Advice I’m giving these days

As I pen this, it’s Good Friday and Passover. Happy Easter and Zissen Pesach! Most of you have folks from whom you solicit advice. Those of you who own a business most likely get counsel from a banker, attorney, or a CPA. Others may seek wise words from priests, clergy or a sage family member. And finally, maybe you get direction from Tik Tok, Facebook or Instagram. Regardless, you rely upon a trusted advisor. I am such a source for many of my clients. Today, I’d like to review some of the advice I’ve given this week and the situation that preceded the request for counsel.
 
Lease renewal on preset terms. We originated a lease in 2017. We are the owner Included in the transaction were five years of term with an option to renew for an additional five. As we’ve discussed here before - options are “personal” to the tenant and must be exercised within a specific time window. Also known as “time is of the essence” - you fail to give your owner the proper notice and you no longer have the option. In this case, the tenant wanted to remain in the building but missed his option window. He also wanted the owner to contribute to some construction expenses and wanted the right to buy the building.
 
So what advice did I give? I recommended the owner renew the tenant at the preset option terms and contribute a small amount of the construction expense. Additionally, I suggested not granting a right to purchase. But why? The family that owns the building relies upon the rent for their livelihood. The tenant wants to remain an keep paying. An interruption of this stream through a costly vacancy plus the expense of originating a new lease would not be offset by a small bump in rent that could be achieved with a new occupant. As to buy rights. These come in several flavors - option to purchase, right of first offer, and right of first refusal - and most favor the occupant. Vs limiting flexibility through a purchase right grant - I offered the owner approach their tenant first if they desire to sell. No commitment to the resident but they’re the most likely buyer anyway.
 
Lease term remaining. I was introduced to a light manufacturing company several years ago. They’ve not had a need for my services but we’ve kept in touch. Recently, the owner made a decision to exit the business she worked hard to build. Trouble was - time remained on her lease and the business buyer only wanted to occupy the premises for a short while - just enough time to relocate the business out of state. This is typical of a strategic buyer who purchases a competitor but has adequate physical plant to consume the operation - thus potentially creating redundancy. Consequently, some time would remain once the new owner of the enterprise vacated.
 
So what advice did I give? Fortunately, the lease rate she pays is dramatically below market - so she has a few paths forward. The easiest is to approach the owner and request a buyout of the remaining obligation. Sometimes a landlord will see a benefit if new tenant will pay more. The buyout is based upon the cost once downtime, broker fees, free rent and improvements are calculated. If that approach isn’t palpable, the tenant can sublease - in this case at more money than currently being paid. Some leases will ding you with a sharing if this profit - so beware.
  
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.