How to Market a Leased Investment

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As commercial real estate practitioners, our assignments vary. But generally they are representing an owner or an occupant. Occupants need a place to conduct business through leasing or purchasing their commercial real estate. Therefore, we conduct searches, tour alternatives, and advocate for our occupant clients. With owner representation, we’re engaged to find a buyer or tenant for an empty or soon to be empty location.
 
But. On occasion an owner assigns us the job of selling an occupied building - also known as a leased investment. You may be wondering why a stakeholder would sell a cash flowing asset. The reasons are myriad. But typically a transition has occurred - a death, divorce, or business succession. Sometimes a change in motivation, the need for cash, or a desire to expand a portfolio through the use of a tax deferred exchange happens. Lately, as values have increased exponentially, we’ve seen a spate of unsolicited offers at eye popping amounts which has caused some owners to transact.
 
So, how do we market a leased investment assignment? First of all we need to understand the differences between an income generating vehicle vs an empty address. You see, a vacant building needs an inhabitant. But an occupied location doesn’t. Therefore, the prospect you’re seeking changes - from a company looking for utility to an investor driving returns. A growing enterprise cares about yard space, warehouse ceiling height and power whereas an investor considers term of lease, rents paid, and the financial strength of the tenant.
 
Marketing collateral for a leased investment will include information on the tenant, demographics, a rent roll - which details the leases, term increases, and expirations - and some color on the local area. Depending upon the dollar amount and nature of the offering - a National appeal may exist. As examples. A $30,000,000 logistics warehouse located in Chino and occupied by Amazon would garner interest from far and wide. But a $2,500,000 price tag with Joe’s Mufflers housed would generate local suiters.
 
We now understand the differences and are ready to launch our effort. Remember, we must get the information in the hands of those most likely to have an interest. Generally, an industrial building will not appeal to a group that acquires shopping centers. High rise office investors normally will not buy big box retail. But other investors will look at any asset class - office, retail or industrial or multi-family. Next, consider the investor’s source of capital. Will they use their own funds or rely upon OPM “other people’s money. And finally, what is their exit strategy. Are they going to raise rents and sell the holding or planning to keep it forever.
 
We’ve identified the most likely buyer pool. Now it’s a matter of choosing the platform to market our assignment. We want to cast our net where the fish are. Real Capital Markets will get your information into many sophisticated investor’s inboxes. A mailer might supplement. Certainly, calling likely candidates is effective. An email campaign to proprietary lists works great. Publishing in a multiple listing service - Costar, LoopNet or CREXI will yield results.
 
Ok, nets cast. Time to harvest the bounty of investor interest.

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.

Inflation Fears

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Inflation is a ugly tax that reduces the buying power for all Americans rich or poor.
 
Granted, those at the upper echelon of earnings may not feel the pinch of those making minimum wage but there is an impact nonetheless. Our current inflation rate is running at an annual rate of over 8%. We’ve not seen that since the Carter years in the late 1970’s!
 
Clearly, all that we buy is not considered. Take industrial real estate rents for example. A small percentage of our society leases manufacturing and logistics buildings. But those that do and have the unfortunate timing of a lease expiration are experiencing a doubling or tripling of their rates. You read that correctly. In many cases we’re witnessing a 100% increase in that check you write to your landlord! Wow. We’ve seen rents increase close to 31% annually since the doldrums of 2010.
 
Why you may be wondering? Really it’s a simple case of too few available spaces (supply) to fill expanding business operations (demand). Owners are bullish and press rents. After all, where is the operation going yo move? In order to compete and win a deal, asking rates are often exceeded. We launched a lease listing three weeks ago. Bettered by 30% was our offered monthly amount.
 
Good thing commercial lease rates don’t factor into the metric of annual inflation percentages. Or do they? You see when a business - that leases an industrial address - sees a dramatic pop in one of its costs - that cost must be recouped somewhere.
 
Labor - especially skilled workers - was in short supply before the pandemic. Now that we’re back to work, companies must pay more in salary, benefits, and perks to attract and maintain quality employees. Therefore, another layer of costs is added to the product made or shipped.
 
What about fuel? A manufacturing company must receive raw materials to build its wares. Said components arrive via trucks that burn…yep! Diesel fuel.
 
So rents, labor, and delivery expenses are all spiraling out of control. Consequently, in order for an enterprise to remain profitable it must charge the consumer more. And the beat goes on.
 
Our government - in an effort to quell inflation has adopted a strict policy of increased interest rates. Now, on top of rents, labor, and materials - the cost of money is higher. When the Fed tightens credit by charging banks more - the trickle down to consumer prices eventually crashes home.
 
Buying power is further reduced. Just look what’s happening to housing. When a home buyer must pay more for a thirty year mortgage - the price they can afford goes down. Sure. A share of homes is purchased all cash - no loan. But when does that end?
 
You now start to understand why Amazon is curtailing expansion and why Target and Walmart reported abysmal earnings last quarter. The folks that buy things can’t afford as much.
 
Short term? More pain is on the way as the pendulum swings. But, know. Inflation fears will pass. Our last bout was followed by the greatest economic expansion in our nation’s history.

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.

Memorial Day Memories

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Most of you are reading this on the day before Memorial Day. A day set aside to remember those who gave the ultimate sacrifice for our freedom. Freedom to live in a great country with infinite opportunities to worship, work, and live without the threat of an oppressive government. For those - we give thanks. For others who’ve lost loved ones in this struggle, our heartfelt condolences. Today, I’d like to share with you some folks who’ve been instrumental in my commercial real estate career who sadly are no longer with us. To my knowledge, none served our country but are fondly remembered nevertheless.
 
Bill Lee. Bill left this world on April 5, 2021 surrounded by friends and loved ones. I wrote a column in this space about Bill’s life and impact on Commercial Real Estate. If you like, you can read it here - Location Advice - California Businesses: How to Become a Commercial Real Estate Legend? Simple! R.I.P. Bill Lee. Bill’s enthusiasm was contagious. I adored him the moment we met. His wheels were always turning and you’d sense it when you spoke to him. Always open to new ideas and keenly aware of opportunities - times with Bill were memorable. However, Bill was chronically late. I finally learned to tell Bill a meeting was thirty minutes before it’s actual commencement so that he’d show up on time. Fashionably late indeed! Because, I could never count on his punctuality - I was acutely aware of my meeting preparation. Thus, I was less reliant upon his presence. Maybe that was his intention all along - to train me to be prepared. Also gleaned was the importance of cooperation with your competitors. Please don’t misunderstand. Bill wanted to beat them for assignments but once the client decided - cooperation was tantamount.
 
My paternal grandfather, Sam Buchanan Sr. I had the privilege of knowing Samuel Abraham Buchanan, Sr. until his death on March 30, 1975. He was 71. I thought he was an old man. Now that I’m 65, I’ve revised my definition of old. Grandad founded the Buchanan Bottling Company in 1930. Texarkana, Texas was his location of choice. Relocated we’re his wife and two small boys and their new lives began. I marvel at his grit. To take a risk at that time - the Great Depression was in full swing and a World War was a decade away - form a business, move his family on hope and prayer was remarkable. Observing the joys and struggles our family business experienced prepared me well for a career advising family owned and operated manufacturing companies on their real estate decisions.
 
My father Sam Buchanan Jr. As many father son relationships can be - ours was strained at times. I spent far too much time concerned about his opinion of me. Shortly after he died on July 4, 2020 - I penned this final momento. “Dad, as an adult, I’ve been the best I could be. I celebrated forty years of marriage with the love of my life, raised three amazing college grads, have been blessed with five beautiful grands, live debt free, don’t drink, smoke, or do drugs, have achieved success within one of the toughest industries in one of the most competitive markets, have a great relationship with all of our family and enjoy a strong faith in God.” I have Dad to thank for that - pressing me to achieve.
 
Sheldon McKnight. “Shelly” was one of my dearest friends and clients until his death in 2017. My first encounter in 1996 was a sign call. You see, folks - in need of a building - used to drive around and call agents whose names appeared on signs. He described his requirement like this - 4000 square feet of dock high space he’d prefer to lease month-to month. You brokers understand. Best case, this was a $200 pay check. And I should mention, had an availability rarer than a Big Foot siting. Something inside me said I should not shine this gentleman but should try to help him. His requirement morphed into a much larger deal - a 15,000 square foot sale. Many more would follow - 18 in all over the next decade and a half. He shared with me years later his strategy. He wanted to team with someone who was hungry and would work hard on his behalf. By describing an uber small deal - he knew he’d weed out those not interested in rolling up their sleeves.
 
So, there you go. Rest well dear ones. Our memories are still alive.
 
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.

The BIG Deals

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I’m penning this column from our oldest son’s breakfast room. You see, his wife, three beautiful children and he live north of Austin, Texas - which is my home for the next few days. Our agenda includes lots of hugs for papa, wary looks and barks from their new puppy, a birthday celebration for #2 of our five grands and caddying for our son as he played in a qualifier for the Texas State Amateur. For those not bitten by the golf bug - it’s sort of a big deal. Stay with me, commercial real estate is coming - I promise. Our son has never - until yesterday - played a competitive round of golf. But, he maintains a 5 index - quite respectable for a recreational golfer. Consequently, yesterday was a huge stage! Akin to singing at Segerstrom when you’d only Kareoked - he was a bit outclassed. His demise was epic, humbling and embarrassing as he carded more shots in four holes than most do in nine. But the learning experience was life altering. I believe the lessons he learned apply to commercial real estate - so fore!
 
Two things were lacking. Quite apparent were the absence of competitive rounds and a fool proof pre-shot routine. In our trade, what he attempted was to sell a 100,000 square foot logistics building when his previous record was a 2000 square foot lease. Doable but highly unlikely. It’s quite necessary to “build your resume” with months or years of sale transactions before you venture off into huge deals. Our pre-shot routine of relationship building, qualifying, controlling and transacting provides a gauge on how things are progressing. Once you’ve taken these steps for awhile - they become rote. Skipping a step will always bite you. Similar to a shank - you just don’t know when.
 
When should you swing for the fences? Sorry to mix metaphors but just when should you try for the big transactions? My rule is not until your expenses for the year have been paid from smaller closings. Those whoppers are elusive, buyers and sellers more sophisticated, and competition fierce. Large real estate contracts have more attorney scrutiny, lender oversight, and can take time. If your staying power is compromised - the waiting is agony.
 
Practice is not the same as playing. You must place yourself in positions that mimic tournament conditions - the nerves, the fear of failure, the penalties for errant shots. In our world, practicing a pitch is great - but drastically different from live. The more opportunities you give yourself to compete for assignments, the better you’ll be. The nerves vanish. Sure, you may get some pre-proposal jitters but once you start they go away.
 
You miss 100% of the shots you don’t take. Made famous by Wayne Gretzky - these words are applicable to life, golf, and commercial real estate. I was very proud of our son for his attempt. It took real moxie to tee it up with the big boys. In brokerage it’s fine to compete for assignments outside your comfort level. It’s how we grow. But, just be prepared to be humbled…often. Just always take away two things you’ll do differently before the next time. Is transactional experience lacking? Are you unfamiliar with the market? Could your team use another member? Are you with the wrong firm? Consider all of these carefully.
 
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.