Friday, November 1, 2024

S.P.A.C.E.


Over the last couple of weeks, we’ve explored the ebb in demand for industrial real estate—why it’s happening and how to measure the market’s pulse through a tool known as the sentiment index. If you missed those columns, you can catch up here.
As logistics inventories have swelled, creating a shift in favor of occupants, we’re fortunate to be representing an e-commerce distributor expanding into the Inland Empire. In the size range we’re targeting, the choices are abundant. To focus our client’s search on only the best options, we reduced the initial list from 47 properties down to 19. Yes, you read that right: 47 choices in this market. To narrow down, we eliminated short-term subleases, locations tied up through our client’s target date, and any projects still scheduled for completion in early 2025. But even with 19, touring each of these sites is a Herculean task.
From coordinating with agents, previewing buildings, and clarifying each owner’s motivation and pricing, to planning a seamless tour route—it all adds up. And the toughest part? Keeping all 19 locations fresh in our minds, accurately ranked as to suitability. To stay sharp, we use a system we call S.P.A.C.E. Here’s how it works:
Each category is scored on a scale from 1 to 10, with 10 being the best. For instance, if the building is at a prime intersection, “C” for Coordinates gets a 10.
  • S = Structure of the Transaction. This covers lease terms, free rent, extension options, rights to buy, tenant improvement allowances, and other incentives that make the deal attractive. It’s the “bones” of the deal, setting the foundation for the entire transaction.
  • P = Pricing. We look at the asking lease rate or sale price, but also dig into whether there’s room to negotiate below the stated amount. Pricing flexibility can make or break a deal in today’s market.
  • A = Amenities. Our client is prepared to invest significantly in outfitting their new space—installing warehouse racking, security systems, dock equipment, and lighting, to name a few. If a building already has some of these features, it’s a big advantage. Amenities also include the essentials: ceiling height, truck access, trailer parking—all contributing to the overall amenities score.
  • C = Coordinates. Location is everything, and coordinates cover proximity to highways, ports, customers, and suppliers. We also assess access to a reliable labor pool and check how close key employees live. If the site is perfectly positioned, that’s reflected in its score.
  • E = Equity and Ownership. This is one aspect that’s often overlooked, but we find it crucial. The stability of ownership impacts everything from lease flexibility and maintenance responsibilities to financial strength and motivation. It’s the “X factor” in the relationship between occupant and owner—the basis for a partnership that lasts.
Next time you’re faced with an overwhelming array of options, try using this S.P.A.C.E. system. It really works!
 
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, October 25, 2024

Gauging the Market


As commercial real estate 
 practitioners, we spend our days advising owners and occupants of locations. These may be office, retail or industrial. I’ve plied my trade industrially for over four decades in Orange County and the Inland Empire. Over time, I’ve seen some wild swings in market activity - also known as buying and leasing. 
 
The early nineties were mired in a deep sleep caused by the invasion in Iraq and the savings and loan implosion. We dealt with tepid demand until the middle part of the decade when velocity returned. The dot com bubble bursting and the financial - err - adjustment of the early and mid 2000s caused quite a ruckus as well. What followed was a spate of activity like no other we’ve  seen until - well 2020-2022. Now we sit with a lack of demand precipitated by uncertainty. Recall, I wrote about that last week. If you missed the column, you can refresh here. 
 
Today, I’d like to discuss a simple way to figure in which way we’re headed - up or down - with the scale pushed in favor of occupants or owners. 
 
If there’s one thing I’ve learned over the years, it’s that gauging the market isn’t just about looking at vacancy rates or rent trends—it’s about understanding the balance of power between owners and occupants. 
 
A simple, albeit informal, method I’ve used is what I call the "Sentiment Index." Essentially, it’s a measure of who feels the pain—or the confidence—more sharply: those with the space to lease or sell, or those seeking to occupy it.
Right now, what I’m seeing and hearing suggests the scales are tipping in favor of occupants. How do I know? Conversations with landlords have turned from boastful pride to cautious consideration. When owners and their representatives are more eager to have a “productive chat” about lease terms, you know we’re moving into a phase where flexibility and concessions might be on the horizon.
 
Lessons from the Field: The Subtle Shifts in Conversations
In fact, these shifts in tone can often signal broader trends before the numbers catch up. Let me give you an example: Back in the early 90s, during what many in the industry refer to as the post-S&L era, the signs of a cooling market weren’t apparent in the stats just yet. But for those of us on the ground, it was clear as day. What tipped us off? The tone of conversations with owners changed from assertive to inquisitive: “What’s happening out there?” took the place of “We’re holding firm at this price.”
Today, I’m noticing a similar shift. In the Inland Empire, where logistics had been king over the last five years, conversations that were once about jockeying for the best price per square foot have turned into careful discussions on structuring deals that create longer-term value. For example, some owners are asking about the implications of rent abatement periods or tenant improvement allowances—areas where, in stronger markets, the negotiation wasn’t as flexible.
 
Keeping a Pulse on Indicators Beyond the Numbers
But why focus so much on sentiment? Because market reports and metrics, while useful, can lag behind the reality on the street. When deals are being renegotiated, terms are becoming more flexible, and incentives are starting to creep back in, it suggests that demand is softening relative to supply. And that’s exactly what I’ve been noticing lately.
 
For example, last month, I saw a deal come together for a mid-sized logistics tenant in Riverside. The lease was inked at a rate that, six months ago, would have raised eyebrows among the ownership crowd. But with looming uncertainty, the landlord chose certainty of occupancy over a speculative holdout for higher rents. To me, that’s an early indicator of where we’re headed.
 
Occupants: A Window into Demand Dynamics
On the occupant side, I find their actions can tell us just as much about market direction. When they start negotiating harder on expansion options or holding off on committing to large leases, it’s clear they’re sensing future uncertainty. Right now, I’m seeing this play out with clients in the Inland Empire who are recalibrating their growth strategies to align with supply chain volatility and interest rate hikes.
 
If you ask an occupant why they’re hesitating, they won’t often point to market reports. Instead, you’ll hear things like, “We’re waiting to see if interest rates stabilize,” or “We’re worried about carrying costs if demand slips.” These concerns are less about where the market is now and more about where it’s headed.
 
Conclusion: Listening to the Market’s Whispers
In commercial real estate, the market doesn’t always shout its intentions—it whispers them through subtle cues. Right now, the whispers are pointing to a delicate balance, one that could easily tip in favor of occupants if uncertainty persists. The key is listening closely and responding proactively.
 
So, if you’re trying to gauge market activity, don’t just look at the metrics. Tune in to the conversations and observe the changes in sentiment. Those shifts can tell you more about where the market is headed than a spreadsheet ever could.
 
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, October 18, 2024

Lack of Demand in Industrial Real Estate


Good day, dear readers! Today I feel a bit professorial. Therefore, I’ll discuss a phenomenon we’re witnessing in the industrial real estate market in Southern California—
the lack of demand.
 
What is demand, you may ask? In this context, demand stems from a need created by external factors. Think for a moment about your own household. If you suddenly realize you’re out of coffee, you have a need created by an external factor—someone forgot to put coffee on the shopping list. Consequently, you rush to your corner Starbucks or neighborhood Albertson’s to get your caffeine fix.
 
Demand in industrial real estate works in much the same way. It arises from changes in business activity, external economic factors, or shifts in the marketplace. In the halcyon days of 2020 and 2021, as many of us were quarantined in our home offices, a surge in online shopping occurred. Retail giants like Amazon, Walmart, Costco, and Target ramped up their inventories to avoid stock shortages, leading to a massive boom in demand for warehouse space.

Two things happened:

1.       On-hand inventories swelled to unprecedented levels.
2.       This massive uptick in inventories led to historically low vacancy rates in industrial spaces, especially in logistics hubs. As a result, rents and sale prices for warehouse space soared, and smaller retailers began relying heavily on third-party logistics providers (3PLs) to manage distribution. These 3PLs also scrambled to lease more space to meet the growing needs of their customers.

But by the summer of 2022, everything changed. The business climate cooled, interest rates rose, and the once-voracious demand for industrial space slowed down. No longer could the industry count on Amazon absorbing millions of square feet of space to fuel growth.
 
However, today’s lack of demand feels different. It’s more systemic—driven not only by market corrections but by a deeper uncertainty. When businesses are uncertain about the future, they hesitate. They are less likely to acquire competitors, hire new employees, venture into new business deals, or lease additional space. And this hesitation is what we’re witnessing now.
 
What’s Causing the Uncertainty?
I believe several factors are at play that contribute to the lack of demand in industrial real estate:
1.       Upcoming Election: Political transitions and elections often lead to a wait-and-see approach from businesses. They want to know which policies will be implemented before making large commitments.
2.       Global Tensions: From trade wars to geopolitical conflicts, uncertainty on the world stage makes companies think twice before investing in new space or expanding operations abroad.
3.       Federal Reserve Moves: The Federal Reserve’s interest rate hike shave made borrowing more expensive, which in turn raises the cost of financing real estate transactions. This has caused both tenants and investors to hit the pause button on deals that previously made sense financially.
4.       Natural Disasters: The growing frequency of natural disasters—wildfires, hurricanes, floods—has added a layer of risk to real estate decisions. Companies are increasingly aware of the potential impact of these events on their operations and are cautious about committing to long-term leases or purchases in areas vulnerable to climate change.
5.       Record-High Rents and Sales Prices: After years of rapid growth, industrial real estate prices have hit record highs, making it difficult for tenants to justify paying such premiums, especially in uncertain economic times.
6.       Higher Interest Rates: With interest rates on the rise, the cost of borrowing for expansions, acquisitions, or even renewing current leases has significantly increased. This has forced many companies to reconsider their growth plans or downsize their space requirements.
7.        
What’s Next for Industrial Real Estate?
While this slowdown in demand is significant, it doesn’t spell doom for the industrial real estate market. Instead, it signals a recalibration—a moment to step back, assess, and adjust strategies for both owners and tenants.
For tenants, this cooling market could present opportunities to negotiate more favorable lease terms, secure rent reductions, or lock in concessions like tenant improvements or free rent periods. Meanwhile, for landlords, this is a time to consider flexibility—offering shorter lease terms, more aggressive incentives, or even speculative development that aligns with future market shifts.
 
As we move forward, it will be crucial to keep an eye on the macroeconomic factors—interest rates, geopolitical developments, and economic policy decisions—that continue to shape demand. The industrial real estate market has proven its resilience over the years, and while today we may be facing a lull in demand, tomorrow’s landscape may very well be different.
 
Conclusion
So, where does that leave us? While the current market conditions are challenging, this period of lower demand is not necessarily a long-term problem. Instead, it’s an opportunity—for businesses to secure better deals and for property owners to reevaluate and reposition their assets. As we all navigate through this uncertainty, one thing remains clear: industrial real estate will continue to adapt, evolve, and play a critical role in the broader economy.
 
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, October 11, 2024

Executing a Purchase Escrow in Commercial Real Estate


As commercial real estate professionals, we facilitate both lease and sale transactions for our clients. While the steps leading to both types of deals are similar, the execution diverges significantly once terms are agreed upon. In leasing, once the document is signed, our role diminishes—aside from helping with city approvals or coordinating tenant improvements. However, in a sale, our involvement intensifies as we guide the process through escrow to ensure the transfer of title and ownership. 
 
Today’s column walks you through the essential steps in managing a smooth purchase escrow.
 
Deposit wired to escrow
One of the first actions after signing the purchase agreement is ensuring the buyer’s deposit is wired to the escrow holder. This demonstrates the buyer’s commitment and allows the formal escrow process to begin. Failing to make this deposit in a timely manner can result in delays or even jeopardize the entire transaction.
 
Sign the property information sheet
The property information sheet is crucial for ensuring the buyer has all necessary details about the property, such as zoning, utilities, and any existing conditions. It also serves as a checklist to confirm that both parties agree on the property’s specifics, preventing any last-minute surprises.
 
Engage consultants for due diligence
The property condition assessment (PCA) and Phase I environmental report are key to identifying any potential issues with the property. These assessments provide a comprehensive look at the building's structural integrity and environmental safety, ensuring that the buyer isn't inheriting hidden liabilities. Hiring reliable consultants early in the process avoids delays.
 
Get your lender moving
Lenders often require third-party reports, particularly appraisals, which can be time-consuming. Ensuring your lender begins these processes early can prevent bottlenecks later in the escrow period. Timing is critical here, as any delay in the appraisal or other required reports can push the closing date back.
 
Organize transaction documents
Creating a Dropbox or another shared platform for housing all transaction documents keeps everyone—buyer, seller, attorneys, lenders—on the same page. Having easy access to all documents allows for smoother communication and avoids the risk of lost paperwork.
 
Calendar key dates
Every purchase and sale agreement has specific timelines, from the deposit deadline to the closing date. It’s essential to calendar these dates to stay ahead of any upcoming deadlines. Missing a critical date could cause the deal to fall apart or, at the very least, complicate negotiations.
 
Create a lease between the LLC and the operating company
In cases where the buyer is an owner-occupant purchasing the property through an LLC, creating a lease agreement between the LLC and the operating company is crucial. This ensures the property remains properly structured from a legal and financial standpoint. Additionally, this arrangement can offer tax advantages and protect the buyer's personal assets.
 
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, September 27, 2024

What Can the Desert Southwest Teach Us About Commercial Real Estate?


As our travels took us to Phoenix, Tucson, and Santa Fe over the past week - I had two colliding thoughts. The beauty of the desert southwest was consuming and our world at this time 16 years ago was consuming as well! Our commercial real estate market was side swiped by the financial crash of 2008! I wondered if the two were somehow related and if lessons could be leaned. 
 
So. Here goes. 
 
If you’ve ever spent time in the desert Southwest—Arizona, Nevada, New Mexico—you know that survival there is all about adapting to extremes. In the blistering summer, temperatures soar, and water becomes a precious resource. Yet life persists. Cacti, creosote bushes, and desert wildlife don’t just endure—they thrive because they’ve evolved to do so. They’ve learned to make the most out of the environment they’re in, maximizing every drop of water and adjusting to whatever comes their way.
 
Commercial real estate, like desert life, is a game of adaptation. Whether you’re a seasoned investor, an owner-occupant, or an industrial broker positioned in today’s dynamic market, the lessons from the desert are right there in front of us—if we’re willing to see them.
 
1. Resilience in the Face of Scarcity
The desert’s number one challenge is scarcity, and in real estate, it’s no different. In boom times, it’s easy to make deals—capital is abundant, credit is flowing, and everyone’s eager to move fast. But what happens when those resources dry up? Think back to the 2008 financial collapse. One moment, liquidity was everywhere; the next, it vanished. Deals died overnight, and only the most prepared, resilient players could weather the storm.
 
A desert cactus stores water for months, waiting for the right conditions to use it. As a commercial real estate professional, this is a reminder to build reserves—whether that’s in capital, market knowledge, or relationships. Like the cactus, don’t overextend yourself in good times. Prepare for downturns, and when they inevitably come, you’ll not just survive—you’ll thrive.
 
2. Know Your Environment
Brokering commercial real estate isn’t just about playing the market—it’s about knowing the environment. The desert has very specific climates, microclimates even, and if you don't understand those differences, you’ll fail. Phoenix, Las Vegas, and Albuquerque might all share the desert’s common traits, but each has its unique challenges and opportunities. What works in Phoenix won’t necessarily work in Las Vegas.
 
Likewise, industrial real estate in Southern California has its nuances. I often remind clients that even though SoCal is a booming market, the micro-markets of Long Beach, Inland Empire, and north Orange County, where I worked during the 2008 financial crisis, each require a tailored approach. Just like a desert traveler checks the conditions before setting out, commercial real estate practitioners must assess the specific terrain they’re in. Understanding the local economic, political, and market conditions can mean the difference between a deal’s success or failure.
 
3. Timing is Everything
The desert teaches patience. Rain doesn’t come when you expect it; it comes when the environment is ready for it. In commercial real estate, timing is just as critical. Sometimes deals fall apart not because of lack of interest, but because the timing isn’t right—either for the buyer, the seller, or the market itself.
 
I’ve seen this time and time again in my own experience. Back in 2008, during the height of the financial collapse, a promising buyer for a large manufacturing site suddenly lost financing when their Small Business Administration loan commitment disappeared. The market shifted almost overnight, and we had to wait until the right time to close a deal at a significantly reduced price. Understanding when to act—and when to wait—is a skill that separates the seasoned from the amateurs.
 
4. Innovation is Key
Despite the desert’s harsh conditions, innovation thrives there. Solar farms, sustainable architecture, and water conservation technologies are just some of the breakthroughs we’ve seen over the years. Similarly, commercial real estate is ripe for innovation. The industrial sector is adapting to a post-pandemic world by embracing e-commerce, automation, and green technologies.
 
Whether you're retrofitting older properties or designing new industrial spaces, the industry’s future depends on staying ahead of the curve. Just like innovators in the desert seek new ways to make life easier and more efficient, those of us in commercial real estate need to be thinking not just about the present, but about how to create spaces that will serve the future.
 
The Takeaway
The desert may seem like an unforgiving place, but it’s also full of lessons. Adaptability, patience, and resourcefulness are key to surviving—and thriving—in both the desert and in commercial real estate. As the market shifts, those who prepare, understand their environment, and are willing to innovate will be the ones who succeed. So, the next time you're out in the desert Southwest, take a moment to reflect. The landscape might be more like our industry than you’d think.
 
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, September 20, 2024

The Dance of Commercial Real Estate: A Complex Waltz


Commercial real estate deals often appear as a bewildering tango of factors. Motivation, fear, greed, market conditions, financing, credit-worthiness, uncertainty, and economic outlooks all swirl together in a dizzying display. But strip away the complexities, and you're left with two essential players on the dance floor: an occupant and an owner.
An occupant might be a buyer looking to purchase or a tenant seeking to lease. On the other side, an owner could be a landlord with space to rent or a seller ready to part ways with their property. When these two parties, properly motivated, find each other, the real dance begins.
As a commercial real estate practitioner, my role is to choreograph this intricate performance. To do so effectively, I rely on five key elements:

  1. Ownership: Knowing who holds the deed is the first step in any potential transaction.
  2. Availability: What's on the market? What spaces are up for grabs?
  3. Recent leases: Understanding the current rental landscape informs both occupants and owners.
  4. Recent sales: These transactions set the tempo for property values.
  5. Appeal: Identifying which occupants might be drawn to a particular building is crucial for a successful match.
But let's circle back to those factors I mentioned earlier. How do they fit into this dance?
Motivation is the music that gets everyone moving. Without it, the dance floor remains empty. Fear and greed? They're the rhythm section, driving the beat faster or slower, influencing how quickly deals come together or fall apart.

Market conditions and economic outlooks set the overall mood of the ballroom. Are we in a upbeat swing or a cautious waltz?

Financing and credit-worthiness act as the dancing shoes. Without them, even the most eager dancers might sit out a few numbers.

Uncertainty? That's the fog machine, adding an element of mystery and sometimes confusion to the proceedings.

When all these elements align - when the music is right, the rhythm is pulsing, the mood is positive, and everyone's got their dancing shoes on - that's when the magic happens. A motivated occupant and an equally motivated owner find each other on the dance floor, and a deal is struck.
As a commercial real estate professional, my job is to be part DJ, part dance instructor, and part matchmaker. I need to read the room, understand the music, and bring the right partners together at the right time.

It's a complex dance, indeed. But when it all comes together? There's nothing quite like it in the business world.
 
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, September 13, 2024

Marshall Field’s Contribution To Retail


Our travels took us to the Windy City over the weekend to celebrate a milestone event in our marriage. To better understand one of America’s great cities and its origin - we took a walking city tour. I love the architecture of the bygone days and as a commercial real estate professional, the story behind how cities develop is fascinating to me. 
 
As we approached the corner of State and Washington, an immense fourteen story structure loomed. We found ourselves learning about a Chicago icon—Marshall Field. As we strolled through this bustling city, weaving through shoppers and gazing up at storefronts, I was reminded of just how much one man, more than a century ago, shaped the way we experience retail today. 
 
Things such as individual item pricing, customer service, purchase returns and the experiential approach stores such as BassPro and REI have adopted were all Field hallmarks. 
 
Field’s legacy is more than a department store; it’s a blueprint for modern commerce, and his influence is still alive in almost every retail experience we have today.
 
Marshall Field more than a retailer—he was a visionary. His store on State Street wasn’t just a place to buy things; it was a place to be. He understood, long before anyone else, that shopping should be more than a transaction—it should be an experience. Walking into his store was like stepping into another world, where beautiful displays and carefully curated products drew customers in, not just to buy, but to linger and enjoy. 
 
Field realized that the environment mattered as much as the merchandise. It’s no wonder department stores became destinations unto themselves, and that tradition endures in some of our most iconic retailers today.
 
But Field’s real genius was his deep respect for the customer. He’s the one who coined the phrase "The customer is always right," and he truly lived by it. He made it easy for people to return items if they weren’t satisfied, a policy that, at the time, was revolutionary. Field believed that if you treated people well, they’d keep coming back—and they did. 
 
His dedication to customer service laid the groundwork for the personalized, customer-first approach that we all expect from businesses now.
 
Field also understood something else that was ahead of its time: the value of offering a unique product mix. He built relationships with suppliers all over the world to bring exclusive, high-quality items to his stores. Instead of trying to be everything to everyone, he focused on offering carefully selected goods that reflected the taste and aspirations of his clientele. It’s a lesson that many retailers would do well to remember—especially in today’s landscape, where a well-curated selection often speaks louder than endless options.
 
It was more than the products or the atmosphere, though. Field also believed in running his business with integrity and treating his employees with respect. At a time when labor conditions were often harsh, he made sure his employees were paid fairly and worked in humane environments. This not only created a loyal workforce but also reinforced the values of his brand—integrity, quality, and care. It’s a reminder that the culture behind the scenes often shapes the experience in front of the store.
 
As I reflect on my own experiences—whether it’s walking through grand department stores in major cities or the charm of smaller, curated shops—I realize how much of what we take for granted in retail today can be traced back to Marshall Field’s vision. His legacy is a reminder that great businesses aren’t just built on products—they’re built on people, values, and an unwavering commitment to creating something special. 
 
So next time you’re enjoying a beautifully crafted window display or being greeted with a smile when you walk into a store, take a moment to think about Marshall Field, the man who helped make it all possible.
 
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.