With the Slowdown - How should you Change - 4 Ways

Image Attribution: www.homesphere.com

I read with great interest this week a column by Jeff Collins entitled Home Seller’s Market Cooling wherein he reports the year over year home sales in December of 2018 declined 20.3%! This is a staggering figure and confirms “the bloom is off the rose” officially in the housing market. Economic uncertainty, a spike in interest rates, and a glut of homes for sale are the culprits - a decline in the median home price in SoCal is the hangover that will follow. Will the carnage be similar to 2008-2009? I doubt it - but we will have to stay tuned.

You may be wondering - I thought this was a column on COMMERCIAL real estate? Indeed. But our world closely mirrors that of our residential counterparts - albeit nine to eighteen months later.

So with that hurricane of change on the horizon - how should you - an occupant of commercial real estate prepare for the downturn that is blowing our direction?

If you’re in a lease. The owner of your building relies upon the rent you pay each month to fund his livelihood. He’s had a great run! You may find yourself paying a rate which is over market. Remember that renewal you signed in 2016 when no alternatives existed for your consideration and you decided to stay put? Yep. You’d have more leverage this year. So now you’re faced with a few more years of rent premium. Do you have an argument? Of course. Depending upon the nature of your building owner - you may be able to appeal to his need for stability. He may be willing to reduce your rent in return for your commitment to stay another few years past your expiration. Give it a try. The worst he can say is no.

If you’re lease expires this year or next. You’re golden! The market is moving in your favor. Find a commercial real estate professional who can report to you - monthly - on the market. You’re interested in new availabilities and new completed transactions. Pay close attention to how long these avails stick around, how many leave the market each month, any variance in “ask” vs “take”, and the concessions owners are including - such as abated rent and money for upgrades. If my prediction is correct - you’ll start to see more owner motivation creeping in.

If you want to buy. Wait! Similar to the posture you adopt with an expiring lease - the market is moving your direction. It may not appear that way because our vacancy is still historically low. But, we are seeing two things which confirm the shift. First, we are witnessing price reductions for offerings that have not sold. In a robust market - the only price reductions you see are for buildings with problems. Now, that is evolving into solid offerings - maybe overpriced at the outset - settling into reality. Secondly, fewer buyers are orbiting waiting for an open place to land. Those in the market are not afraid to “make an offer” at well below asking price.

Position yourself for success. Some believe - as the market changes - the need for preparation vanishes. Not so! If you’re scouting the area for that perfect lease with a motivated landlord - you still must make sure your financials are updated and solid. Give some thought to your story and verify it’s compelling. Create a laser focused understanding of your value as a tenant and be conversant with his cost to originate a lease with you. Specifically - how much revenue will your lease generate over the term minus the abated rent, improvements, and broker fees. Will he lay fallow a few more months until someone else wanders by? Buying? You still need a pre-qualification from a lender. Certainty of close is what most seller’s seek today. Finally, remember - negotiations work best when both parties win.

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.com.