - the percentage that defines your return on an all cash basis. The question is - what’s causing the bump? Some opine as the cost of borrowing increases - cap rates must climb lest there be negative leverage. You’ll find a school of thought believing it’s all about fear and greed. As interest rates rise, uncertainty is created which causes some investors to tap out - fear. With the buyer universe smaller - less competition - pricing must be reduced to generate activity - greed. I believe it’s a combination of both. We’ll see less equity selling in 2023.
 
Commercial real estate micro trends. Manufacturing and logistics buildings are still in extremely short supply. 99 of every hundred buildings is occupied. Rents for class-A industrial are now over $2.00 per square foot. For context - those rents were only $1.00 in 2021. In Orange County, many exhausted manufacturing campuses have been retired. Once bustling operations such as Kimberly Clark, Beckman, Schneider Foods, Kraft Heinz, Boeing, and National Oilwell Varco have been replaced with monster boxes to fill the pressing need for the new purchasing paradigm. Repurposing aging research and development campuses has found favor with many developers. Examples include Ricoh, Bank of America, OC Register, and locations along Imperial Highway in Brea.
 
What are tenants thinking. Companies that occupy buildings and pay rent are bracing for impact. As mentioned before, class-A industrial rents hovered around $1.00 per square foot only a year ago. They’ve since doubled. Operations whose lease payments comprise a small percentage of their overall cost structure are taking the increases in stride. But, closely held businesses are realizing increased rent will reduce their margins and may not allow for hiring, equipment purchasing, or acquiring a competitor.
 
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.
 

Should you make a Long Term Commitment in These Times?

I once authored a column entitled “Worst mistakes occupants make”. Among these are - buying when you should lease, leasing when you should buy, signing a short term lease in a downward trending market, or signing a long term lease in a peak market.
 
To review.
 
Buying. A new, rapidly growing business generally finds a better fit leasing for a term than investing precious operating capital into a static purchase of real estate. Conversely, if the company has been around awhile, is privately owned, has generated a profit for the last two years, has an ownership structure that can benefit from depreciation, and can afford the down payment and debt service - enormous generational wealth can be created by owning the facility from which your enterprise operates.
 
Leasing. When an economic outlook is fuzzy - most operations hedge by making short term lease deals. In fact, much can be gained doing the opposite - think contrarian. While the world zigs - you should zag. But, I have seen companies goof by signing term leases when things are frothy only to see the monthly amount they pay be dramatically greater than current rates - and they’re locked.
 
Most would agree we are in a changing market with respect to industrial real estate. Those occupying retail and office spaces are way ahead of us as their markets morphed years and months ago. With retail it was pre-pandemic and office as a result of the pandemic. But, now here we are with an uncertain future for manufacturing and logistics spaces.
 
So, if you lease an industrial building and you are approaching a renewal - what strategy should you employ? Assuming the space still works for you - location, size, and amenities - feel out your owner. How does she view the current conditions. Is she bullish, bearish, or running for the exits? If she falls into category two or three - she’s probably willing to forego a risky vacancy in favor of constant cash flow. Read - make you a deal! Another idea is the “blend and extend”. We saw a ton of these used in the early 2010’s and they exchange a lesser rate today in exchange for additional years added to the lease term. Both are effective. Just know your owner, know your alternatives, understand your cost to relocate, and finally - be familiar with the cost to replace your tenancy.
 
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.

A Conversation with a Private Investor

Investors in commercial real estate come in different shapes and sizes. Recall, I define an investor as one who relies upon the rent an occupant pays for her livelihood. All investors - institutional, public, or private have in common this requirement - a paying tenant. You may be wondering. Do investors ever buy a vacant building? Sure. But trust me. They understand the time and expense necessary to originate a tenancy. If they miscalculate - there goes the return on their invested dollars. And this loss can never be recouped.
 
Recently, we were engaged to assist a private investor redeploy proceeds from the sale of another piece of commercial real estate. He’s deferring the gain through use of a 1031 exchange. If you’re unfamiliar with an exchange - here’s a brief description. A seller transacts. The proceeds are placed with a qualified intermediary. Time starts. Replacement(s) must be identified within 45 days and purchased the earlier of 180 days from close or the filing date of next years tax return. An equal amount of dollars and debt must be spent on a like kind income property(s). If orchestrated correctly, the income taxes on the gain are deferred. Simple. But, please consult your tax, accounting and real estate professionals before undertaking.
 
Last week, we toured a couple of alternatives and I believed our conversation was column worthy.
 
While his sale property was in escrow, we spent a couple of meetings discussing his qualifications for the buy. What emerged was a desire to acquire a single or dual tenant industrial building with a triple net lease. The return should be north of 4.5%, and should provide a reasonable remaining lease term. Credit of the tenant is important and the rent being paid should be at or below market.
 
First on our list was a single tenant property that could be divided once the tenant vacates. Currently, the building is occupied by the owner who is moving out of state. Because his new business home is not yet completed, he is looking for a short term lease back of a year to 18 months.
 
After the first property visit we looked at option number two. The occupant of the building was once owned by the owner of the building. We frequently see this when a business owner decides it’s time to cash in the chips but sees merit in retaining ownership of the real estate. In this case - it’s now time for the owner of the real estate to move her money into a more tax friendly state - therefore her motivation to sell. Encountered was an operation that has a significant amount of money invested in the infrastructure of the building and 4 1/2 years remaining on their term of lease. Located in an emerging area - but not quite mature - one could sense we were pioneering a bit.
 
So here’s what our client had to say about both alternatives.
 
He really likes the first building we looked at although he understands an amount of money for re-tenanting the building must be considered. After all, this will be addressed in early 2024. Our client was concerned that the owner of the building has time until his new building is completed and therefore might not be terribly motivated. Additionally, the owner had unrealistic expectations of the property’s worth especially based upon the economic storm clouds we see massing on the horizon of inflation, rate increases and the threat of inflation. He’ll offer, but at well less than the ask.
 
On to the wild, wild west. We discovered the owner of this building would like to carry a loan. If favorable terms can be negotiated, this could actually be a win. Because the property is located in a developing area, the term of lease becomes critically important. Insufficient are the 4 1/2 years that remain. Consequently, we will ask to have a longer-term deliver to us upon the close of escrow.
 
Ok, nets cast. Time to harvest the bounty of investor interest.

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.

How will we Know When the Market Changes?

Much has been written lately about economic storm clouds massing on the horizon. If you doubt what I say, pick up any periodical, listen to talk radio or a network news broadcast and mentions of inflation, interest rate hikes, and the Fed’s remedies will abound. Akin to a desert monsoon that starts with a puff of clouds and morphs into something larger - everyone senses the deluge is coming but are uncertain how extreme the soaking will be. Full disclosure. Neither do I. 

 
Certainly, my years of experience and witness of several downturns can add credence. But, the reality is all are different in their causes. Take 1990-1994 as an example. Loose lending by savings and loans and their ultimate demise, over building, and Iraq’s invasion of Kuwait catalyzed the boom years of the late eighties to a screeching halt. 
 
How about 2008-2011? Easy money to unqualified home buyers coupled with another spate of massive construction starts was ill prepared for a pause in the music. Many were left without a chair as the financial markets froze and lending ceased. 
 
Today, the culprits are the pandemic which left us home bound and computer key happy, stimulus checks, and supply chain clogs. The classic case of too many dollars and too few goods took effect causing consumer prices to spike. Not since the Carter years have we seen inflation this high. 
 
Caught in the crossfire is real estate - commercial and housing. Housing has started to slow as buying power is directly impacted by pricier loans. Even though inventory of homes for sale is low - offerings are sitting around longer and the frenzied pace of January 2022 is a distant memory. 
 
So when will we know the commercial market is slowing? The following will provide some guidance. 
 
As I’ve mentioned, commercial real estate trends follow residential by 12 to 18 months. But we’ll sense a slowdown soon - if it’s coming. 
 
First, listings will languish. What flew off the shelves earlier in the year will take longer to lease or sell. Recall, our vacancy is at historic lows. So, this won’t happen next week. But, maybe an offering that generated multiple offers will settle for one or two. 
 
Next, owner motivation will shift. The longer a vacant building lays fallow, the more desire an owner will have to fill it. 
 
Pricing will stabilize and then decline. With occupants on the sideline, owners will be forced to deal. One way to do so is through a reduction in asking prices. 
 
As rents adjust, so will values. Recall, the price an investor will pay is a return on the lease check a tenant writes each month. A decline in this amount coupled with an upward move in capitalization rates causes the price per square foot to decrease.  

Believe me, I’m watching all of the above quite carefully. Just today - while guiding a tour - the conversation centered around “where are we going” as it pertained to our owner’s situation. Yep. An entirely different rhetoric was rampant a mere three months ago. 

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.

Random CRE Thoughts

Occasionally, it’s cathartic to empty the cache of our consciousness. Today is that day. As someone famous once opined - they’re only thoughts but they’re random and all mine. So with no further adieu, here goes!
 
Lee and Associates Summit. Last week we found ourselves at the Encore in Las Vegas for our annual soirée - AKA the Summit. Participants from all over North America and the UK attended. 2020 was scrapped entirely. 2021 was virtual. So this was the first time we’d been together since 2019. MUCH has changed - including a supercharged industrial market, an uncertain office environment, and a morphing retail experience. I should mention, our technology tools have also improved. Months of lockdown will do that to an industry.
 
Highlights from the industrial panel featuring professionals from the Rockefeller Group, Dermody, and Prologis follow. Institutional property owners are wary of inflation, a pending recession, and what impact both will have on cap rates. All agreed - industrial has been the darling and even if all of the new projects under construction laid fallow - our vacancy would still be skimpy - around 5.5%. Fuel conservation, automation, and taller and more efficient inventory is in our future. With the advent of self driving trucks - truck courts may be shorter.
 
Technology use in commercial real estate has lagged our residential counterparts. Since a house purchase is largely a consumer transaction vs a business deal - target rich social media sites are not as plentiful. Plus, we don’t share our available inventory and lease comps through a realty board clearinghouse. Therefore, we’ve been slower to adapt. We’ve witnessed a large consolidation of tech providers as evidenced by Lightboxes acquisition of ClientLook, Real Capital Markets, and Digital Map Products. Also, Buildout recently added Apto, Rethink CRM, and Prospect Now. No one dares to take on the big Gorilla - CoStar however. Some in the audience wondered if the broker would ultimately be ousted? Consensus was more money CSM be made selling to brokers vs replacing their role.
 
Who knows where we’ll be next year. Most agreed Las Vegas is tough to beat for its travel ease, entertainment, and massive convention know how. It is a tough schlep from the East however.
 
My foray into the Orange County office world. As readers know, my expertise centers upon manufacturing and logistics buildings and the family owned and operated companies that occupy them. I don’t seek office assignments, but occasionally they find me. Our current task is an offshoot of an industrial deal. You see, we were engaged to sublease a building’s warehouse. Planned was for the tenant to remain in the office portion. As our campaign unfolded - two groups emerged who wanted both - the warehouse and office portion of our offering. Now the operating group is considering a move into a suite of offices. Therefore, we toured eight suites in five buildings over the past week. The office world is changing to meet an evolving workforce. Open collaborative spaces are vanishing and returning to banks of private areas. After all, virtual meetings require privacy. Outdoor space is sought for respites, meetings, and functions. On-site amenities such as conference areas, fitness centers, and game rooms are cropping up. Corporate America is considering amenities in office buildings as a way to attract new workers and convince existing ones to return. Quite interesting turn of events, indeed.

 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.

Mechanics of a Build-to-Suit

Negotiations are underway - actually we have a signed Letter of Intent - on a large logistics building outside the Southern California basin. Our client plans an expansion of their operation into this location. The lure of less expensive land and fewer city restrictions hooked us. The lack of supply nearly capsized us until we decided to buy land and build - AKA a build-to-suit.
 
Recently, we sold a building located out of the state of California. Our client is an investor who purchased the Texas building to affect a tax deferred exchange.
 
Cash flow, ease of management, and the multi year lease had appeal to the buyer. For the next 10+ years, our client will enjoy clipping the coupons of rent payments. 
 
The building is leased long term to a Fortune 500 company. A build-to-suit was accomplished for the tenant four years ago.
 
So, what is a build-to-suit and when should one be considered? I believe one or more of the following circumstances would dictate building new versus buying or leasing an existing building.
 
Lack of availability. Industrial vacancy in Orange County, California is the lowest in history. 99.5 of every 100 manufacturing and warehouse buildings are occupied. And if your desire is Class A - in many cases there is no supply. If your company needs to grow into a larger building, chances are you'll be hard pressed to find one. The lack of available buildings should suggest a good climate for a build-to-suit. The trouble is - there is very little undeveloped land in the county. Even if you wanted to build a building, no vacant land exists to accommodate the build. In the case of the Texas building above, there were NO vacant buildings within the desired city - but a surplus of affordable, available, buildable land sites. Thus, the choices were - build or consider another city.
 
Special purpose building. This is similar to the circumstance of "lack of availability" yet very different. If you are patient, and occupied buildings are present in your market, eventually one will lay fallow, create a vacancy, and need a new occupant. A special purpose building contains features that don't exist in the market - a warehouse with 40' ceilings, or a building with acres of excess land for outside storage, maybe one constructed to store highly combustible or explosive contents. Our Texas building required two of these - VERY high ceilings and acres of excess land for expansion and trailer storage.
 
A unique deal structure. Recently, a grocery distributor required a class A constructed warehouse building in a size that didn't exist in the city they desired. Additionally, the occupant wanted to own but couldn't afford to purchase land, build the building and carry the debt on a building under construction they couldn't occupy until completion. The solution was to interject a developer who purchased the land, built the building, leased the building to the grocery distributor and granted the occupant an option to buy the building once completed.
 
But, be wary of the following issues.
 
Lotsa lead time. Few if any occupants can predict their space needs two to two and one half years in advance of a move. However, you must allow this much time to complete a build-to-suit.
 
Complete understanding of the mechanics. The basic structure is - land is owned or purchased, new construction is planned and permitted, building is built, new construction is occupied. Easy, right? Yes, if you own the land, already have the plans drawn and permitted, have a bucket of cash to spend on the construction, and don't need the building for several months. Complexity is added with each un-checked box.
 
Financeability. You need to understand how the financing of a build-to-suit works. I could write an entire column on this subject, however, some of the highlights are - vacant land will generally need to be purchased for cash, a construction loan will precede the permanent loan, a couple of appraisals may be needed, land owners won't allow their loan (if seller carried) to be junior to a construction loan - are you yet confused? Exactly - not a simple transaction!
 
Understanding you will pay more. I would encourage you to take a look at the reasons you will pay more to occupy a new build vs. an existing building. In short the reasons are - land prices, soft costs, entitlements, time value of money, financing, economies of scale, and market forces.
 
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.

Inflation Fears

Inflation is a ugly tax that reduces the buying power for all Americans rich or poor.
 
Granted, those at the upper echelon of earnings may not feel the pinch of those making minimum wage but there is an impact nonetheless. Our current inflation rate is running at an annual rate of over 8%. We’ve not seen that since the Carter years in the late 1970’s!
 
Clearly, all that we buy is not considered. Take industrial real estate rents for example. A small percentage of our society leases manufacturing and logistics buildings. But those that do and have the unfortunate timing of a lease expiration are experiencing a doubling or tripling of their rates. You read that correctly. In many cases we’re witnessing a 100% increase in that check you write to your landlord! Wow. We’ve seen rents increase close to 31% annually since the doldrums of 2010.
 
Why you may be wondering? Really it’s a simple case of too few available spaces (supply) to fill expanding business operations (demand). Owners are bullish and press rents. After all, where is the operation going yo move? In order to compete and win a deal, asking rates are often exceeded. We launched a lease listing three weeks ago. Bettered by 30% was our offered monthly amount.
 
Good thing commercial lease rates don’t factor into the metric of annual inflation percentages. Or do they? You see when a business - that leases an industrial address - sees a dramatic pop in one of its costs - that cost must be recouped somewhere.
 
Labor - especially skilled workers - was in short supply before the pandemic. Now that we’re back to work, companies must pay more in salary, benefits, and perks to attract and maintain quality employees. Therefore, another layer of costs is added to the product made or shipped.
 
What about fuel? A manufacturing company must receive raw materials to build its wares. Said components arrive via trucks that burn…yep! Diesel fuel.
 
So rents, labor, and delivery expenses are all spiraling out of control. Consequently, in order for an enterprise to remain profitable it must charge the consumer more. And the beat goes on.
 
Our government - in an effort to quell inflation has adopted a strict policy of increased interest rates. Now, on top of rents, labor, and materials - the cost of money is higher. When the Fed tightens credit by charging banks more - the trickle down to consumer prices eventually crashes home.
 
Buying power is further reduced. Just look what’s happening to housing. When a home buyer must pay more for a thirty year mortgage - the price they can afford goes down. Sure. A share of homes is purchased all cash - no loan. But when does that end?
 
You now start to understand why Amazon is curtailing expansion and why Target and Walmart reported abysmal earnings last quarter. The folks that buy things can’t afford as much.
 
Short term? More pain is on the way as the pendulum swings. But, know. Inflation fears will pass. Our last bout was followed by the greatest economic expansion in our nation’s history.

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.

Status Update on 2022 Predictions

I normally wouldn’t do this in May. Typically, I’d wait until next year to do a look back on my 2022 predictions. However, things are moving so fast these days - a year is eclipsed in 90 days. And by that I mean the stodgy, slow moving old business of commercial real estate is progressing at warp speed and is vastly different than it was in January 2022. With inflation at a forty year high, a Russian invasion of Ukraine, wild stock market gyrations, political unrest, and folks back to work - we are witnessing life altering changes in our world. So, I believed this check was important.
 
2022 Prediction - Industrial rents. They’ll increase. Next bullet point. However, I’ve a few more words, so stay with me. We track Class A inventory for an upcoming assignment. What’s that, you may ask? We describe Class A inventory as buildings constructed since 2000. In this way we are able to weed out functionally obsolete structures that may exist in the market. In Orange County, there are eight new developments proposed or under construction totaling over 2,700,000. A staggering number until you factor in what’s available today. Ummm. That would be one. That’s correct! One available. Demand is still strong so nowhere for rents to go but up. Update - I’m shocked to see industrial rents surpass two dollars per square foot triple net. Just to put this in context, industrial rents in 2010 were approximately 25% of this. Yes! That’s correct 25% of what they are today.
 
2022 Prediction - Developer appetite. With industrial rents increasing, interest rates still low - that will change this year - plentiful capital seeking a place to reside, and an acute shortage of land from which to produce concrete caverns - a conundrum continues. An industrial development at your neighborhood Sear’s store? A campus built for industries who’ve left the area? All will be targets this year. Update - Developers still have ovation appetite for sites with which to add value. There are rumored to be several in play presently at absolutely eye-popping land values. More on this to come.
 
2022 Prediction - The office. No, not the series - the market. Recently, I read this with interest in these pages - “A new report from Ladders, a career site for high-paying jobs, says things will likely stay that way. In fact, Ladders predicts that 25% of all professional jobs that pay $80,000 or more will be remote by the end of 2022.” Wow! My suspicion is it will be greater than that. Anecdotally, take our office as an example. We own a 21,700 square foot, two story location. We occupy the upstairs and a portion of the down for about 13,000 square feet. When locked and loaded - 49-52 folks commuted in each day. Now? Probably half regularly attend. My team works remotely as do others. Adjusting to this change will be smaller footprints and more multi-use spaces. Update - there is some talk among the big players that a return to the office is eminent. Mention frequently is the difficulty in maintaining a culture with a remote workforce. We haven’t experienced this so much in orange county. I believe we are headed for a hybrid between remote and in person office occupancy.
 
2022 Prediction - Retail slowdown? We all know that, big fella. How’s that prescient? Actually, what slowed during our two year pandemic fueled sabbatical were trips to the store. Retail sales actually increased as we bought tons of stuff from our home keyboards. But, one of our clients, corporately based in NYC, is a tremendous gauge on the brick and mortar retail business. By that I mean, destinations such as Wal-Mart, Costco, Burlington, and the like. He’s sensed a REAL dip and predicts more to come. So we’ll see. Update - as you may have read, the largest e-commerce retailer – Amazon - recently put the kibosh on 200 projects in process. Their earnings are predicted to decline by 3% and they admitted they have over built their storage capacity. Consequently, any Amazon deal on the margin was postponed. What this foretells about brick and mortar retail will be interesting to observe.
 
2022 Prediction - Stagflation. What on Earth is that? According to Wikipedia -“In economics, stagflation or recession-inflation is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actions intended to lower inflation may exacerbate unemployment.” Hmmm. Inflation rates, high - check. Economic growth slowing - check. Unemployment high - check. By the way, you may be thinking - I thought unemployment was low, currently. Actually, the percent of the workforce NOT working is high. The statistics reported are only those who’ve filed claims - quite misleading. Update - Wow! That didn’t take long. With inflation running 8% annually and a decline in gross domestic product for the first quarter we already are in a stagflationary period. Not since the Jimmy Carter administration has this been a thing.
 
Things I didn’t foresee: The invasion of Ukraine, the dramatic Amazon slow down, two dollar industrial rents - were all not on my radar in January 2022. Now you understand why a first quarter update was important.
  
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.