Spring Abounds!

I love this time of year! My favorite golf tournament - “a tradition unlike any other” tees it up at Augusta, Georgia. We, this week, crowned a new NCAA basketball champion. Congratulations to the Jayhawks of Kansas. And, after a lengthy labor dispute, the dial tone of Major League Baseball games returned. A true smorgasbord of sports descends. Plus, flowers are fragrant, Easter hops in and hope abounds as 2022 is in full bloom. You may be wondering what any of this has to do with commercial real estate? Sit back and allow me to connect the dots.
 
A new beginning. Our year - as commercial real estate practitioners starts over every January. The slates are wiped clean and we start again with a new year of production. Much like a professional golfer or a major league batter - we begin with no earnings or batting averages. Left to our devices is our success or failure. By spring, the year unfolds as deals are originated, qualified and put into the pipeline. We have a strong sense how the year will continue. Akin to those tiny Crocuses that peak out from the winter freeze - transactions start to return.
 
Seasons are long. Embrace them. Seasons, like real estate deals, take awhile. Typical among sales transactions is a long gestation period. Three trimesters indeed! It’s quite common for a building search to precede negotiations. Once the right spot is located - which takes time - offers are submitted, responses generated, and an agreement is forged. The long dance of escrow commences. Due diligence - title review, financing, city approval, scouring of books and records, physical inspection and environmental investigations - is conducted. With the proper amount of motivation and pixie dust, a closing is in your future. As spring folds into summer, deals pop. Leases happen quicker although the contract negotiations can be brutal.
 
New life gives way to maturity. By late spring, the landscape of our year is growing nicely and we have a forward expectation of the fall harvest. By the time we scoot off to the myriad fall conferences in October - our production is largely completed. Sure, we can finish strong and close deals during the holidays - but the pace is slower than the spring and summer crush.
 
It’s quite refreshing to witness a “normal” spring in 2022. We’ve weathered much in the past two years - a pandemic lockdown, shuttered business, an industrial rebirth, office uncertainty, a fundamental shift in buying habits, a change in administrations, a war in Eastern Europe, rampant inflation, a supply chain kink, and more. Throughout, seasons have come and gone as the steady drumbeat of time plays cadence to our years.
 
Next month marks my 38th anniversary schlepping industrial buildings - parts of five decades. 38 springs, 38 new beginnings, and 38 rings on my proverbial brokerage tree. Ben Crenshaw won at Augusta in 1984, the Georgetown Hoyas were the NCAA champions, and after a long season - the Detroit Tigers edged the San Diego Padres 4 games to 1 in baseball’s crowning series. I’m a grandfather of five now. I’m content watching the seasons of their lives unfold in magical ways. Commercial real estate has allowed me the means and flexibility to be present. Is starting over every year something I enjoy? Not really. But this time of year, hope springs eternal.
 
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.

Industrial Real Estate Logistics - Challenges and Opportunities

Another month, another SIOR (Society of Industrial and Office Realtors) dinner. This time thankfully indoors! We were treated to a presentation by Jon DeCesare, CMC, President and CEO of World Class Logistics Consulting. Jon can be reached at jondecesare@wclconsulting.com. Jon’s presentation focused upon the challenges and opportunites facing logistics providers in 2022. Logistics simply is receiving, warehousing, and shipping goods. Think those massive Amazon warehouses you drive by on I-15 en route to Las Vegas. An awful lot else happens before that box arrives on your porch.
 
But, as Jon discussed, logistics is only a small part of the supply chain. Woven in to the fabric of supply are factories - where the stuff is made, trucking companies, freight consolidators, marine terminals, ports, steamship lines, railroads, intermodal hubs, government agencies, custom house brokers, less than full load trucking companies, small parcel companies, and retail stores. Whew! That’s a long chain with many links - and crimping any one causes delay. Weakest link indeed.
 
Faced has been the largest disruption to supply chains since WWII. A brief timeline follows. March of 2020 - Covid lockdowns. April 2020 - a lot of empty ships expecting out capacity. June 2020 - demand returns as folks order with a vengeance. After all, retail outlets were largely shuttered leaving consumers few choices. August 2020 - imports boom leading to trade imbalances and equipment shortages. November 2020 - port congestion worsens. March 2021 - Panama Canal blockage. January 2022 - regional lockdown in China affects the largest Chinese ports. The disruption has caused equipment imbalances - ships, trucks, trains - port congestion, schedule reliability, and cost of transportation has increased nearly five fold. Doubt what I say? On a clear day, take a look at the line of ships dotting the western horizon waiting to dock. Last count there were over one hundred.
 
Locally, our ports of Long Beach and Los Angeles - where approximately 40% of our nations import arrive - have seen excessive driver marine terminal turn times, increased ocean carrier transit times - from 15 to approximately 65 days, railroads unable to haul intermodal containers, a serious shortage of truck chassis, 100,000+ empty containers, appointment time delays at the marine terminals, and high cost and poor service quality. These combined have delivered - sorry - a knockout blow to logistics providers.
 
Jon quoted Thorsten Meincke, a board member for ocean and air freight at DB
Schenker - “We don’t see the tide turn in 2022, infrastructure problems, labor constraints, high demand and reduced capacity will continue to trouble the market. Stakeholders in the industry don't see much relief coming for shippers anytime soon. It will not get better and 2023 will be worse.”
 
I should add at this point, Southern California’s dramatic shortage of available warehouse boxes has fueled the flame. Not only are there not enough spaces to fill the demand - but, the obsolescence of old stock has led to inefficiencies. By that, I mean - low ceiling heights and poor truck access.
 
This environment has caused companies to re-think how and where warehouse sites are chosen. Jon mentioned four opportunity areas in Southern California where the next building booms may occur and logistics providers could locate. Highlighted were the Victor Valley - including Apple Valley, Victorville, Hesperia, Adelanto, Barstow and Phelen. The Antelope Valley with communities of Palmdale, Lancaster, Antelope Valley and Littlerock. The Tejon Ranch just north of the Grapevine and finally the I-10 corridor east of Banning to Indio. Can you imaging the congestion coming back from the desert? 
 
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.
 

When Will We Experience a Slowdown?

When meeting with clients and prospects these days, most are curious about my opinion. Specifically, when will this frenzied market activity start to cool? Frankly, I’m shocked at the exponential rise in lease rates and purchase prices we’ve experienced over the past year. Talk to any commercial real estate practitioner and most will confess they didn’t see this coming. When our economy collectively pressed pause two years ago - uncertainty abounded. Most of us believed the pandemic was the black swan event that would derail the status quo. Yes. Certain segments of CRE have taken their lumps - office suites and brick and mortar retail. But, manufacturing or logistics oriented buildings continue to find favor. I caution all that my crystal ball is somewhat murky but share with them the things I watch as predictors.
 
Residential. A downturn in housing sales generally proceeds a stall in commercial activity by 12-18 months. Pre-Great Recession, there were myriad warning signs a slowdown was coming. Certainly, few of us were prepared for the severity of the dip. I remember one of my clients in the building industry was alarmed by the precipitous drop in new housing starts. His group supplied bathtubs for new housing projects. Companies such as these are a bellwether for coming attractions.
 
New construction. Currently, industrial demand far outpaces supply. We cannot build enough new locations to meet the appetite. Under construction inventory is being gobbled up quicker than a teen consumes an In N Out burger. Consequently, our stock - new and used - is significantly costlier. I’m presently watching the next round of lease and sale comps to gauge if the market will continue to rise or stagnate. Akin to lightning that precedes a thunder clap - we’re awaiting the next strike to determine proximity to asking rates.
 
Interest rates. The cost of money affects so much, I could spend an entire column about the subject. Suffice to say, we’ve enjoyed a decade or so of lifetime low interest rates. These cheap dollars fueled an unprecedented buying spree. Rampant inflation is rearing its head and causing policy makers to counteract. As of this writing the benchmark 10 year Treasuries are at 2.4%. Still puny if you’re a saver but at some point - investment returns will be impacted. Simply, capital will flow into a government backed issue vs a real estate investment if cap rates are comparable.
 
World events. Russia’s invasion of Ukraine has placed a crimp in the global supply chain of energy and food stuffs. Fortunately, even with our sanctions against Russian oil and natural gas - the United States is ok. But many European countries, such as Germany largely rely upon imported petroleum. As to food, Ukraine and Russia are two of the largest wheat producers and exporters in the world. Planting season is now. We only have a 90 day food supply, globally. And wheat is in everything! You can start to understand how this disruption can trickle down to all of us.
 
Industrial metrics. We still look at what’s available, leased, and sold on a daily, weekly, and monthly basis. How many spaces out of 100 are currently on the market? - our industrial vacancy results. In a normal market - which we haven’t seen since 2013 - 5-6 of 100 are available. We’re now fewer than 1%. In some size ranges there are none. Something quite catastrophic would need to occur in order to shadow normal.
 
Anecdotes. On the seller and landlord side you hear folks are pressing rents, achieving monster sales values and receiving unsolicited offer out the wazoo. Occupants bemoan raw material shortages, increased costs, fuel surcharges, lack of quality employees and increasing facility costs.
 
So, there are my “tea leaves”. I’d love to know what you watch in order to predict what’s coming.
 
 
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.
 

Unsolicited Offers Abound

With the unprecedented shortage of industrial buildings to buy, cheap abundant capital available, and a steady drumbeat of increased demand from investors and occupants - we find ourselves in an acute seller’s market. 

Many of our clients have received unsolicited offers at eye popping figures! By unsolicited, I mean this - no listing, no marketing, no real thought about selling but the offer arrives in your inbox. Frankly, these numbers are so appealing - it’s caused many to pause and consider accepting the windfall. 

But, there are challenges that must be overcome. What are those, you may be wondering? Allow me to expand your understanding, may I?
 
You still need the building to operate your business. A wise decision was made some time ago to house your business in owned commercial real estate. Through the years, the operation has paid you rent, mortgage balances have been retired, tax benefits achieved, and appreciation has occurred. But the fact remains, so long as your enterprise requires an address - continuing to own and occupy the building is generally the best alternative. Sure, you could structure a leaseback, stay put and take advantage of the lofty offer. Just make sure your operation can withstand the likely bump to market rent your buyer requires. Or, you could relocate the business to a cheaper market. Problem is, this “cheaper market” would likely be in a different state. And the same imbalance of supply and demand likely exists. Finally, many approaching retirement years believe this is a great time to sell the company and the real estate and retire.
 
What will you do with the money? In most ownership structures, the sale of a capital asset triggers a significant tax obligation. Yep. Uncle Sam wants a taste of your proceeds. First off, the gain - difference between your net purchase price and basis will be federally taxed at 20%. Next, any depreciation taken through the years will be recaptured at 25%. California will tack on 13.3% and finally a cut by the Affordable Care Act of 3.8%. All in - your looking at close to 40% of your gain paid in taxes. Some simply believe the best way to go is to pay the levy and be done. With the crazy numbers being offered today - there is still a lot remaining. If the thought of a 40% hit is too much, you can certainly defer the tax through several means - a tax deferred exchange, a partial exchange, a Delaware Statutory Trust, or an allocated LLC. All of these deferral strategies require specialized advice through your CPA and real estate counsel.
 
Certainly, none of us can predict how long these unprecedented prices will continue. Will world events such as the war in Ukraine, rising interest rates, another pandemic, or something unforeseen crater our market with uncertainty? Normally, a vacancy factor of around 5-6% provides a good platform for buyers and sellers to transact. By that I mean 94-95% of our industrial stock is occupied. Leaving the balance in play. Today, depending upon the location in SoCal - we’re talking 1% or less. Skewed is the market. A catastrophe indeed would precede any return to normalcy. 
 
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.