SOLUTIONS for Your Commercial Real Estate Requirement

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A couple of weeks ago, we discussed a system for analyzing an investment property, commercial lease, or potential building purchase,. Known as the acronym - FOCUS - I deferred our conversation on the S - Solution step - as the final letter of itself was column worthy. As you may recall, the F stands for Facts, O for Opportunity, C - Consequence, and U - Understanding. If you missed the missive and would like to check it out - you may do so here. 
 
Solutions may splinter into several directions. However, they generally fall into one of three categories - do nothing, do something, or defer a decision. Simply, if you’ve sold an income property, have used the FOCUS approach to determine your next move, and are to the Solution step - you may choose to pay the gains (do nothing), purchase another asset (do something), or wait (defer).
 
As you approach an expiring lease - the process could suggest you renew your lease (do nothing), relocate into a new address (do something), or allow the contract to expire and hope your owner doesn’t force you to vacate. By the way - with today’s obscenely low vacancies - I’d not suggest doing this. 
 
A lessee considering a purchase could opt to renew the leased premises (do nothing), pull the trigger on the buy (do something), or wait until the nutty prices level (defer).
 
Unfortunately, Solutions are rarely as straight forward as outlined above. 
 
Using our income property sale situation - hours of analysis precede the Solution. Doing nothing and paying the taxes owed appears simple. But, when you consider Uncle Sam and Cousin Gavin will clip an enormous chunk of your profit - this may pale in comparison to another route. Doing something - by affecting a tax deferred purchase and buying another parcel comes with myriad complexities. First, you must decide to do this before your sale closes. Next there are finite time frames guiding your acquisition. And don’t forget. You MUST find something! Sellers are bullish. The pool of suitable offerings is limited. As Tom Petty crooned - “the waiting is the hardest part”. Deferring a decision - if you sell an income property - forces you into the “Do Nothing” mode. If you close without designating your desire to exchange - you lose the option. A fat tax bill awaits.
 
Now, let’s take the example of an expiring lease. Sure. You could elect to find a new spot. In effect “do something”. But the thinking behind the decision warrants some dissection. Frequently we meet with a tenant and hear - “once our lease expires, we will DEFINITELY RELOCATE!” But, these days the majority of occupants don’t. After careful consideration, most realize renewing an existing lease has many benefits - an expensive move is avoided, disruption is nullified, and downtime is erased. The industrial real estate market suffers from an acute lack of available spaces. In some size ranges, our vacancy is zero! Your fine intention to upgrade into a newer facility might be met with very limited choices - and costly at that. Finally, some just cannot pivot into a new address. Generally, we see as motivators such things as - custom improvements, special permitting, or an irreplaceable area.
 
A direction to purchase your business home and pay rent to yourself is a sound plan - sometimes. Doing nothing means you’ll stay, continue to rent, and run your business with little change. Hopping into a purchase - doing something - would require you to survey the market, get yourself approved for financing or tap your piggy bank, and execute a transaction. Don’t forget to look into the “true cost of ownership” by adding - mortgage payments, property taxes, insurance, and some little things like maintenance. It’s generally much cheaper to lease. Oh yeah. Your down payment isn’t free - even if it’s in a liquid account. You could choose to hire, invest in machinery, or open a new market with the cash. In some cases, these alternate investments yield bigger returns than buying a building. Deferring until our pricing settles could make sense. My opinion is we’re long overdue for a correction. But, so far, even a Pandemic hasn’t stalled the upward march.
 
Sometimes FOCUSing on the Solution is tough! 
 
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.

Why so Many Off-Market Deals?

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Thank you dear readers for monitoring my missives for the past six years as with this week’s column we celebrate an anniversary! Yep. The first column authored by yours truly was Super Bowl Sunday of 2015. My how the years have flown. Thank you! Here’s to another six. Whattaya say?
 
Recently, I observed a phenomenon of market activity rarely seen in my years in the commercial real estate business - that of “what’s beneath the waves”. Many deals these days, akin to a ZOOM participant smartly clad from the waste up but wearing pajama bottoms - are happening out-of-sight. Referred to as “off-market” - these secret agreements dominate!
 
So you may be wondering why. I certainly am. Allow me to proffer some opinions. First, a bit of background. Historically, the motivation of accepting an unsolicited offer was attached to one of the following: Selling pressure such as a pending loan maturity or a foreclosure. Desire to avoid disruption of a business - after all, publicly marketed offerings come with tours - read, people walking through. Sale of the operation. Many times the buyer of the company will pay the most for the real estate housing the enterprise. Despite these triggers, proceeds to the seller are generally maximized by casting a wide net.
 
Selling off-market also comes with a down-side angle. You may leave money on the table, you have no advocate to guide you through market conditions and no vetting has occurred. There could be an unresolved title matter, a leaky roof, or an obstinate tenant who must be relocated. Don’t forget the tax impact of selling. Sure. You’ll face this either way - but when that offer arrives - do you understand the after-tax net proceeds?
 
But, these days, we’re seeing sales occur despite the above. The appetite for industrial buildings for buyers to occupy, developers to scrape and build new, or investors to satisfy tax deferred exchanges is voracious! If you’re a seller - or considering selling - your options are to list or not. Hmmmm. Sounds like an HGTV show idea. If you list, your broker will run a process - plant a sign in front, create some marketing collateral, notify the local agents, publish in the multiples, and alert the neighbors. Sprinkle in a drone fly, Matterport tour, some digital pushes and voila! Let the games begin. But with the obscene lack of inventory - many practitioners are phoning sellers with another approach. Just accept our proposal, short circuit the marketing time, avoid the disruption and oh by the way - the buyer we have will pay us, give you top dollar, and close without a financing contingency. Bam! Sellers are responding favorably.
 
But, also in play is what I call “mini-marketing”. Here’s how it works. An owner gives an indication he’ll transact. Brokerage help in engaged. A brief fact sheet is prepared outlining the offering - all with the concurrence of the seller. The best half dozen buyers are solicited. Typically, four will have a strong interest. Boom.
 
Finally, a stakeholder may have zero interest in selling. He may only want to lease the building and hold it long term. But, in the process of finding a tenant - buyer activity floods his inbox. At the prices folks are paying - he can’t refuse. Plus, he can sell high and redeploy into a tax friendlier state such as Texas or Nevada and bolster his return.
 
So in order to know what’s really occurring - take a look under the surface. You might just find that whale of a buyer you seek.
 
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.

Making a Commercial Real Estate Decision Requires FOCUS!

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As a frequent reader of this column, you know how much I like acronyms! You may have seen my missives on NUCLEAR, ask MR BOB, and even one from my friend and neighbor, Rudy - CLIP. Acronyms and their sister, nemonic devices, got me through school - somewhat unscathed - as they train your mind to remember lists and/or a process. Today. Yep! Another one. Proper attribution must be given to my business coach, Rod Santomassimo of the Massimo Group for this sequence. If you’d like to learn more - he’s written a great book entitled Knowing Isn’t Doing - Don’t Kid Yourself. If you’re facing a commercial real estate decision - specifically a relocation - I’d suggest you run down the list and ask yourself a few questions. In other words FOCUS!

F. Facts. Your current location as an owner or an occupant of commercial real estate contains a set of knowns - facts. You been at your location for a period of time. You lease. You own, etc. Layer in such things as the expiration of your rental agreement or a loan maturity. Consider the drivers of your business and how those may have changed. Was a competitor acquired? Did you add employees or machinery since you moved in? By the way. At this point - you may already have a direction. Humor me. Work yourself through the balance of the exercise. Sometimes - results may vary. 

O. Opportunity. Let’s now carefully delve into what’s working with the building and importantly, what’s not. Examples of what’s working could be - your customers know where you are, freeway frontage provides free advertising, or the lease rate you negotiated is 20% below the market rates. However, if the spot causes your employees to park down the street or if your warehouse must be completely unloaded and reloaded so folks can work - those are problems. You may also want to give some reflection to the motivators when you leased or bought the real estate. Was the market on fire and you took what you could get with the promise of re-evaluation? 

C. Consequence. Simply. You’ll need to do some math here. Consider what happens if you do nothing vs something - in dollars and cents. We recently counseled a logistics company. Considered was converting a leased premise to an owned one with a lot more space. Clearly, the new digs were going to cost a great deal more. However, the downside of staying put and continuing to lease would cripple their ability to grow their business. The loss of revenue - by standing pat - was enormous. 

U. Understanding. Now you know your situation, have dived into what’s working or not, and have calculated the monetary impact of your options. All that remains is a road map. Proceed to the next step. 

S. Solution. As the solution is column worthy itself - you’ll have to tune in next week for some suggestions. 

So, please don’t lose FOCUS this week until we meet again. 

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.

Look Beneath the Surface for the TRUE Story

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We’ve been blessed with five grandchildren - two of whom live within walking distance. We see them often. It’s AWESOME! Our oldest is obsessed with the history of the Titanic. Go figure. Suffice to say we’ve become quite expert on the pitfalls of icebergs. As yet another documentary was consumed last night - my thoughts veered - sorry - to commercial real estate. Not the disaster part but the iceberg part. You see, what’s happening currently with industrial real estate is akin to those floating behemoths of frozen H2O - if you can’t see below the surface - you’ll miss 80% of the market’s activity.

 
If we take a look at north Orange County, California which includes the cities of Anaheim, Placentia, Yorba Linda, Brea, Fullerton, Orange - and throw in East Yorba Linda, AKA Corona - for good measure - you will find a startling lack of available Class A buildings. And by Class A, I’m referring to those constructed since 2010. Many of these cities have ZERO availabilities above 100,000 square feet. What’s special about Class A you may be wondering? Well, new inventory comes equipped with several goodies - such as taller ceilings, more powerful fire suppression, and greater truck access. Might I mention ALL of these goodies are needed for the eCommerce occupants that stack and ship things. One of the advantages enjoyed by the Inland Empire? There are still large swaths of land to be developed into concrete monsters and the existing buildings are newer. So what? Inland Empire lease rates are quickly surpassing those of North Orange County - especially if it’s a Class A building in Ontario vs a Class C in Anaheim. Occupants are paying for image and quality. So what if they drive a hit farther. Their business run so much more efficiently.

So how about what’s happening beneath the waves, so to speak? Developers are voraciously gobbling campuses of industrial buildings formerly housing manufacturing entities. We saw this begin around 2003 and continue with a vengeance through 2008. Oops. Minor reset! Then commence again around 2014. Panattoni Development’s re-tool of the Boeing campus in East Anaheim was spectacular! A wonderful mix of quality manufacturing and logistics buildings was delivered over several phases. Even Disney re-located their costume operation to the project. 

Beckman in Fullerton must also be mentioned. If you’re ever in the neighborhood of Harbor and Lambert - take a look. You’ll be impressed! Western Realco created a masterful layout of logistics spaces which engendered great appeal and demand. 

But over the last six months - acquisition activity has been turbo-charged! A former National Oilwell Varco site in Brea will soon house a gorgeous 108,000 square foot development. Part of the former Mitsubishi holdings in Cypress will be re-developed by scraping some existing buildings and leaving some more on the 22 acre parcel. Kimberly Clark’s operation - formerly located on Orangethorpe in Fullerton could very soon be the home of your favorite warehouse operation. Planned are several large boxes for that site. Finally, that location you pass on the 91 Freeway - Universal Alloys? Yep. Slated for a new development. 

The landscape of available Class A inventory should change dramatically over the next twelve months. It will be curious to see if any of the buildings actually hit the market - or if they are simply pre-leased. I’m betting on the latter. 

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.