I
normally wouldn’t do this in May. Typically, I’d wait until next year to do a
look back on my 2022 predictions. However, things are moving so fast these days
- a year is eclipsed in 90 days. And by that I mean the stodgy, slow moving old
business of commercial real estate is progressing at warp speed and is vastly
different than it was in January 2022. With inflation at a forty year high, a
Russian invasion of Ukraine, wild stock market gyrations, political unrest, and
folks back to work - we are witnessing life altering changes in our world. So,
I believed this check was important.
2022 Prediction - Industrial rents. They’ll
increase. Next bullet point. However, I’ve a few more words, so stay with me.
We track Class A inventory for an upcoming assignment. What’s that, you may
ask? We describe Class A inventory as buildings constructed since 2000. In this
way we are able to weed out functionally obsolete structures that may exist in
the market. In Orange County, there are eight new developments proposed or under
construction totaling over 2,700,000. A staggering number until you factor in
what’s available today. Ummm. That would be one. That’s correct! One available.
Demand is still strong so nowhere for rents to go but up. Update - I’m
shocked to see industrial rents surpass two dollars per square foot triple net.
Just to put this in context, industrial rents in 2010 were approximately 25% of
this. Yes! That’s correct 25% of what they are today.
2022 Prediction - Developer appetite. With
industrial rents increasing, interest rates still low - that will change this
year - plentiful capital seeking a place to reside, and an acute shortage of
land from which to produce concrete caverns - a conundrum continues. An
industrial development at your neighborhood Sear’s store? A campus built for
industries who’ve left the area? All will be targets this year. Update -
Developers still have ovation appetite for sites with which to add value. There
are rumored to be several in play presently at absolutely eye-popping land
values. More on this to come.
2022 Prediction - The office. No, not the
series - the market. Recently, I read this with interest in these pages - “A
new report from Ladders, a career site for high-paying jobs, says things will
likely stay that way. In fact, Ladders predicts that 25% of all professional
jobs that pay $80,000 or more will be remote by the end of 2022.” Wow! My
suspicion is it will be greater than that. Anecdotally, take our office as an
example. We own a 21,700 square foot, two story location. We occupy the
upstairs and a portion of the down for about 13,000 square feet. When locked
and loaded - 49-52 folks commuted in each day. Now? Probably half regularly
attend. My team works remotely as do others. Adjusting to this change will be
smaller footprints and more multi-use spaces. Update - there is some
talk among the big players that a return to the office is eminent. Mention
frequently is the difficulty in maintaining a culture with a remote workforce.
We haven’t experienced this so much in orange county. I believe we are headed
for a hybrid between remote and in person office occupancy.
2022 Prediction - Retail slowdown? We all know
that, big fella. How’s that prescient? Actually, what slowed during our two
year pandemic fueled sabbatical were trips to the store. Retail sales actually
increased as we bought tons of stuff from our home keyboards. But, one of our
clients, corporately based in NYC, is a tremendous gauge on the brick and
mortar retail business. By that I mean, destinations such as Wal-Mart, Costco,
Burlington, and the like. He’s sensed a REAL dip and predicts more to come. So
we’ll see. Update - as you may have read, the largest e-commerce
retailer – Amazon - recently put the kibosh on 200 projects in process. Their
earnings are predicted to decline by 3% and they admitted they have over built
their storage capacity. Consequently, any Amazon deal on the margin was
postponed. What this foretells about brick and mortar retail will be
interesting to observe.
2022 Prediction - Stagflation. What on
Earth is that? According to Wikipedia -“In economics, stagflation or recession-inflation
is a situation in which the inflation rate is high, the economic growth rate
slows, and unemployment remains steadily high. It presents a dilemma for
economic policy, since actions intended to lower inflation may exacerbate
unemployment.” Hmmm. Inflation rates, high - check. Economic growth slowing -
check. Unemployment high - check. By the way, you may be thinking - I thought
unemployment was low, currently. Actually, the percent of the workforce NOT
working is high. The statistics reported are only those who’ve filed claims -
quite misleading. Update - Wow! That didn’t take long. With inflation
running 8% annually and a decline in gross domestic product for the first
quarter we already are in a stagflationary period. Not since the Jimmy Carter
administration has this been a thing.
Things
I didn’t foresee: The invasion of Ukraine, the dramatic Amazon slow down, two
dollar industrial rents - were all not on my radar in January 2022. Now you
understand why a first quarter update was important.
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.
I’m
pleased to report, last week we were rewarded an assignment to represent a
bustling logistics company in their search for a new warehouse location.
Certainly, they may renew at their present address but that will all be put
into the mix of our process. Why’d we win the deal? Aside from my charismatic
personality and dashing good looks - I haven’t a clue. But I digress. We were
told our thoroughness in understanding their situation, our plan, and the way
we’d centered upon them vs us we’re keys. Owner centric indeed! Crafted was an
agreement for our engagement. The points of said understanding I believed to be
column worthy - so here goes.
Time frame. We generally base our exclusive
engagement agreements on a six-month term. Certainly this can vary - but we
have found, in this environment, more time is needed in the market notification
and search process, therefore a few more months are needed. In some instances
lease negotiations can take several weeks and this needs to be built into the
time frame.
Description of the requirement. The
ultimate determination of the requirement is what is in the tenant’s best
interest as determined by the tenant. However, there are some general
parameters of the sought after alternative that we build into our agreements. Things
such as total square footage, office space within the square footage, clear
height of the warehouse, sprinkler calculation, truck turning radius, and if
important - things such as the power into the building, trailer storage,
outside staging, and fenced yard areas.
Location. We start with Ground Zero which is the existing location,
and build from there. In our experience some tenants want to stay very
proximate to the existing location because of employees, suppliers, freeway
proximity, and the general familiarity with the surrounding amenities. In other
cases, a tenant might like to look at markets well beyond their existing
location including out-of-state. In the above referenced assignment we are
going to focus upon orange county, the inland empire, and potentially one
location out of state which is yet to be determined. This could potentially be
Arizona, Nevada, or Texas.
Rate and terms. These are difficult to pinpoint
because there is such a wide variation in owner motivation these days and consequently
lease rate and term expectations vary. Most tenants do you have a general idea
of the lease term with which they’re willing to commit. This could be a short
as three years or as long as 10 years. Therefore, we author in some general
terms with the caveat that ultimately it’s as acceptable to the tenant.
What we’re authorized to do and not do. Our
agreements provide for us to notify the market of the requirement - being
careful to keep the tenant’s name anonymous, search the available inventory both
vacant and occupied, vet these alternatives for their suitability, tour with
the tenant, make proposals on behalf of the tenant and enter into the
negotiations with the landlord. Obviously, we are not authorized to commit the
tenant in any way to a lease. We are also not to disclose the name of the
tenant unless they enable us to do so.
Escape hatch. Since most of our engagements
involve a first time assignment, we include the ability for the client to
cancel the contract after a certain period of time by giving us written notice.
We are careful to point out that any building in which negotiations have
occurred are excluded from future broker dealings for certain period of time.
This is referred to as an exclusivity period or a “tail”. These can range from
30 days to 180 days.
Expectations of the Tenant. As a part of
our partnership, we ask the tenant to allow us to be the clearinghouse for all
information. Should they receive a submittal from another broker or hear about
a building at a cocktail party - we ask them to route that through us for
consideration. Additionally, the tenant is responsible to notify their landlord
that they have selected an agent to consider alternatives in the marketplace.
Should an aggressive owner contact our tenant directly - with the eyes toward
ousting us, we ask our tenant to back us up and let the owner know we have been
engaged to represent them.
Deal changes. Frequently, there are variations to
the requirements as outlined. As an example - some occupants start out being
tenants and convert into buyers. In some cases, their existing location becomes
the best alternative for them. Finally, some locations are not considered
initially and then find favor. All of these modifications must be wordsmithed
into the understanding.
So
why should an occupant sign an exclusive engagement with a broker? After all,
it’s a bit different than listing your building for sale or lease in
anticipation of the broker scouting prospects. Isn’t it more beneficial - as an
occupant - to have several agents searching on your behalf? These are all
questions that arise. The easiest explanation is it costs a tenant nothing to
engage a broker to exclusively search on their behalf. The owner of the
property is responsible for any commissions and therefore you benefit from the
experience of a broker and eliminate your need to have several points of
contact in your search.
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.
As
I’ve written countless times and as recently as last week - commercial real
estate practitioners are either the hunter or the hunted. By that I mean the
nature of our assignments varies from searching for suitable opportunities for
our clients to lease or buy - the hunter. To marketing available buildings -
the hunted. You may be wondering - aren’t both tasks in effect hunting? If an
owner hires you to locate a tenant or buyer for their vacant location don’t you
hunt? Actually, no. Available space is in such short supply than an owner
assignment is tantamount to a blue light special. It’s a mad dash to the exits.
Managed are myriad tour requests, multiple offers and bidding wars - thus the
moniker of hunted.
Year
to year our percentage of owner to occupant representation varies. Last year,
as an example, the majority of our work was representing tenants. The complete
opposite has occurred this year. But despite that ratio - we’re busiest
fulfilling occupant’s needs.
Recently,
we were asked to compete for a tenant representation assignment. I believe what
we discussed would be informative for my readers - so here goes.
Fortunately,
our prospect is flexible and has allowed plenty of time to conduct an adequate
search. By flexible, I mean they’re able to stay in their existing address,
relocate within Orange County, move inland or even move out-of-state, if
necessary. Regardless, required is a location in the OC so if alternative one
or two don’t happen - we’ll have to source a suite of offices locally in
addition to their warehouse. We did a similar deal last year whereby the owner
was unwilling to build enough office space within the warehouse to accommodate
our head count forcing us to split the operation. The good news? If a separate
office configuration is needed - they’re plentiful. Unlike the frenzied pace
and low vacancy of manufacturing and logistics buildings - office suites are
begging for tenants.
So
what’s important for the prospective operation? Port access as their products
are manufactured overseas and shipped in, modern warehouse amenities which will
allow them to rack and stack, a central location to afford access to their
distributors, and as mentioned, if their lease isn’t renewed or relocated close
by - we’ll need an office suite to house twenty folks.
So,
what are their options?
Certainly,
staying put has its benefits. A costly move is avoided which is disruptive and
inefficient. Employees, suppliers, truckers, and the like know their location.
Generally, a landlord realizes the cost of finding a new occupant, and will be
motivated to keep an existing tenant. The downside is their warehouse clearance
is skinny - which means more floor space must be leased to store the same
amount of goods as a smaller, taller space. Because owners charge by the floor
square foot not the cube - a smaller taller space could be cheaper.
A
relocation within north or south Orange County will be challenged today by the
lack of available Class A inventory. But, that landscape is changing. Close to
2,700,000 square feet of newly constructed logistics buildings will dot the
basin from Brea to Orange to Fullerton and Anaheim soon.
Inland
- whether west in Chino, Ontario, Eastvale, and Corona. Or East such as San
Bernardino, Perris, Riverside, and Moreno Valley - holds some possibilities.
The majority of stock in those areas was built after 2004 with a logistics
provider in mind. Plus, a lot of new is being tilted and will be ready for
occupancy by early 2023. Port proximity and new regulations against trucking
are the storm clouds on the horizon.
Finally,
a move out-of-state to neighboring Nevada or Arizona appears to be attractive.
Both are exceeding California’s pace of new construction and quite inviting of
California companies frustrated by local politics and expensive cost of living.
But, as I warn anyone considering a move away from California - other places
are not simply California with cheaper housing and a lower tax rate. There are
real cultural, economic, and political differences to be considered.
Options
abound and we look forward to providing our advice. The journey should be quite
interesting!
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.
During
certain cycles of prospecting, I present a lot. Generally, this involves
someone with whom I’ve not done business. If a client and I have transacted and
she knows my capabilities - the need for formal presentations is lessened. But
takeaway the familiarity and the pitch is needed. Today, I’ll explain my
presentation style and show you a few tricks of my trade. I believe you can
learn from these - as chances are - you’ve been on the receiving end of one.
As
discussed, clients engage commercial real estate brokers for one of four tasks.
They are - to help them find a building to lease or buy. Typically, referred to
a “tenant rep” - this assignment can also involve assisting in a lease renewal
- we’ll call this task two. The last two involve the representation of an owner
of commercial real estate. You see, when a building loses its occupant -
another must be found. Involved is an agency agreement or “listing” to market
the parcel to potential tenants or buyers. But’s that’s only three. What’s the
fourth task? Well, the fourth is the preparation of a Broker Opinion of Value
or BOV. Normally, a BOV precedes a presentation to list a building for sale or
lease. After all, you gotta know what it’s worth. So to review, here are the
four tasks - representation of an occupant to source a new location to buy or
lease, representation of an occupant to renew their lease, representation of an
owner to locate a tenant or buyer, and finally preparation of a broker opinion
of value.
With
each comes its own brand of presentation. However, I like to think of them in
two broad categories - owner centric and broker centric. The former zeroes in
on what’s important to the person being represented - occupant or owner, and
the latter centers upon the experience of the broker and what he can do for
you. While either can be effective, I enjoy presenting in an owner centric
format. Why? I’ve found most clients “don’t care how much you know until they
know how much you care.” Corny? Maybe. But think about it. If your company is desperate
to find a new location and your service provider comes in hot, guns blazing,
and launches in about his experience - without even a question or two about
what YOU are facing - the emphasis is misplaced. YOU are the client, the one
with the challenge. And, therefore, shouldn’t it be about you?
So,
my pitches take an owner centric approach. I start with a discovery meeting -
preferably in person. The last couple of years have made in person meetings
difficult. But, things are a bit looser nowadays. We discuss a few facts - how
long have they occupied the address, confirm their lease expiration, and gain
an understanding of their need. We then explore some opportunities such as what
doesn’t work with the location and how a new address might be better.
Consequences of moving or staying put are next followed by a summary of our
understanding and a suggested next step. Now, the framework of your owner
centric presentation is set.
We
follow a guideline of an agenda, situational review, discussion of their
building, review of the market, a plan, our specific capabilities, and finally
a look at our compatibility. Start to finish - these take about twenty minutes.
Since the presentation is “centered” on the client, all the fluff is eliminated
and we spend our time together discussing what’s important to them vs a brag
fest on how many buildings we’ve sold.
Maybe
you don’t own or occupy commercial real estate. But you certainly buy stuff,
right? Let’s say you replace interior doors at your house or get a new air
conditioner. Start paying attention to the folks that ask for your business.
What approach do they take? Is their pitch all about you or all about them.
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.
