Friday, January 26, 2024

Trends

Over the past three years we experienced changing markets. By that I mean the dynamic between buyers and sellers that sets stage for negotiation and results in transactions. 
 
At the beginning of 2021 - as we slowly awakened from the ether of pandemic lockdowns, two trends emerged - rampant on-line shopping and hybrid work forces. Both of these affected commercial real estate and the three asset classes - office, industrial and retail - in different ways. Owners of industrial spaces - especially those equipped to welcome logistics providers - saw a rabid increase in demand. Fulfilling on-line orders quickly and efficiently required more on hand inventory - read. A place to receive, stage, store, and distribute said goods. 
 
Conversely, as our shopping experiences turned from visiting our local retailer in person to surfing the web - foot traffic to brick and mortar stores lessened and spaces became ghost towns. On the office front, tenants choreographed a thoughtful dance of safety of work forces vs in-office appearances. We realized we could ply our trades from most anywhere - our home, from the front seat of our cars, or abroad - and many did. Therefore, office and retail tilted toward tenants and industrial spaces were heavily slanted in owner’s directions. 
 
As we dawn 2024, the aggressive pursuit of available inventory by industrial tenants has ebbed, investor activity has been reduced to a trickle, and we’re seeing signs of lease rate softening. 
 
In light of changing markets, how should you - as an occupant of industrial space - tender your offers? That, dear readers, is the focus of the balance of this column. 
 
Know the trends. At the beginning of 2023 we counseled  our industrial occupants to watch lease rates. Our prediction was significant softening would occur by the end of the year - and therefore, to transact at the beginning of the year might result in a rate higher than anticipated. Our gamble proved prescient as we experienced a declination of rates - in some cases by 25%. 
 
Know the metrics. A simple review of how many available properties within a certain size range exist versus how many similar properties have leased or sold, is a good way to measure the velocity of a market. As an example, if during the past year three buildings between 25 and 35,000 ft.² have leased or sold, and presently there are 15 available, one could surmise that five years of supply exist. This, of course, assumes everything stays the same, pricing is not reduced in order to spur demand, or something outside our economy causes the need for space to increase - i.e. a pandemic.
 
Understand the owner’s situation. If an owner is currently carrying a vacant building, it’s important to gauge how willing she will be to accept a deal. For someone who purchased the building at the peak of the market with the appurtenant increase in operating expenses, and potentially debt service, her willingness to strike at a number less than her carrying costs might be difficult. By the same token, if an ownership has existed for many years with low operating expenses, and little to no debt - any deal might look appealing. 
 
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.
 

Friday, January 19, 2024

Institutional vs Private

One of my predictions headed into 2024 is that we’ll see an uptick of buying activity - especially from institutional purchasers. Why you may be wondering? For three reasons. Number one. Most haven’t transacted since the middle of 2022 and must to balance allocations. Number two. We should get clarity this year about one of the metrics that determine commercial real estate value - rental rates. Number three. A declining interest rate environment which will make Treasuries less compelling and real estate more so. 
 
Allow me to add color to these three reflections. But first a quick review of my definition of an institutional investor. If you’re a teacher, firefighter, police officer, or work at city hall you can relate to a potion of your paycheck that’s deducted to fund your retirement. Prior to the predominance of 401ks, Private employers also provided pensions and took a slice of your salary to do so. If you pay into a whole or universal life insurance policy - those premiums must be invested as well. All of the above form pools of capital that need returns and are used to buy stocks, bonds, money market funds and commercial real estate. Each asset class has its own percentage the fund managers dictate. Advisors - at the direction of fund managers - use these funds to make buys. Thus an institutional investor. 
 
Now to that promised detail. 
 
Pencils down. When we began 2022, institutional interest in commercial real estate was rabid - especially if you owned and operated a company from your building - you had many buyers knocking on your door. The play two years ago was to purchase the real estate and provide the occupying company a lease-back of preferably two years in duration. Demand during this period of time drove values to unseen levels. In some cases doubling the amount buyers were willing to pay by double. The theory was by 2024, rental rates would far eclipse the lease back amount -therefore, providing a greater return on the investment. However, when the Federal Reserve started to hike interest rates in the middle of 2022 - coupled with global uncertainty - we saw a shift in Investor attitudes. The term, “pencils down“ permeated the industry. For the entirety of 2023 this outlook continued and institutional investor activity was reduced to a trickle. 
 
Where are rents. One of the fundamental metrics in the world of commercial real estate is rental rates. Think of it as the heartbeat of the industry. The coming year holds the promise of clarity in this crucial metric. As I’ve written in the space, rents in class-A industrial in North Orange County seem to have found a level that has spurred demand. So why is this so important? Imagine you're considering buying a commercial property. You need to know how much rent you can expect to charge tenants. If this number is vague or uncertain, it's akin to navigating in the dark. But when you have a clear picture of expected rental rates, it's like having a bright guiding light. Clear rental rate data allows investors to make informed decisions. They can assess whether a property is undervalued or overpriced, which ultimately impacts the return on investment. It's the linchpin that can make or break a deal.
 
Rates. Now, let's talk about something that affects every investor's decision-making process - interest rates. In 2024, we're looking at a landscape of declining interest rates. But why should that matter for real estate? Picture this. You have some money to invest, and you're considering your options. On one side, you have Treasury bonds, historically considered a safe bet. On the other side, you have commercial real estate. Traditionally, when interest rates on Treasuries are high, they're a compelling choice because they offer a relatively safe and stable return. However, when interest rates start to drop, as they're doing now, the risk ratio changes. Suddenly, the returns on Treasury bonds become less appealing, while the potential returns from real estate start to become more compelling. Investors look for opportunities that offer higher returns, and that often leads them to the commercial real estate market. In a world where real estate can provide solid returns in a low-interest environment, the appeal of this asset class becomes evident. It's a shift that institutional investors can't afford to ignore.
 
So to sum it up. 2024 holds the promise of an exciting year for commercial real estate. Institutional investors, with their careful balancing of allocations, eagerly await clarity on rental rates as they navigate the changing interest rate landscape. These factors, when combined, create a compelling case for increased buying activity. 
 
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.
 

Friday, January 12, 2024

Advice I’m Giving These Days

As I pen this, we begin the second week of 2024. National Football playoff matchups are set, the first Professional Golf event is in the books, Washington v Michigan takes center stage for the NCAA football championship - Go Huskies, it feels like winter in socal as temps dip into the thirties at night, the television and movie industry awarded the Golden Globes, and the Iowa presidential primaries are just over a week away which officially begins an election year. Yes! A lot is happening. As 2024 ramps into full swing, here’s the advice I’m giving to my owners and occupants of industrial buildings. 
 
Look at total cost. Generally, our annual transaction mix is around 70% leasing and 30% sales. 2023 was no exception. 2022 reversed that ratio as we experienced a buying frenzy in the first half of the year. But as I mentioned in my annual prediction column last week, I expected some rate softening last year and we got it. For context, let’s use a 40,000 square foot building in the Inland Empire. In January 2023, the prevailing ask was $66,000 per month triple net - rent net of operating expenses. By the end of 2023 it had dropped to $54,000 - an 18% decline. However, ignored in that calculus are the “gross up expenses” of property taxes, insurance, and costs associated with mowing the lawn, servicing the air conditioners, and keeping the roof water tight. These vary widely. For an owner who purchased his building recently, expect these extras to be approximately $6000 per month. The low end - for an owner who’s held title for many years could be half - $3000 per month. Added to our triple net rates and a $54,000 per month cost escalates to a range of $57,000-$60,000. We advise clients these days to consider the “grossed up” rates when comparing alternatives. 
 
Buying. More buildings for sale will hit the market this year. Fueled by vacancies - not experienced in years - some owners will cash out vs originating new leases. We just completed a deal where the owner spent 36% of the leases future income just to attract our client to his building. Downtime, abated rent, beneficial occupancy, refurbishment, tenant improvements, and paying commercial real estate professionals for their representation are among the expenses necessary. We’ll also see sales of buildings to their tenant occupants. I’ve mentioned many times in this space - your best buyer is your resident. What about interest rates, you may be wondering? Some wise person once opined, “you marry the building, you date the interest rate”. Focus upon the price you’re paying. You can always refinance if rates settle lower. Also, consider owner financing. We struck a sale last year using this structure. Encumbered by a long term lease that paid them effectively a 3% dividend - they were thrilled to sell, carry the paper, and get a higher return. Plus, the crush of taxes is protracted. 
 
Expiring lease. If you occupy a building under a lease arrangement and your lease expires sometime in 2024, we advise proceeding with caution - particularly if your lease commenced prior to 2021. Lease rates have experienced an exponential rise, but are now softening. Depending upon pon the nature of your ownership - private or institutional - you may be able to strike a renewal at a rate below that of the market. Pay special attention to the owner’s cost to replace you. Remember the example above where an owner spent 36% of his future income just to secure a resident? Some owners can’t afford to do this and are willing to reduce the rate in order to keep you. Look to class-A industrial buildings as well. our prediction is that these rates will soften and you may be able to get a better building for the price of one that’s a bit more antiquated.
 
Election year. Jonathan Lansner did a masterful job reviewing election year trends as they affect our economy. If you didn’t catch his piece, I’d highly recommend you find it, cut it out, and pin it to your bulletin board. Enough said. 
 
Cap rates. We pay very close attention to a United States Treasury instrument known as the 10 year treasury note. Commercial lending, as well as capitalization rates closely follow this indicator. We started to see a fairly astronomical rise in 10 year notes last year. They reached a crescendo in November topping 5% for the first time in a couple of decades. They’ve now settled back to a more reasonable level of around 4%. Simply, you can invest idle cash and receive a risk free return of 4% on your money. Many opt to do this versus investing in the uncertainty of real estate ownership. For context, this same rate at the beginning of 2022 was a poultry 1.76%. As the 10 year note, falls into the 3 1/2% range, institutional investors shift their focus to investing in commercial real estate, which has the effect of lowering capitalization rates. This could spell a spate of buying activity by the big boys.
 
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.
 

Friday, January 5, 2024

Predictions 2024

Happy new year! If you’re reading this, most likely you’ve already blown two or three resolutions. That’s ok. Just resolve to read this column each week and you’ll be fine. Well. At least you’ll be up to date on all things commercial real estate. Last week, I reviewed my prognostications from a year ago. I must admit, getting a perfect score - nailing all my predictions - was better than watching Alabama return to Tuscaloosa defeated, but I digress. Today, I turn toward our newly minted 2024 and what to predict this year. 
 
Industrial lease rates will soften. This time last year, a client of ours was facing an expiring lease. We tried to find a suitable alternative to move his operation. Nothing was ideal. We advised him to stay put, negotiate a short term fix - 6-12 months and continue our search. His owner would only agree to six months so we had a new deadline - June of 2023. We nearly struck pay dirt in March but jettisoned the opportunity due to its size - just not quite big enough. Once again, we approached his owner asking for some more time. He agreed to extend through December. Our gamble paid off as we secured a suitable building at a 15% discount! Why, you may wonder? Simple economics. We tracked new avails and ones leaving the market and noticed an imbalance. Yep. More was coming than going. We knew someone would drop their rate to secure a great tenant. Expect more of the same this year - especially with Class-A buildings above 100,000 square feet. At last count in the OC - eleven were open for business and seeking a resident. Two left the market last year. Hmmm. Someone will get motivated and make a deal, comps will reset to the new level and the frenzy will begin.  
 
Expect sales volume to increase. The forces outlined in the paragraph above will trickle into the sales world. By that, I mean  an owner awaiting a tenant may choose to sell. A further catalyst could be the underlying debt on the asset. Imagine you’ve originated a short term construction loan to build a class A structure. You considered construction costs, time to build and lease. Your calculus was based upon conditions in early 2022. You’ve delivered a new building into an entirely different market - longer vacancy and lower rates. Your lender might be getting a bit nervous. When will the maturing debt be repaid?Thus pressure to dispose of the new build. 
 
Recession or no? I say no. Last year I took a contrarian approach and predicted we would avoid a recession in 2023. Recall, recession is a decline in gross national product for at least two quarters. I believed in the resiliency of the United States economy, especially the consumer, and we skated by a recession in 2023. As I write these predictions today, the only storm clouds I see on our horizon, are global uncertainty in the Middle East. Specifically, will the Red Sea shipping lane disruption cause inflationary pressures on goods delivered? If this proves to be the case, the federal reserve may be persuaded to delay cuts in interest rates, which are predicted for this year. However, I’m reminded of our status in January 2020. We were rocking along when a microscopic foe sent us to our spare bedrooms. Therefore, beware of the Black Swan event. 
 
Interest rates. Last year, for the first time in a couple of decades, you could actually make money on idle cash. We saw a peak in Treasuries occur last year when the 10 year T-note eclipsed 5%. The rate this morning is slightly above 3.8%. This is good news for borrowers, bad news for savers and could cause an uptick in institutional buying activity. These behemoth money managers are constantly seeking return and might view commercial real estate as a safe haven to earn some additional juice. I believe the 10 year notes will level at around 4 to 4.25% percent this year.
 
Ok. So there you have it. My commercial real estate crystal ball. Best wishes, dear readers for much success in 2024. 
 
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.
 

Friday, December 29, 2023

2023 Recap

Happy new year, dear readers. I trust your 2023 was productive and I wish you great success for 2024. As you read this on New Year’s Eve 2023 - let’s review what I predicted in January 2023 and see how I did getting my Nostradamus on. 
 
In January of this year, I wrote:
 
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. July 2023 update. We’ve seen a fair amount of give back as Amazon started the whittling process in late 2022. The push for space seems to be a lot less rabid than it was in 2021 and 2022. I frankly thought we would see more space returning to the market from third-party logistics providers. Although we’ve seen a bit of this it’s not happened on a wholesale basis the way I anticipated. So this one falls into the category of let’s wait and see what happens for the balance of the year. December 2023 update. The give back continues! I recently pulled a list of spaces 275,000-425,000 in the Inland Empire. Of the 34 available, one third were subleases - companies trying to shed space. Nailed it!
 
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! July 2023 update. I nailed this prediction as our economy has not fallen into recession. Some would say the full impact of the federal reserve’s rate increases have not been felt throughout. I still believe in the resiliency of the United States economy, our ability to innovate, and the seemingly unstoppable consumer. We will see what the next six months holds, but I for one believe that we have “stuck the landing” and will avoid a recession. December 2023 update. We will finish 2023 recession free. Quite miraculous considering what many were saying last year at this time. No one predicted the Hamas attacks on Israel or ten year treasuries topping 5% - briefly in November. Unrest still rages in the Middle East but interest rates have settled in the 4% range. 9 of ten believe we will avoid recession in 2024. I for one hope they’re correct. Nailed it!
 
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. ðŸ˜ŽI 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. July 2023 update. I read with great interest Jeff Collins and Jonathan Lansner‘s columns that appeared in the Orange County Register yesterday. Vacancy throughout office space has doubled since the pandemic in 2020. The new normal is a hybrid workspace with the exception of a few industries. As an example the wealth advisory businesses are back to the office full-time whereas flexible industries such as real estate, healthcare, insurance, are still working remotely. I would count this prediction as a miss thus far but we’ll see what the next six months bring. December 2023 update. Certain industries such as wealth management are back. Other typically office bound crafts - attorneys, real estate professionals and CPAs are not. Nailed it!
 
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. July 2023 update. Brick and mortar retail continues to it astonish me. I recently purchased some items online and chose to return them at the store versus dealing with reboxing and shipping them through UPS. I was greeted with lines in the return lanes that would rival 405 traffic on a busy weekend. One of these was a lower end big box retailer and the other was a higher end specialty seller. Expected would be the lower end store to be busy but I was surprised to see the higher end specialty retailer just as busy. People are traveling! I recently heard a report that the July 4 weekend was the busiest in Los Angeles international airport’s history. It appears the pent-up demand for wander lusters is quickly unfolding. December 2023 update. If you visited a mall or power center during this extended shopping season - you were met with a crush normally reserved for the intersection of the five, 57, and 22. Gridlock indeed. Our economy seems to be settled in to a nice combination of on-line and in person shopping. Nailed it!
 
For those keeping score - a perfect 4 of 4 for this columnist. Next week, I’ll proffer my predictions for commercial real estate in 2024. You won’t want to miss that episode. Until then, be safe my friends. 
 
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.
 

Friday, December 15, 2023

Home for the Holidays - Navigating Real Estate in Family Business Traditions

Family owned and operated manufacturing and logistics providers - and the ways in which their commercial real estate is managed - provide the cornerstone of my brokerage practice. Growing up in a family owned and operated manufacturing business helped provide keen insight into the challenges faced by these local employers and key components of our local communities. I recall numerous Christmas gatherings with our company’s employees and the special meaning of this time of year. 
 
The holiday season is a time of family, traditions, and gathering around a warm and welcoming home. Much like the heart of the holiday season, family-owned manufacturing businesses often have a central hub - their commercial real estate. In this column, we'll explore the unique challenges and blessings that come with harmonizing real estate and the traditions of family businesses.
 
Tradition and Succession Planning. Picture a family-owned manufacturing business as the treasured holiday feast, and the real estate as the time-honored recipes that have been passed down through generations. Planning for succession in such an environment can be as intricate as the preparation of a family recipe. It's about ensuring the family tradition continues to thrive while also preserving the home in which it all began.
 
Decking the Halls with Financial Considerations. The holiday season is often marked by financial decisions - gifts to buy, decorations to adorn, and feasts to prepare. Similarly, real estate assets within family businesses bring their own financial considerations. Property values and rental income are like the ornaments and lights that decorate the family tree, enhancing its beauty. However, just as the holiday season comes with its expenses, so do real estate assets with maintenance and operational costs. Balancing these financial aspects is critical for a harmonious holiday season.
 
Gifts and Legacies - Tax and Legal Implications. Gift-giving is a central theme of the holidays, but when it comes to real estate within family businesses, it's essential to navigate the legal and tax implications carefully. Just as Santa knows his route, families must be guided by knowledgeable legal and financial advisors to minimize tax burdens and protect their legacies.
 
Diversifying the Feast - Expanding Traditions. During the holidays, it's common to try new recipes and incorporate diverse flavors into your traditions. In the world of family-owned manufacturing businesses, real estate can be the secret ingredient to diversification and growth. Ownership of the buildings from which your company operates can be a magical way to increase generational wealth. These strategies can bring new flavors to your business traditions and ensure a bountiful holiday season.
 
Family Harmony - A Must-Have Decoration. The holiday season is a time for unity and togetherness, but it can also bring forth differing opinions and tensions within families. Managing real estate assets within a family business can require the skill akin to Santa’s elves. The family, much like the ornaments on a tree, should work together to create a harmonious atmosphere.
 
Holiday Recipes - Learning from the Masters. As with any holiday feast, it's often helpful to learn from the masters. Let's explore a couple of real-life examples. The Smith family, seasoned in the manufacturing business, wisely chose to own their real estate. As the value of the enterprise grew, so did the worth of the real estate. Additionally, in tough times, rent paid by the operation could be subsidized by the ownership of the building. It is common these days for the value of the real estate to far eclipse that of the occupying business. Merry Christmas indeed! On the other hand, the Johnsons decided to lease the facilities from which their enterprise operated. They avoided the heavy down payment needed to own their real estate. However, leases have maturity dates and rents over time have risen. No additional equity is built, and the operation must constantly face an evolving rental market. This can be great when rents are depressed, but troublesome in a time like today, when rents have escalated to an historically high-level.
 
Blending real estate assets with family-owned manufacturing businesses during the holidays is similar to preparing a cherished family recipe - a delicate balance of tradition, innovation, and unity. You can create a holiday season that's not only joyful but also filled with the promise of enduring traditions and lasting legacies.
 
So, as you gather around the family table during this festive season, remember that your real estate assets can be the foundation of your traditions, and the family business is the holiday feast that brings you all together. 
 
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.
 

Friday, December 8, 2023

The True Measure Of A Lease Comp

Tracking the market is a task that consumes some of our time as commercial real estate professionals. A fancy way of saying “what’s happening” in our commercial real estate world - we look at things such as comparable lease transactions, comparable sale transactions, number of new availabilities, and the number of months needed to complete a lease or sale once the property enters as an availability. 
 
By analyzing these metrics, we’re able to gauge the health of our business. New avails and time on the market are easy enough. The measures more difficult are the comparable sales and leases as you must factor in some equalizer. By this - and using housing as an example - you wouldn’t compare the price a 10,000 square foot beach front property to an inland condo without some means to level the comparison. Price per square foot helps along with age of construction and amenities. We’re then able to suggest a status of comparable, inferior or superior. If we get quite granular, we can suggest a percentage by which a comp is superior or inferior and add or subtract this from the sale price. 
 
Lease comps are trickier. Leases - different from sales comps are not a matter of public record. In other words, we can’t go to the county recorder to see where a deal traded. We must rely upon relationships with fellow brokers, who will share the points of a lease with us. 
 
Important to consider:
The starting rate. Defined as the lease amount the tenant pays upon commencement of the lease.
 
Operating expenses. In certain leases, an amount - in excess of base rent - is billed to the tenant. Operating expenses include costs such as property taxes, building insurance and maintenance. 
 
Annual increases. These are bumps in the lease rate that occur annually, or at some other throughout the term. Most leases these days are written with fixed annual increases versus the change that occurs in the consumer price index which we frequently saw in the 1980s.
 
Term. Number of months that the tenant commits to pay rent. 
 
And concessions such as:
Refurbishment. Generally referred to as rent, ready items, such as paint, carpet, and general cleanup. Not typically included in refurbishment, would be tenant specific improvements, which are referred to as tenant improvements.
 
Free rent. This period is and the tenant gets to occupy the building free of base rent.
 
Beneficial occupancy. Any occupancy granted prior to the commencement of the term is referred to his beneficial occupancy, and sometimes may be called early possession.
 
Improvements made to the building specifically for the tenant. As mentioned above in the refurbishment section, tenant improvements would be outside the scope of the normal cleanup. This could include things such as adding offices, or upgrading the power panel.
 
If a fellow broker is willing to share all the points above, we can then do some math and compute what’s known as the effective rate. Simply stated, the effective rate considers rent - including increases - over the term minus the concessions. The actual computation is a bit more complex. But you get the idea. 
 
Now, armed with the effective rate of each lease, we can assign the same - inferior, superior, or comparable tag used for sales comps - based upon amenities. As an example, a brand new class A offering should be superior to a thirty year old counterpart. How superior you may wonder? In certain cases, the 30 year old address may be functionally obsolete to modern occupants and may need to appeal to a smaller pool of tenants who don’t need class A amenities.