Is Price Important - 5 Reasons Why it’s Not!

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This could be the shortest column EVER! Of course price is important. End of story. But, because I have a bit more space - allow me to offer some arguments as to why price is not important. As we’ve discussed - buyers of commercial real estate either buy to occupy (owner occupant) or buy to collect the rents as income (investor). In the latter case - no relationship exists between the owner and the occupant - it’s strictly arm’s length. Counter with the former as an owner operated business will soon be housed.

With this as a backdrop - in what circumstances would price not matter?

Utility trumps. Currently, I’ve a client who leases a good sized space for his distribution business. His lease expires in a year and he wants to buy a building from which to operate. While understanding his motivation - he explained - the new footprint will allow him to triple his revenue. Sure. Owning a facility twice the size of his leased premises will cost him more - but not as much as the inability to expand his revenue. Plus, these are young businessmen. They see the bigger building accommodating their growth for many years. Does price matter? Not in the face of the alternative - stymying the sales pop!

Tax impact. Many times an investor will find himself in a pickle. You see, he sold a piece of commercial real estate and must now purchase another lest he pay a significant chunk of his equity to the government. I’ve seen extreme examples where the potential tax exceeds the sale proceeds. Does price matter? No! Just help me defer my tax obligation.

The hold horizon is longer. When I started my commercial real estate career - Wham! was together - the price of a 50,000 square foot industrial building was around $2,500,000. The same 50,000 square foot building today weighs in closer to $11,500,000. Wham is right! So that buyer in 1984 who had heartburn over a few thousand dollars is now kicking himself. Does price matter? No. Just don’t ever sell.

Financing is attractive. We have benefited from Eisenhower era interest rates for several years. The days of double digit borrowing costs we saw in the early 1980s have been usurped by rates in the low 4% range. If you can buy today - lock in financing at record low rates for 25 years - why not? Does price matter? Not when the payment is close to what you would pay in rent.

After-tax benefits. Owners of commercial real estate are afforded many ways to reduce their taxable income. Depreciation. Each year - as a property owner - you’re able to deduct a percentage of the structure’s value. Certain expenses related to the operation of the real estate are also deductible. The costs associated with re-tenanting should be considered. Mortgage interest? Yep. Does price matter? Not when you analyze the after-tax reality.

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.

What is a Tenant Rep Broker?

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A commercial real estate professional’s work is generally divided between agency assignments - listings - wherein an owner is represented or tenant or buyer representations. In the former - an agency - needed is a buyer or tenant for a vacant building. So, we are hired to locate an occupant. The latter? Yep. We are engaged to source a spot for a buyer to by or a tenant to lease.

Today, I delve into the world of buyer and tenant representation also know as Tenant Rep. By the way - this genre of commercial real estate practice evolved in the mid eighties. Largely responsible was the legendary Dallas Cowboy quarterback Roger Staubach. Prior to that time most of us were generalists and even today most of us work both sides of the fence - owners and occupants.

When do you require a Tenant Rep Broker? Most typically a need arises. Such as - the current physical plant can no longer house the operation or the opposite - swimming in excess square footage is the company. A lease expiration portends a requirement as one of three decisions must be made - stay and extend the term, move, or stay month-to-month. Mergers and acquisitions can create a Brady Bunch of facilities with a consolidation warranted. Opening a location in a new market creates a search criteria. Sure. You could attempt to navigate the waters without help - but you recall what someone once said about the person who represents himself.

What is typical? Standard among most practitioners in this space is an engagement agreement whereby you - the occupant - “hire” the broker to conduct a search and market your requirement. Included in this marketing is a notification sent to cooperating professionals, solicitation of owners with buildings meeting the criteria, and a vetting of potential buildings submitted for consideration.

Who pays? The cool thing about engaging a Tenant Rep is the owner of the building pays him. You may be thinking - I know I must somehow pay more. In actuality, you don’t. Most market lease rates and sales prices contemplate a broker fee. If you forego representation - you pay more because you lose the benefit of her market knowledge - which leads to more favorable rates and terms.

Are other services included? In some instances - yes! Many Tenant Rep outfits employ project managers, space planners, architects, and move advisors. All are included with no cost to you.

How does the process work? Steps may vary. But generally - you engage the professional, your requirement is clearly defined, marketing collateral is created, your requirement is published to the brokerage community, submittals are received and vetted, buildings are previewed, alternatives are toured, requests for proposals are submitted, proposals are received and compared, negotiations commence, negotiations are finalized, a lease or purchase agreement is signed, the deal is closed, improvements to the space - if any - are completed, you move in. Whew! Now you understand why you shouldn’t try this untethered. It’s a complicated process with many steps.

A Week in the Life of a Commercial Broker

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As commercial real estate professionals we have two commodities - our time and our information - aka our market knowledge. Therefore - we must spend our time wisely - on profitable activities and share our knowledge with those who need our services. My philosophy is to be stingy with my time and generous with my knowledge.

So, just how do I spend my week to monetize activity and gain market knowledge? Today - I’ll share with you a formula that has served me well. The percentage of time spent on each category each week may vary according to tenure - but should include all of the components highlighted below.

Prospecting. Knocking on doors and calling on prospects on the phone. Sure. There may be a more high tech way to go about prospecting but I have found the old fashioned way of looking for new business still occupies a large part of my week.

Canvassing. This is quite different than prospecting although some use the term interchangeably. Canvassing is viewing the stock of inventory within your market. Whereas prospecting is about business development. My differentiation between canvassing and prospecting? Canvassing is gaining knowledge about the building and prospecting is gaining knowledge about the occupant or the owner of said building.

Networking. Chambers of Commerce, BNI, Society of Office in Industrial Realtors, National Association for Office and Industrial Parks, Provisors, Vistage, all provide great platforms from which to meet professionals who are complementary to your profession but not competitive. Remember, networking is not selling. Networking is creating strategic referral relationships. A successful referral relationship should work both ways - you should be willing to give in order to get.

Research. Conducting a search for a potential purchase or lease requirement, finding out members of a company who have a LinkedIn profile, reviewing quarterly reports of publicly traded companies, and updating your contact relationship manager fall into the category of research. Many companies have a research department whereas smaller brokerage houses conduct their research individually. Mine tends to be a combination of both.

Meetings. Our commercial real estate industry is a contact sport - meaning we must conduct face-to-face negotiations, building tours and prospect discovery meetings. I have used video conferencing to accomplish this when a face-to-face meeting is impractical.

Food and drink opportunities. Each work week contains at least three food and drink opportunities per day – breakfast, lunch, and dinner. Additional opportunities could be cocktails after work or a midday smoothie at the gym. Don’t eat alone! It will be your most expensive meal ever. I generally conduct these on a one to one basis with a strategic networking partner. I have found these in formal face-to-face meetings are a tremendous way to generate activity.

Transaction coordination. A certain amount of each day must be spent actually closing the business that you generate. I employee a full-time transaction coordinator who can deal with some of the nuts and bolts of the deal such as contract preparation, fielding inquiries and forwarding information, document circulation, tracking of key dates, and general closing conditions. However, if the deal hits a snag and additional negotiation is needed - I am always ready to re-engage.

Marketing. Digital, physical, and personal. The marketing of your services should include a good mix of digital - email marketing, social media marketing and content creation or curation. Mailed to potential prospects and referral partners should be newsworthy articles, gifts, market information, or success stories,. All of these mailed pieces increase your physical presence. You also must be known in your marketplace. Your personal presence – open house attendance, group functions, networking events, and other community activities will boost your personal presence immensely.

There you have it!

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.

Commercial Real Estate IBuyers - Will we See Them?

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I read with great interest Jeff Collin’s column entitled - Will Online IBuyers Upend Home Sales? If you missed the column - shame on you! But, allow me to provide you the abridged version. Currently, there is a trend in residential sales wherein on-line buyers purchase your house quickly and you avoid the hassle of the marketing steps - choosing an agent, pre-sale prep, repairs, staging, showing, negotiating and closing.

Akin to CarMax - you receive an offer on your house - with fees, closing costs, and repair concessions baked in. If you say yes - the deal is done without you ever having to V-dent a sofa pillow. Easy. So what’s the catch? Just this. IBuyers rely upon a motivation which eclipses most sellers. Simply - you MUST sell and can’t wait for the normal sales process to unfold. Remember - the IBuyer isn’t planning to live in your house. They’ll buy it, fix it and flip it to someone who will. Therefore, you walk away with less than a conventional arrangement. How much less? It depends on the condition of your house - repair offset plus the larger fees associated with an IBuyer.

So what’s this to do with commercial real estate? I pondered this question and my thoughts are outlined below.

Do commercial IBuyers exist currently. The short answer is no. Buyers of commercial real estate typically fall into two broad categories - occupants and investors. The difference? Occupants buy to house their business. Investors rely upon the rents paid by the tenants in the building. Residential IBuyers are investors with no desire to lease the house. Their play is to acquire it, prepare it for sale, and sell the home to a resident. Could such a strategy be employed commercially? Sure. Some value-add investors operate this way. But the price delta is enormous. Most commercial real estate sellers - when shown the amount a value-add investor will pay compared to an owner occupant - will opt for the latter.

Can commercial real estate be standardized. Another challenge confronting commercial IBuyers? No two commercial buildings are identical. You may say - gee, neither are there synonymous houses. However, tracts of cookie cutter domiciles dot our poppy filled hills. Very few differences exist within plan models sans owner changes. Not so with commercial real estate. So the challenge becomes just how to value a commercial offering. Layer in some special features such as upgraded offices, a fenced outdoor yard, or special power feed - and the challenge continues. Considered next would be the out sale price or expected lease rate less the cost to originate the lease - fees, concessions, down-time, etc. Kinda complex.

Will we see IBuyers. We’ve certainly encountered on-line selling platforms. What started as a way to liquidate distressed lender owned buildings under the umbrella Auction.com has morphed into Ten-X which relies upon one of three ways to create buyer pools for commercial assets - traditional auction, managed bid or offer select. I’ve used Ten-X successfully. With certain commercial offerings - it works quite well. But the lack of lender owned portfolios of problem properties has slowed their volume. Another drawback? The large buyer load - in addition to the fees paid by the seller to his broker. It’s quite expensive.

The takeaway. Yes. We will see IBuyers. When? Hard to say. Our industry is too huge and spans over 55,000,000 commercial properties nationwide. That’s an awful lot of semolians! Some well-heeled tech savvy group will figure it out and disrupt the commercial buying process. Just look at the way in which CoStar upended commercial real estate research and inventory. Stay tuned.

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.