Friday, May 13, 2022

Space Requirements

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As I’ve written countless times and as recently as last week - commercial real estate practitioners are either the hunter or the hunted. By that I mean the nature of our assignments varies from searching for suitable opportunities for our clients to lease or buy - the hunter. To marketing available buildings - the hunted. You may be wondering - aren’t both tasks in effect hunting? If an owner hires you to locate a tenant or buyer for their vacant location don’t you hunt? Actually, no. Available space is in such short supply than an owner assignment is tantamount to a blue light special. It’s a mad dash to the exits. Managed are myriad tour requests, multiple offers and bidding wars - thus the moniker of hunted.
 
Year to year our percentage of owner to occupant representation varies. Last year, as an example, the majority of our work was representing tenants. The complete opposite has occurred this year. But despite that ratio - we’re busiest fulfilling occupant’s needs.
 
Recently, we were asked to compete for a tenant representation assignment. I believe what we discussed would be informative for my readers - so here goes.
 
Fortunately, our prospect is flexible and has allowed plenty of time to conduct an adequate search. By flexible, I mean they’re able to stay in their existing address, relocate within Orange County, move inland or even move out-of-state, if necessary. Regardless, required is a location in the OC so if alternative one or two don’t happen - we’ll have to source a suite of offices locally in addition to their warehouse. We did a similar deal last year whereby the owner was unwilling to build enough office space within the warehouse to accommodate our head count forcing us to split the operation. The good news? If a separate office configuration is needed - they’re plentiful. Unlike the frenzied pace and low vacancy of manufacturing and logistics buildings - office suites are begging for tenants.
 
So what’s important for the prospective operation? Port access as their products are manufactured overseas and shipped in, modern warehouse amenities which will allow them to rack and stack, a central location to afford access to their distributors, and as mentioned, if their lease isn’t renewed or relocated close by - we’ll need an office suite to house twenty folks.
 
So, what are their options?
 
Certainly, staying put has its benefits. A costly move is avoided which is disruptive and inefficient. Employees, suppliers, truckers, and the like know their location. Generally, a landlord realizes the cost of finding a new occupant, and will be motivated to keep an existing tenant. The downside is their warehouse clearance is skinny - which means more floor space must be leased to store the same amount of goods as a smaller, taller space. Because owners charge by the floor square foot not the cube - a smaller taller space could be cheaper.
 
A relocation within north or south Orange County will be challenged today by the lack of available Class A inventory. But, that landscape is changing. Close to 2,700,000 square feet of newly constructed logistics buildings will dot the basin from Brea to Orange to Fullerton and Anaheim soon.
 
Inland - whether west in Chino, Ontario, Eastvale, and Corona. Or East such as San Bernardino, Perris, Riverside, and Moreno Valley - holds some possibilities. The majority of stock in those areas was built after 2004 with a logistics provider in mind. Plus, a lot of new is being tilted and will be ready for occupancy by early 2023. Port proximity and new regulations against trucking are the storm clouds on the horizon.
 
Finally, a move out-of-state to neighboring Nevada or Arizona appears to be attractive. Both are exceeding California’s pace of new construction and quite inviting of California companies frustrated by local politics and expensive cost of living. But, as I warn anyone considering a move away from California - other places are not simply California with cheaper housing and a lower tax rate. There are real cultural, economic, and political differences to be considered.
 
Options abound and we look forward to providing our advice. The journey should be quite interesting!
 
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, May 6, 2022

Most Effective Sales Pitch

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During certain cycles of prospecting, I present a lot. Generally, this involves someone with whom I’ve not done business. If a client and I have transacted and she knows my capabilities - the need for formal presentations is lessened. But takeaway the familiarity and the pitch is needed. Today, I’ll explain my presentation style and show you a few tricks of my trade. I believe you can learn from these - as chances are - you’ve been on the receiving end of one.
 
As discussed, clients engage commercial real estate brokers for one of four tasks. They are - to help them find a building to lease or buy. Typically, referred to a “tenant rep” - this assignment can also involve assisting in a lease renewal - we’ll call this task two. The last two involve the representation of an owner of commercial real estate. You see, when a building loses its occupant - another must be found. Involved is an agency agreement or “listing” to market the parcel to potential tenants or buyers. But’s that’s only three. What’s the fourth task? Well, the fourth is the preparation of a Broker Opinion of Value or BOV. Normally, a BOV precedes a presentation to list a building for sale or lease. After all, you gotta know what it’s worth. So to review, here are the four tasks - representation of an occupant to source a new location to buy or lease, representation of an occupant to renew their lease, representation of an owner to locate a tenant or buyer, and finally preparation of a broker opinion of value.
 
With each comes its own brand of presentation. However, I like to think of them in two broad categories - owner centric and broker centric. The former zeroes in on what’s important to the person being represented - occupant or owner, and the latter centers upon the experience of the broker and what he can do for you. While either can be effective, I enjoy presenting in an owner centric format. Why? I’ve found most clients “don’t care how much you know until they know how much you care.” Corny? Maybe. But think about it. If your company is desperate to find a new location and your service provider comes in hot, guns blazing, and launches in about his experience - without even a question or two about what YOU are facing - the emphasis is misplaced. YOU are the client, the one with the challenge. And, therefore, shouldn’t it be about you?
 
So, my pitches take an owner centric approach. I start with a discovery meeting - preferably in person. The last couple of years have made in person meetings difficult. But, things are a bit looser nowadays. We discuss a few facts - how long have they occupied the address, confirm their lease expiration, and gain an understanding of their need. We then explore some opportunities such as what doesn’t work with the location and how a new address might be better. Consequences of moving or staying put are next followed by a summary of our understanding and a suggested next step. Now, the framework of your owner centric presentation is set.
 
We follow a guideline of an agenda, situational review, discussion of their building, review of the market, a plan, our specific capabilities, and finally a look at our compatibility. Start to finish - these take about twenty minutes. Since the presentation is “centered” on the client, all the fluff is eliminated and we spend our time together discussing what’s important to them vs a brag fest on how many buildings we’ve sold.
 
Maybe you don’t own or occupy commercial real estate. But you certainly buy stuff, right? Let’s say you replace interior doors at your house or get a new air conditioner. Start paying attention to the folks that ask for your business. What approach do they take? Is their pitch all about you or all about them.
 
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, April 29, 2022

Spring Abounds!

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I love this time of year! My favorite golf tournament - “a tradition unlike any other” tees it up at Augusta, Georgia. We, this week, crowned a new NCAA basketball champion. Congratulations to the Jayhawks of Kansas. And, after a lengthy labor dispute, the dial tone of Major League Baseball games returned. A true smorgasbord of sports descends. Plus, flowers are fragrant, Easter hops in and hope abounds as 2022 is in full bloom. You may be wondering what any of this has to do with commercial real estate? Sit back and allow me to connect the dots.
 
A new beginning. Our year - as commercial real estate practitioners starts over every January. The slates are wiped clean and we start again with a new year of production. Much like a professional golfer or a major league batter - we begin with no earnings or batting averages. Left to our devices is our success or failure. By spring, the year unfolds as deals are originated, qualified and put into the pipeline. We have a strong sense how the year will continue. Akin to those tiny Crocuses that peak out from the winter freeze - transactions start to return.
 
Seasons are long. Embrace them. Seasons, like real estate deals, take awhile. Typical among sales transactions is a long gestation period. Three trimesters indeed! It’s quite common for a building search to precede negotiations. Once the right spot is located - which takes time - offers are submitted, responses generated, and an agreement is forged. The long dance of escrow commences. Due diligence - title review, financing, city approval, scouring of books and records, physical inspection and environmental investigations - is conducted. With the proper amount of motivation and pixie dust, a closing is in your future. As spring folds into summer, deals pop. Leases happen quicker although the contract negotiations can be brutal.
 
New life gives way to maturity. By late spring, the landscape of our year is growing nicely and we have a forward expectation of the fall harvest. By the time we scoot off to the myriad fall conferences in October - our production is largely completed. Sure, we can finish strong and close deals during the holidays - but the pace is slower than the spring and summer crush.
 
It’s quite refreshing to witness a “normal” spring in 2022. We’ve weathered much in the past two years - a pandemic lockdown, shuttered business, an industrial rebirth, office uncertainty, a fundamental shift in buying habits, a change in administrations, a war in Eastern Europe, rampant inflation, a supply chain kink, and more. Throughout, seasons have come and gone as the steady drumbeat of time plays cadence to our years.
 
Next month marks my 38th anniversary schlepping industrial buildings - parts of five decades. 38 springs, 38 new beginnings, and 38 rings on my proverbial brokerage tree. Ben Crenshaw won at Augusta in 1984, the Georgetown Hoyas were the NCAA champions, and after a long season - the Detroit Tigers edged the San Diego Padres 4 games to 1 in baseball’s crowning series. I’m a grandfather of five now. I’m content watching the seasons of their lives unfold in magical ways. Commercial real estate has allowed me the means and flexibility to be present. Is starting over every year something I enjoy? Not really. But this time of year, hope springs eternal.
 
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, April 22, 2022

Industrial Real Estate Logistics - Challenges and Opportunities

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Another month, another SIOR (Society of Industrial and Office Realtors) dinner. This time thankfully indoors! We were treated to a presentation by Jon DeCesare, CMC, President and CEO of World Class Logistics Consulting. Jon can be reached at jondecesare@wclconsulting.com. Jon’s presentation focused upon the challenges and opportunites facing logistics providers in 2022. Logistics simply is receiving, warehousing, and shipping goods. Think those massive Amazon warehouses you drive by on I-15 en route to Las Vegas. An awful lot else happens before that box arrives on your porch.
 
But, as Jon discussed, logistics is only a small part of the supply chain. Woven in to the fabric of supply are factories - where the stuff is made, trucking companies, freight consolidators, marine terminals, ports, steamship lines, railroads, intermodal hubs, government agencies, custom house brokers, less than full load trucking companies, small parcel companies, and retail stores. Whew! That’s a long chain with many links - and crimping any one causes delay. Weakest link indeed.
 
Faced has been the largest disruption to supply chains since WWII. A brief timeline follows. March of 2020 - Covid lockdowns. April 2020 - a lot of empty ships expecting out capacity. June 2020 - demand returns as folks order with a vengeance. After all, retail outlets were largely shuttered leaving consumers few choices. August 2020 - imports boom leading to trade imbalances and equipment shortages. November 2020 - port congestion worsens. March 2021 - Panama Canal blockage. January 2022 - regional lockdown in China affects the largest Chinese ports. The disruption has caused equipment imbalances - ships, trucks, trains - port congestion, schedule reliability, and cost of transportation has increased nearly five fold. Doubt what I say? On a clear day, take a look at the line of ships dotting the western horizon waiting to dock. Last count there were over one hundred.
 
Locally, our ports of Long Beach and Los Angeles - where approximately 40% of our nations import arrive - have seen excessive driver marine terminal turn times, increased ocean carrier transit times - from 15 to approximately 65 days, railroads unable to haul intermodal containers, a serious shortage of truck chassis, 100,000+ empty containers, appointment time delays at the marine terminals, and high cost and poor service quality. These combined have delivered - sorry - a knockout blow to logistics providers.
 
Jon quoted Thorsten Meincke, a board member for ocean and air freight at DB
Schenker - “We don’t see the tide turn in 2022, infrastructure problems, labor constraints, high demand and reduced capacity will continue to trouble the market. Stakeholders in the industry don't see much relief coming for shippers anytime soon. It will not get better and 2023 will be worse.”
 
I should add at this point, Southern California’s dramatic shortage of available warehouse boxes has fueled the flame. Not only are there not enough spaces to fill the demand - but, the obsolescence of old stock has led to inefficiencies. By that, I mean - low ceiling heights and poor truck access.
 
This environment has caused companies to re-think how and where warehouse sites are chosen. Jon mentioned four opportunity areas in Southern California where the next building booms may occur and logistics providers could locate. Highlighted were the Victor Valley - including Apple Valley, Victorville, Hesperia, Adelanto, Barstow and Phelen. The Antelope Valley with communities of Palmdale, Lancaster, Antelope Valley and Littlerock. The Tejon Ranch just north of the Grapevine and finally the I-10 corridor east of Banning to Indio. Can you imaging the congestion coming back from the desert? 
 
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, April 15, 2022

When Will We Experience a Slowdown?

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When meeting with clients and prospects these days, most are curious about my opinion. Specifically, when will this frenzied market activity start to cool? Frankly, I’m shocked at the exponential rise in lease rates and purchase prices we’ve experienced over the past year. Talk to any commercial real estate practitioner and most will confess they didn’t see this coming. When our economy collectively pressed pause two years ago - uncertainty abounded. Most of us believed the pandemic was the black swan event that would derail the status quo. Yes. Certain segments of CRE have taken their lumps - office suites and brick and mortar retail. But, manufacturing or logistics oriented buildings continue to find favor. I caution all that my crystal ball is somewhat murky but share with them the things I watch as predictors.
 
Residential. A downturn in housing sales generally proceeds a stall in commercial activity by 12-18 months. Pre-Great Recession, there were myriad warning signs a slowdown was coming. Certainly, few of us were prepared for the severity of the dip. I remember one of my clients in the building industry was alarmed by the precipitous drop in new housing starts. His group supplied bathtubs for new housing projects. Companies such as these are a bellwether for coming attractions.
 
New construction. Currently, industrial demand far outpaces supply. We cannot build enough new locations to meet the appetite. Under construction inventory is being gobbled up quicker than a teen consumes an In N Out burger. Consequently, our stock - new and used - is significantly costlier. I’m presently watching the next round of lease and sale comps to gauge if the market will continue to rise or stagnate. Akin to lightning that precedes a thunder clap - we’re awaiting the next strike to determine proximity to asking rates.
 
Interest rates. The cost of money affects so much, I could spend an entire column about the subject. Suffice to say, we’ve enjoyed a decade or so of lifetime low interest rates. These cheap dollars fueled an unprecedented buying spree. Rampant inflation is rearing its head and causing policy makers to counteract. As of this writing the benchmark 10 year Treasuries are at 2.4%. Still puny if you’re a saver but at some point - investment returns will be impacted. Simply, capital will flow into a government backed issue vs a real estate investment if cap rates are comparable.
 
World events. Russia’s invasion of Ukraine has placed a crimp in the global supply chain of energy and food stuffs. Fortunately, even with our sanctions against Russian oil and natural gas - the United States is ok. But many European countries, such as Germany largely rely upon imported petroleum. As to food, Ukraine and Russia are two of the largest wheat producers and exporters in the world. Planting season is now. We only have a 90 day food supply, globally. And wheat is in everything! You can start to understand how this disruption can trickle down to all of us.
 
Industrial metrics. We still look at what’s available, leased, and sold on a daily, weekly, and monthly basis. How many spaces out of 100 are currently on the market? - our industrial vacancy results. In a normal market - which we haven’t seen since 2013 - 5-6 of 100 are available. We’re now fewer than 1%. In some size ranges there are none. Something quite catastrophic would need to occur in order to shadow normal.
 
Anecdotes. On the seller and landlord side you hear folks are pressing rents, achieving monster sales values and receiving unsolicited offer out the wazoo. Occupants bemoan raw material shortages, increased costs, fuel surcharges, lack of quality employees and increasing facility costs.
 
So, there are my “tea leaves”. I’d love to know what you watch in order to predict what’s coming.
 
 
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, April 8, 2022

Unsolicited Offers Abound

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With the unprecedented shortage of industrial buildings to buy, cheap abundant capital available, and a steady drumbeat of increased demand from investors and occupants - we find ourselves in an acute seller’s market. 

Many of our clients have received unsolicited offers at eye popping figures! By unsolicited, I mean this - no listing, no marketing, no real thought about selling but the offer arrives in your inbox. Frankly, these numbers are so appealing - it’s caused many to pause and consider accepting the windfall. 

But, there are challenges that must be overcome. What are those, you may be wondering? Allow me to expand your understanding, may I?
 
You still need the building to operate your business. A wise decision was made some time ago to house your business in owned commercial real estate. Through the years, the operation has paid you rent, mortgage balances have been retired, tax benefits achieved, and appreciation has occurred. But the fact remains, so long as your enterprise requires an address - continuing to own and occupy the building is generally the best alternative. Sure, you could structure a leaseback, stay put and take advantage of the lofty offer. Just make sure your operation can withstand the likely bump to market rent your buyer requires. Or, you could relocate the business to a cheaper market. Problem is, this “cheaper market” would likely be in a different state. And the same imbalance of supply and demand likely exists. Finally, many approaching retirement years believe this is a great time to sell the company and the real estate and retire.
 
What will you do with the money? In most ownership structures, the sale of a capital asset triggers a significant tax obligation. Yep. Uncle Sam wants a taste of your proceeds. First off, the gain - difference between your net purchase price and basis will be federally taxed at 20%. Next, any depreciation taken through the years will be recaptured at 25%. California will tack on 13.3% and finally a cut by the Affordable Care Act of 3.8%. All in - your looking at close to 40% of your gain paid in taxes. Some simply believe the best way to go is to pay the levy and be done. With the crazy numbers being offered today - there is still a lot remaining. If the thought of a 40% hit is too much, you can certainly defer the tax through several means - a tax deferred exchange, a partial exchange, a Delaware Statutory Trust, or an allocated LLC. All of these deferral strategies require specialized advice through your CPA and real estate counsel.
 
Certainly, none of us can predict how long these unprecedented prices will continue. Will world events such as the war in Ukraine, rising interest rates, another pandemic, or something unforeseen crater our market with uncertainty? Normally, a vacancy factor of around 5-6% provides a good platform for buyers and sellers to transact. By that I mean 94-95% of our industrial stock is occupied. Leaving the balance in play. Today, depending upon the location in SoCal - we’re talking 1% or less. Skewed is the market. A catastrophe indeed would precede any return to normalcy. 
 
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, April 1, 2022

Reasons to Sell - The Sale Market

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Since June of 2020, the industrial real estate market - manufacturing and logistics buildings - has been on turbo-charge! Anything for sale - regardless how ludicrous the asking price might appear - is met with multiple offers, bidding wars, and one group of winners - sellers!
 
 
As buyers go - we’ve witnessed an owner occupant’s ability to compete with investors wane and a flip in the “occupant premium” once experienced. If you don’t recall the meaning of occupant premium - here is a brief refresher. Occupants - companies that own the locations from which they operate - once could pay about 20% more than investors - those reliant upon rental income produced by the location. Utility, financeability, and rent savings were the main three reasons occupants could pay more. The downside of the higher prices paid, however, was the uncertainty of financing contingencies. If the occupant couldn’t get a loan - the deal could crater. But, now that rents have increased exponentially, investor capital is abundant - downright voracious - and most investors buy without needing bank involvement - the tables have turned. Our paradigm has shifted! Now, investors typically pay way more than occupants. 
 
Rarely, would an investor buy a vacant building and rely upon their ability to rent it in a timely manner. Not that long ago, a steep discount would be negotiated for buying an empty site. After all, such things as downtime, free rent, improvements to the real estate, and brokerage fees had to be estimated and deducted. A long term lease found favor with investors. If this lease had to be originated, an investor would pay less. Now? Shorter termed leases or empty buildings are preferred. Because the market rate can be captured. If an under market agreement is in place - it could take years to ramp up the rate to prevailing levels. In fact, product is in such short supply and capital is searching for a home - we’ve encountered a new deal structure - “the forward”. Simply, investors are lapping up “planned” projects prior to them breaking ground! Amazing. 
 
With that update as a preamble, let’s discuss some reasons why sale opportunities pop-up these days. 
 
Business operation is sold which yields the location an excess. One of the most common circumstances today, which creates a need to sell, is the sale of the business occupying the premises. Some owners opt to retain and lease to the new entity but many cash in the chips. 
 
Fund matures. Many instructional investors set up pools of money with sunset clauses. Simply, at the end of x years - the fund is set to liquidate and return the capital investment. You may be wondering what happens if the fund matures in a down market. Is the sale forced? Generally, the administrator has some latitude to move the sale date up or back to account for market fluctuations. 
 
Merchant builders. Some developers like to acquire land, build, and sell. These function much like new home builders. They like to keep the money turning. 
 
Liquidity event. Death of a principal, a bankruptcy, imminent domain, or partnership squabbles - all can force the sale of a piece of commercial real estate. 
 
At these prices - why not? Finally. Much of our sale activity in 2022 is on an unsolicited basis. See a property you like - that’s not for sale - and submit an offer to buy it. Easy. After all, everything is for sale at some price, right? Akin to casting off the Balboa pier in the hopes of a catch - this manner of scarring up deals is terribly time consuming and inefficient. For myriad reasons, these Hail Marys rarely land. But, it only takes one or two.  
 
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.