Strategic Networking in Commercial Real Estate

Image Attribution: www.clipart-library.com 

Today, I’d like to delve into a subject that can benefit any business - retail, office, or industrial or any service provider. I’ll bet that circles the wagons of lots of my readers. Why? Because we all must use creative ways to secure new business and drive revenue. For an attorney that means finding a new client with a legal issue. A plastic injection molding company? A customer in the market for plastic toilet seats must be found. Medical practitioners continue to source new patients. And those of us who sell and lease commercial real estate are on the prowl for an owner with a vacant building in search of a buyer or tenant or a buyer or tenant looking for a business residence. Easy, right?
 
Whether it’s a new client, customer or patient - all have certain characteristics. We refer to this as an “ideal client”, a target audience, or a prospect. Our commercial real estate practice generally involves a family owned and operated manufacturing or logistics company experiencing a transition. Transitions lead to commercial real estate transactions. A simple example is the acquisition of a competitor. When businesses swallow a competing firm with their own set of customers, real estate, machinery and employees - a Brady Bunch of operations results. Many times the “married entity” has too many buildings. Therefore, one or more must be jettisoned. That’s where our team comes in - to find a tenant, sub-tenant, or buyer for the overrun.
 
So, with that explanation as a back drop - how do we find companies in transition? Certainly, employed are the conventional methods of direct mail, ads, social media, calls, etc. But, we’re limited in the number of contacts we can make. That is where strategic networking comes in. Allow me to explain. You see, the enterprise I described - a company in transition - relies upon several professional service providers - also known as trusted advisors. CPAs, business bankers, commercial insurance agents, transactional attorneys, lawyers who plan for estates, investment bankers and wealth advisors are all consulted on a regular basis. A CPA will generally be in touch with an operation several times a year to audit financial statements, prepare taxes, and potentially provide payroll services. Anytime working capital is needed to buy machinery, equipment, hire employees or buy a building - a business banker gets a nod. Commercial insurance? Those policies are renewed annually. Compare that to the number of times a commercial real estate broker is in touch. When we’re transacting - our involvement is daily. Once the deal is done, the need for our services wanes. Consequently, knowing the service providers above, can become a steady source of referrals as they will typically know if the entrepreneur is expanding, contracting, making money, considering selling the business, getting a divorce, or approaching a lease expiration on their business premises.
 
But beware. Strategic networking is not simply phoning trusted advisors and asking for referrals. These relationships must be fostered over years with the idea of adding value to their clients and by referring business to them. Adopt an attitude of giving without the expectation of getting and you’ll be fine.
 
So, there you go. More space than you knew existed.
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.
 

Random Commercial Real Estate Thoughts

Image Attribution: www.clipartbest.com 

As someone famous once opined - they’re only opinions, but they’re all mine! Today, I embark on the first “random thoughts” column of the year. It’s been awhile and clearing your inbox is cathartic - so here goes!
 
Forecast for 2022. Annually, our chapter of the Society of Industrial and Office Realtors convenes for a backward and forward look at commercial real estate happenings. Last night was the first meet-up since February 2020. Yeah, the pandemic crimped face-to-face gatherings, but I digress. It was great to see the gang. But, what must have seemed like a good idea when planning the event - eating outdoors - morphed into a bunch of shivering brokers huddled around too few heaters. Outdoor event in February? What a good idea. Yeah. A bit of a weather gamble. Reviewed were the office and industrial markets for Orange County and the Inland Empire. Below are the highlights.
 
Industrial - OC. Robust activity, lease and sale price increases in the 30% range, little to no available inventory. Expect to see older office buildings purchased and razed for new industrial developments - think former OC Register campus, B of A data center, 2929 Imperial in Brea, etc. More of this to come in 2022.
 
Office - OC. The office market remains mired in uncertainty as big employers are fearful of a return to the office. However, studies have indicated productivity wanes with a remote work force. Therefore, CEOs are attempting to balance safety and productivity. Expect to see hybrid models prevail - flexible hours and days when an office is fully staffed. Brokering during this uncertainty is a challenge.
 
Office - Inland Empire. Inland vacancies are lower than the OC. OC has 13 spaces of 100 vacant whereas Inland has 10. We saw a mass exodus of population from the coastal areas to inland areas during the last two years. Why pay the exorbitant coastal prices if you don’t need to commute to an office? When all the uncertainty settles - predicted is more corporate headquarters located Inland. After all, employers follow the people. Especially if you’ve a workforce reluctant to commute.
 
Industrial - Inland. Mic drop! Ecom, 3PLs, storing and shipping the massive on-line ordering volume that boomers have adopted. The industrial activity Inland is off the charts! Insiders believe we’re headed for $500 per square foot industrial buildings and rents of $2.00 in the IE. Just last year they were $125 and $.65. Those that can’t pay the higher pricing will be forced east, chased out of state, or out of business.
 
Ukraine. Interestingly, there was little to no conversation of the Russian invasion. It could be the recaps were prepared prior or it could be everyone is taking a wait and see. Regardless, we should experience increased energy prices - especially oil and gas. Aside from larger spikes at the pump, petroleum products fuel - sorry - all manner of raw materials that make stuff. This iPad’s plastic case, that foam in your pillow, and the soles of your shoes - yep. All made from petroleum products. So. A further shortage of said raw materials could really hit us in the wallet. Not to mention. Natural gas is used to generate electricity. You get the idea.
 
So, there you go. More space than you knew existed.
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.
 

Finding Additional Plant and Warehouse Space is Easy!

Image Attribution: www.clipart-library.com

Recently, we explored ways to find additional office space within your building. If you missed the column - you can quickly catch up by clicking the link below.
 
Follow the link below to view the article.
 
We’re lacking space, so now what?
https://ocregister-ca-app.newsmemory.com/?publink=0444e7ae6_1348352
 
In today’s super competitive, hyper tight industrial market - moving an operation is problematic as a relocation target may not be available. Not to mention - moving is expensive, inefficient, and the pay back to your company may be many years. Alternatively, many groups simply cannot move. Reasons given? Owned are the premises, special permitting may be in place, proximity to employees, a lease which doesn’t expire for several years and so on.
 
But if your operation needs more room the regardless of the reasons above, space must be found. Today I’ll share a few ideas as to how.
 
In our experience, many operations believe they’re out of space when in reality a bit more can be found in an existing location.
 
Add a production mezzanine: A production mezz can be a great way to increase production square footage without consuming floor space. If you own your location, add machinery or processes, look into this solution.
 
Store some finished product or raw materials outside: Subject to city ordinances (if outside storage is allowed), a yard or a secured area outside multiplies your usable square footage.
 
Lease additional space close by: Whether you own or lease your location, a temporary fix to your space needs may be accomplished by leasing space down the street. But be forewarned - you may create inefficiency. Certainly the upside to this strategy is that the excess space (if the lease is flexible) can be discarded at the lease expiration (if the space is no longer needed) or renewed until a more permanent solution can be achieved.
 
Outsource a function to another producer: This solution is potentially costly and should be compared to moving and keeping the function in house. Some economies can be achieved however if the function is new (and the upside unknown) or the barriers to entry are formidable.
 
Separate a portion of the operation and relocate that portion: Once again with full acknowledgement that the main reason I see for companies "relocating" is the inefficiency created by operating from multiple locations - in some cases it works and can solve a space issue. The best example that comes to mind is a client of ours. Needed was an upscale office image combined with a plain vanilla warehousing function. The two were diametrically opposed and unattainable in one building. We discovered a solution! Relocate the office into an owned location and leave the warehouse at the existing location - space issue solved.
 
Use a third party logistics company: Also known as a 3PL, these independent warehousing providers serve as an outsource for all of your warehousing needs. A third party logistics company provides a "soup to nuts" solution for additional warehousing. Included in the per pallet charge is warehousing, access, shipping and receiving, insurance, etc.
 
Add building square footage to your location: This solution would only apply if all of the following criteria exist - you own your location, the site is large enough to accommodate additional square footage, and the city will allow additional square footage to be constructed. If all of these apply, congratulations! You managed to foresee your growth and planned accordingly.
 
Utilize cube by reworking your racking plan and purchasing a swing reach forklift: Every time you modify your aisles in to a narrower configuration, you gain approximately 33% increase in pallet storage density. Therefore moving your wide aisles to narrow aisles, increases storage density by 33% and moving from narrow aisles to very narrow aisles, you save another 33%. Of course this increased storage capacity comes at the price of increased capital investment in lift trucks  and pallet rack. A quick and easy tip to help evaluate if you can increase your storage space in your current building is to stand at one corner of the warehouse and look out at the opposite corner. If you can see the opposite corner without obstructions, you likely have an opportunity to increase storage cube using increased investment in materials handling products. Commodity class, stacking height and sprinkler calculation must be considered before you go vertical.
 
Add another shift or two: We have clients who have prolonged moving for several years by adding a second and then a third shift. Generally, the advantage of the second shift is that most overhead (rent, exec salaries, benefits, etc.) are covered in the  business generated by the first shift. The second and third shift become very profitable as a result.
 
So, there you go. More space than you knew existed.
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.
 

How to Unwind a Commercial Real Estate Deal

Image Attribution: www.wdrfree.com

Today, I will delve into the topic of cancel culture. No, not stifling free speech, but the cancellation of a commercial real estate deal - AKA, how to unwind a transaction.
 
As mentioned in this space over the years - commercial real estate agreements come in two forms - leases and sales. Unlike our residential colleagues, commercial leases can make up a substantial portion of our practices - in some cases 100%. Because many businesses opt to lease the premises from which they ply their professions and the sale market these days has an acute shortage - more and more leases are originated. Clearly, cancelling either - sale or lease - have their nuances - so I’ll spend time on both.
 
What precedes each direction is an identification of needs, a survey of the market, tours of potentials, negotiation and contracts. Departure occurs at the documentation stage. When a lease is signed, the deal is done - notwithstanding fit out and move-in. When a Purchase and Sale Agreement is executed - the deal begins. As you can gather, unwinding depends upon where you are in the process. Allow me to dissect.
 
Leases. Until you scratch your John Hancock on that 17 page tome - you can walk away - even if you’ve signed a Letter of Intent. In some cases, after you’ve signed a lease and you don’t timely deliver the deposits called for - the owner can hit eject. But generally, once you and the owner sign, deposits and insurance are swapped, a lease agreement is affected. Now. Should circumstances cause a “delay in possession” - meaning you can’t move in - beyond what’s outlined - a cancellation may occur.
 
Ok. You’re in and things change. Now what? Typically, you’ve three alternatives - buy-out, sublease, or default.
 
A buy-out works like this. With the lease, you have committed to a certain dollar obligation which is calculated by multiplying your monthly rent by the years remaining on your term. Let’s say this figure is a million dollars. In order to achieve a buyout, you would approach the owner of the building and offer her a fraction of the remaining obligation. She then will analyze whether taking a buyout is in her best interest. Specifically - with the money offered - can the costs of sourcing an new occupant be absorbed.
 
Next, a sublease. You attract a surrogate to live out your lease and do all of the things you committed to do - like pay the rent, reimburse the property taxes, mow the lawn, etc. Beware. Subleases must be ok’d by the landlord - but she can’t be unreasonable.
 
Finally, you walk away and stiff the owner. Never recommended as all manner of legal recourse will be unleashed. But. It’s an option.
 
Sales. Recall. When a Purchase and Sale Agreement is signed, the stopwatch begins ticking. Until a deed is recorded - signaling the race is over - there are escapes.
 
The easiest occurs during a due diligence period. Accomplished within 15-60 days from execution of a contract is a commitment for financing; a review of title; inspection; forensics of the leases(if any), expenses and income; and an investigation of environmental conditions. If any don’t pass muster and a solution compromise can’t be reached - over and out.
 
Once all of the conditions outlined in a contingency period are waived - some money is at risk. Meaning, the buyer may bolt - but the deposit is forfeited.
 
Some may wonder - hmmm. It appears the buyer holds the key. When can a seller cancel? Simply, if the buyer performs - the seller can’t. My lawyer buddies are collective saying - uh huh! True. Suffice to say, however, a costly “specific performance” battle may ensue. Probably, the wackiest example of this occurred a couple of years ago with a seller we represented. It seemed the seller - after committing to sell his property - and the buyer waiving contingencies, discovered a costly pre-payment penalty. I received a call one day from the seller asking me to cancel the deal. Astonished, I asked - “on what basis”? ‘Because I can’t afford the pre-pay, he replied”. Hmmm. Fortunately, we persuaded the buyer to walk away. But not without a reimbursement of their costs and paying their agent.
 
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.