What’s Commercial Real Estate Worth Post Covid - and other Assorted Questions

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First of all I pray that each of you is maintaining during this period of craziness. This too shall pass and we will be better, stronger and more nimble as a result. As previously mentioned, I have pivoted into a resource and informational clearinghouse for my clients and prospective clients. Consequently I have made a number of phone calls over the past three weeks. After all, our transactional volume has decreased substantially and with an awful lot of time at home - what better time to take advantage of some great connections and conversations.

I thought it would be informative to review a few of the most commonly asked questions I’m asked these days and the ways in which I am responding.

Are there any essential deals? Certainly transactions which are the replacement portion of a relinquished property - the upleg to a 1031 tax deferred exchange - are essential in order to defer capital gains. Late yesterday we learned the IRS extended some deadlines. According to Stephen Decker of IPX 1031 exchange “

Are new deals occurring? New closings, yes. But, generally the origin preceded the current craziness. New listings are appearing on the market. However, most existing contingent escrows and requirements to buy or lease have hit the pause button until we get some clarity.

What do you see after all of this shakes out? As I opined a couple of weeks ago - retail may never recover as we knew it before. Folks will realize they can occupy fewer square feet of office space with greater efficiency. The new trend toward co-working and collaborative work places will be altered because occupants will maintain distancing. Industrial - in many cases essential - will be the big winner in commercial real estate classes. Multi-family has a tsunami of issues with rent control, eviction moratoriums and tenant defaults to overcome.

Is Commercial Real Estate going to get crushed? In the short run - 6-12 months - quite possibly. Expect a bounce back to be steeper than 2010. Aside from retail - our fundamentals pre-Covid - vacancy, absorption, and rent growth were quite strong. If we can return our economy to work soon - the carnage may be largely avoided.

Is now a good time to market my commercial real estate? Unless the sale is forced or a new tenant is sought for a vacant building - I would suggest waiting a few weeks.

What is my building worth these days? No one really knows. Value depends upon the capitalized net income of rents or the utility with which an occupant’s operation relies. In the former - how will rents be impacted and at what return percentage will the market place settle? Pre-Covid found yield requirements in the 4.5-5% range. Now. Anybody’s guess.

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.

Bright Spots in a Dark Commercial Real Estate World

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Those of you who know me realize I’m a “half full” guy - an optimist. After all, commercial real estate brokerage requires us to be upbeat. Transactions can be clipping along nicely when something unforeseen derails them. Needed to return deals to the track is a belief things will work out for the best through a solid resolve and problem solving attitude.

Frankly, I was a bit down last month when our world morphed into the reality of Covid-19 quarantines, a precipitous drop in business, working remotely, and staff furloughs. We were bombarded every day with a torrent of terrible tales, increased body counts, and venue closures. I had to turn off the news, pull myself up, and return to my daily routine of advising commercial real estate owners and occupants. By what should I say to them - amidst the uncertainty?

Well. As thin as these words appear - we are all in this together. No one’s to blame. In order to survive we must cooperate. Communication is key. Our clients want solutions. Thus, I pivoted into a resource. Developed were talking points to discuss rent forgiveness. Strategies were outlined to request mortgage relief. Numerous webinars educated me on the CARES Act. Attended were ZOOM calls with strategic partners such as wealth managers, bankers, commercial insurance brokers, mergers and acquisitions, accounting, human resources, and legal professionals. What developed was a nice list of assistance I could provide. So I started dialing the phone.

As the completed dials compounded - what I didn’t anticipate were the bright spots in an otherwise dark world. Indulge me while I share a few.

One of my clients applies adhesives to rolls of tape. His business is booming! Why? Admittance wrist bands to hospitals are supplied by his main customer.

Aerospace tooling operations are bustling. Military airplanes are still flying. Parts are replaced. Plus, many make ventilator components.

Received yesterday was a request from one of my colleagues. A company has countless drums of hand sanitizer scattered across the nation. Needed was a plastic bottle manufacturer who could blow mold the bottles and fill them - immediately. Speaking of sanitizer. How about my client who builds the metal bases on which the sanitizing stations rest. Yep. Crushing it!

You’d believe pool chemicals might be a bit of a luxury. Not so! Pools must be kept clean and germ free lest the bad virus starts to grow. My supplier of pool chemicals has benefitted from a pop in sales.

Construction crosses many subsets of industrial occupants. All are essential to keep the infrastructure humming - heating, cooling, electricity, roofs and the like.

As our society adjusts to on-line ordering and home delivery - operations such as e-commerce, transportation, and maintenance of vehicles are slammed. Empty store shelves require replenishment. Anyone along the supply chain - manufacturers of toilet paper, warehousers, truckers, and grocery store personnel are working non-stop.

Akin to the aftermath of those devastating brush fires which blacken the landscape - green shoots of do appear.

Stay well, dear readers! This too shall pass and we will be stronger and better as a result.

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.

Will Commercial Real Estate Change Forever?

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Social distancing, shelter in place, “Coronacation”, learning from a distance - phases now rooted in our lexicon which weren’t used just one month ago. My how things have changed - and how quickly! My column from March 1 - in this space - recapped an event I attended the week prior. Hosted by Northwest Mutual - the gathering focused upon ways to keep more of your businesses profit. Also reviewed were the five causes of a bear market - one of which was recession. I cautiously opined that I wasn’t predicting a recession - even though the disruptions to our supply chains were forming as China suffered the impact of a workforce largely bridled. Why run around like Chicken Little? After all, the job creation numbers in February were remarkable. Man was I wrong! Often stated - you see the big things coming, it’s the little things that get you! Little indeed - microscopic in fact.

As our local economy is in virtual lockdown and the raging tsunami of disruption roils our psyche - will commercial real estate, and it’s owners and occupants change? Maybe forever? In a word, yes! Indulge me while I recap a few.

Office space. Although we are open for business - our physical location at 1004 W. Taft in Orange is closed to the public. Agents can come and go as they please - being mindful of the governor’s guidelines - but are encouraged to work remotely. Staff members are home bound with an internet connection to projects that need attention. For the first time in our office’s 37 year history - we are completely virtual. We own our building with a partner who services auto loans. Roughly 85 employees - in both companies - reside in the 21,700 square foot, two story structure. Per agent - we pay approximately $731 per month in rent - albeit to ourselves. Is space overhead necessary? Certainly for some companies. However, I’m certain many others will do the same math and ask the same questions.

Retail establishments. Wow! Traditional retail was in a world of hurt before the pandemic. Now? Pure carnage. Many stores - straddling the ledge of viability - just got shoved into the abyss. Few will return. Sure. The biggies - Walmart, Target, Costco, Home Depot - will rebound with a vengeance. But Amazon and other on-line portals will consume what retail business is left. Some restaurants will decide on-line and takeout is more profitable and adjust with smaller spaces. What will be left is a landscape of empty storefronts. Investors who rely upon rent from these tenants to service their debt and fuel their lifestyles? They just got a pay cut.

Automation. Hmmm. I don’t believe a conveyor system ever called in sick, filed a worker’s comp claim, sued an employer, or showed up late to work after a crazy weekend. My prediction is manufacturers and logistics providers - once they navigate the mine field of business interruption - will restructure accordingly. Less reliance upon employees and more automation. Akin to lack of preparedness in advance of a big shaker - local employers were not geared for this level of disruption.

Technology. I’m penning this from an iPad on our living room sofa. Many of you are reading this column on line from your breakfast rooms. Wednesday my strategic business coach - The Massimo Group - hosted a webinar entitled “how to be a lighthouse in a storm”. Yesterday, three strategic partners and I joined a Zoom call to discuss their worlds and some suggestions on servicing our client’s uncertainty. Sure. This is not new technology but the ways in which we used it was innovative. Look for expansion in internet bandwidth, mobile solutions, and other advances in technology. Tele-diagnosis’s?

Public gatherings. 9.11 changed security protocol forever. Remember when you could show up to the gate as your flight was revving to taxi? I do! Or walk into a courthouse through a doorway and not under a metal detector. Emptying your pockets of wallet, phone, keys and stripping belt buckles was never required at amusement parks or sporting events until the past few years. Will we now have our temps checked when we enter the Honda center? Sorry sir. You’re running a bit hot - we cannot let you in. Will networking events - chambers of commerce, Provisors, BNI - now be held virtually? How about city council meetings? No public discourse? Well, maybe that’s positive. Pro games without fans? Return of the drive-through theatre? Wedding venues, country clubs, convention halls. Preposterous? Maybe. Maybe not. Think airline security now vs 2000. A lot has changed in twenty short years.

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.

We MUST Save Tenants!

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Commercial real estate is a complicated web of owners, occupants, lenders, and buildings. Owners - owner occupants or investors - are either residents of their commercial real estate or reliant upon the income it produces. Occupants or tenants - who operate businesses - pay rent - either to themselves or to a landlord. Lenders make loans - ordinate debt - based upon the sum occupants pay. So you can see - at the baseline of all commercial real estate - someone MUST pay rent. If not, the entire structure comes cascading down.

During this pandemic - unprecedented in so many ways - government has shuttered businesses such as restaurants, bars, and meeting venues. Many more companies have adopted a remote work force - office suites are dark. Those few “essential” operations keep chugging along - albeit at a reduced labor force. When commerce can’t occur, cash dries up - money used to pay employees, rent, debt service, purchase raw materials, etc. evaporates.

Many owners of commercial real estate - such as the Irvine Company - have pre-empted the spate of rent defaults by offering their retail tenants a deferral of their payments for 90 days. The deferral is then repaid over the following year. Bravo!

If your enterprise is facing similar pressure - below is a simple set of talking points you can use to have a conversation with the owner of your commercial real estate.

Please keep in mind this approach will vary depending upon the sophistication of your landlord, your relationship, and the specific impact that COVID-19 has had upon your operations. It’s important to be very transparent with your owner these days in the hardship that your company is experiencing.

Number one. Your tenancy is vital to our economy and specifically to your landlord’s building - as your rent pays his mortgage and creates the building’s value. 

Number two. To replace your tenancy is is extremely costly. In good times this means approximately 10 to 15% of the entire consideration of the lease. In uncertain times this could be up to 30% of the total consideration of the lease. A good tenant is not someone you want to lose and it’s in everyone’s best interest to keep the tenancy viable. 

Number three. Request rent relief in the amount of $_______________ as a furtherance of your viability.

I’m confident once we navigate this patch of uncertainty - our economy will return to its previous trajectory - at least that is my hope. Tenants, please stay safe and healthy out there! Our future relies upon you.

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.