3 Random Commercial Real Estate Thoughts

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As we now have eclipsed six months of 2021 - I know, right? Costco already has Christmas decorations displayed alongside the red, white, and blue sheet cakes! But I digress. Anyway, I thought it would be fun to review what this year has brought and what I see for the balance of 2021. It’s good to periodically clear my consciousness of clutter, so I appreciate your indulgence.
 
One year ago - July 2020. One year ago today we got some great news on a deal we were transacting. The due diligence period ended, the buyer waived contingencies, and we proceeded to close the escrow on July 17, 2020. Boom! Why do I mention this? You see, this offering was originally launched in February 2020 - great timing, huh? We quickly received an acceptable proposal and put the property under contract - just in time for the United States to hit the pause button. As you would expect, the deal blew up, we waited, and re-launched the marketing in June 2020. Our new chronology proved to be prescient as buying activity had returned with a vengeance. Candidly, the uptick in industrial demand has not stopped - if anything it’s even more frothy that it was a year ago. But why? Manufacturing and logistics concerns were deemed essential. Replacement parts were needed for anything relating to home or auto. Because people were stranded at home - they spent hours staring at their computer screens and ordering merchandise. All of these factors caused businesses - who make and ship things - to explode with commerce.
 
What is taking so long? I had a nice conversation yesterday with a moving and storage company with whom I network. He had just visited a tech company in the in the Inland Empire that is experiencing a transition. Apparently, a decision has been made to largely work remotely and therefore their former bristling bank of office suites will not be needed. They’ll attempt to find a surrogate to replace their tenancy. This is a classic example of the decisions that will be made by office occupants throughout the balance of 2021. Now that we have a clear path forward - well, until the next speed bump - folks are starting to return to the office - or not. We have a much clearer picture of exactly how much square footage operations require. So to my question of what is taking so long? The uncertainty that a market upheaval experiences. When California shut down in March 2020 and we were forced to hibernate in our homes, no one really knew what the future held. As we emerged from the ether after 90 to 120 days we discovered that industrial activity returned to its pre-pandemic turbo charged trajectory but the office world was still mired in lock down. Uncertainty is painful! Decision gridlock ensues. Long term commitments - such as a multi-year lease renewal - are postponed.
 
Skate to where the puck will be. Overused but so descriptive - “Wayne Gretzky famously opined, “I skate to where the puck is will be, not where it has been.” It's a popular quote because it vividly illustrates something that everyone wants to do, but may not understand how. You may be wondering what this has to with Commercial Real Estate? Just this. Predicting where lease rates and sale prices will be in the upcoming months is next to impossible! Especially with inventory planned or under construction. Admittedly, prices will be higher - but how much higher? Placed is a huge burden on commercial real estate practitioners to provide proper guidance to our clients. Afterall, we don’t want to leave shekels on the sideboard. Vacancies are expensive, however. So, if you press - which can cause a delayed occupancy - is the expense worth it? During this time I generally recommend pricing on a to be determined basis which unfortunately is a bit of a cop out. Occupants like to negotiate from an established ask - not a - you tell us what it’s worth to you.
 
Let’s do this again next January - the predictions, not the Pandemic - and see how accurate we were, shall we?

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.