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 26, 2024
Trends
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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.
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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.
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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.
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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. 😎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. 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.
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. 😎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. 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!
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Allen C. Buchanan
,
commercial real estate
,
Lee and Associates
,
SIOR
Orange, California 92865
1004 W Taft Ave #150, Orange, CA 92865, USA
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.
Labels:
#cre
,
Allen C. Buchanan
,
commercial real estate
,
Home for the Holidays - Navigating Real Estate in Family Business Traditions
,
Lee and Associates
,
SIOR
Orange, California 92865
1004 W Taft Ave #150, Orange, CA 92865, USA
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.
The starting rate. Defined as the lease amount the tenant pays upon commencement of the lease.
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.
Labels:
#cre
,
Allen C. Buchanan
,
commercial real estate leases
,
Lee and Associates
,
SIOR
,
The True Measure Of A Lease Comp
Orange, California 92865
1004 W Taft Ave #150, Orange, CA 92865, USA
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