CARTs

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CARTs. An acronym which stands for Challenge, Action, Result, and Testimonial. Our team uses these “case studies” to tell a transaction story through the lens of these four filters. The cool thing is CARTs have no shelf life and can be used many times as the situation dictates. One thing my over 38 years in the commercial real estate business has taught me is every deal is unique but many have similarities. However, we use CARTs looking through the rear view mirror after the close. As I pondered the information conveyed - I wondered why we don’t us them before a transaction occurs. After all, the information contained can be helpful to anyone with a desire to sell or lease - regardless which side they occupy. Allow me to demonstrate how this might work. 
 
Let’s say you’d like to sell a building you occupy but stay put after the sale. We refer to this as a sale leaseback. Easy enough, right. But now, let’s dig into the four areas to  engineer the kind of result you’re seeking. 
 
Challenge. Here you want to think about issues such as your ownership structure. Is the real estate owned solely by you or are other stakeholders or shareholders involved which may have a different view of the world. Many times parties may be juxtaposed depending on their station in life and direction they’d like to head in the future. How much, if any, money is owed against the property? How does the physical plant of the building compare to others in your size range in the marketplace? How about things such as percentage of office, truck loading doors, warehouse clear height, fenced yard or staging area, and available parking spaces. All of these physical aspects will affect the value of your real estate. If you own the building as a limited liability company and lease the building to an operating corporation, you may be paying yourself a rent which is not commensurate with market. As we’ve seen many times recently, this amount might be dramatically less than what the market rent would generate. Consequently, any investor willing to purchase the building would base his price upon the rent he will receive. Finally, really be candid with yourself as to what you will do with the proceeds. As we’ve discussed in this space numerous times, if you are not planning to defer the taxes via a 1031 tax deferred exchange, there will be a significant tax bill to pay – approximately 20% for long term capital gains, 25% for depreciation recapture, 13.2% for the state of California, and 3.8% to the affordable care act. As you can see - almost half of your gain would be wiped out by taxes if you don’t defer the gain. In situations where you have multiple shareholders, this can get a bit cumbersome, especially if there is a disagreement.
 
Action. In the action phase, we will consider exactly what steps will need to be taken in order to achieve the results that you seek. As an example, let’s say your plan is to defer any gain received from the sale yet you have shareholders with differing opinions. It might be wise to break up the limited liability company into a tenants in common structure - whereby upon sale - the individual tenants may go their separate ways. Your property may contain some deferred maintenance that needs to be addressed prior to marketing the building for sale. Finally, you may need to examine the lease under which you will operate once the transaction closes. We assume here that you’ll engage a commercial real estate professional to assist you in marketing the building. Don’t get too tangled up with exactly how your action will be accomplished - as a part of this will be directed toward your brokerage professionals. However, having an idea how you’d like the action to unfold is critically important.
 
Result. Here, you get to close your eyes and imagine the perfect result. You sell your building for top dollar to a qualified purchaser, in the least amount of time possible, with very favorable lease back terms and conditions, and with very little oversight on your part.
 
Testimonial. Certainly, after the task is accomplished, you’ll have some things to say about how the plan unfolded, the challenges overcome, the results that were maximized and positive actions taken by yourself and your professionals.
 
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.
 

 

2023 Predictions

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Yes. I’m feeling the pressure - as last week proved I was quite prescient in my prognostications for 2022. My crystal ball was in fact clear. Good thing it dropped before 9:30 this year as I was snug in bed by then. But I digress. So akin to those holiday goodies you gorged and now have resolved to avoid - here is yet another prediction column for commercial real estate.
 
Industrial real estate. Third party logistics providers will give back space. If you’re unfamiliar with the term - 3PL or third party logistics provider - allow me to explain. Simply, a 3PL is an outsourced warehousing service. Say you’re a company that needs to get your product distributed to Walmart but don’t have the space or inclination to do so yourself. Enter the 3PL who will charge you - by the pallet - to receive, store, re-package, and ship your goods for you. For the past three years - to keep up with the demand of online shopping - 3PLs thrived and leased hundreds of thousands of square feet of logistics boxes. With the “de-inventorying” currently occurring, these providers need fewer square feet. But there’s an issue as many signed term leases which still have time to go. Therefore look for much of this excess to enter the market as sublease space.
 
Recession? I vote no. How’s that for contrarian thinking! Here’s how I read the tea leaves. The Fed came out with guns blazing last year with three .75% and one .5% rate bumps. As we’ve discussed, this increase affects the rate in which banks borrow. The theory is more expensive money will cool a white hot economy as businesses will re-think borrowing for expansion. If you look at Gross Domestic Product or GDP for the third quarter of 2022 - it actually increased over Q2. By the time you read this, we’ll have a glimpse as to how the fourth quarter fared. Now couple that with core inflation which has declined for several months. Finally, retailers are shedding inventory as mentioned above. In fact this is deflationary as things are on sale. Now some might counter by opining - we’ve not felt the full impact of the Fed rate increases, folks are spending that idle cash left over from the pandemic, and massive layoffs await. We’ll see. I choose to believe in the resiliency in the US economy. Plus. Did you visit a mall, restaurant, or attempt to book a flight during the holidays? Bedlam!
 
Return to the office. Much has been written on this subject. We’re starting the third year since all of us were forced to return to our spare bedrooms. Remember that fateful day in March of 2020? Like yesterday! Fortunately, our team had spent the previous few months figuring out how to duplicate our desktop mobily. Did we have insider scoop? No. We just wanted the flexibility to do stuff in a client’s lobby, our dining room, or the front seat of our car without losing productivity. We were lucky. When the order came - we simply unplugged, drove twenty minutes home and plugged back in. Many were not so lucky and found themselves grappling with how to remain viable. Others simply ordered a bunch online and ate alot. I heard this from a friend. 😎I predict workforces will return to the office this year. Sure, a hybrid model will be employed where - as an example - Tuesday-Thursday will be office days and Mondays and Fridays will be optional work from home.
 
Retail. A continuation of the experiences that brought us back to brick and mortar stores in 2022 will continue. As examples. On a recent visit to Main Place, we were serenaded by era dressed carolers, and our grandsons thrust into a cube of stuffed animals as human claw machines. I’ve never seen the place so packed! My wife and I commented - what recession? Sans these experiences, however, I’m afraid the on-line shopping is easier. What’s avoided are out-of-stocks, surly clerks, crowds, and no parking. Speaking of Main Place. Our favorite parking spaces are now consumed with a multi family building which is under construction. Providing your own customer base and foot traffic - once the units are fully occupied - is always a great idea. But how cities choose to eliminate tax basis while at the same time increasing police and fire service remains the tug-of-war.
 
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.
 

2022 prediction recap

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Happy New Year dear readers! 2023. Wow. A full three years since the pandemic’s outset. Who believed Covid 19 - and it’s variants would still be in our collective conversations in 2023. Not seeing many hands raised - you, like I couldn’t fathom it’s offspring would still be wreaking havoc. Yet it’s one of the three amigos - along with the regular flu and RSV - causing the hacking. Well. On to some happier conversations - my commercial real estate predictions from 2022. 
 
Here were my words this time last year. 
 
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. 2023 Update. Nailed it. 
 
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. 2023 update. Quite prescient was I. 
 
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. 2023 Update. This story is still unfolding. But, we appear to be headed toward a permanent hybridcy. 
 
Retail slowdown? We all know that, big fella. How’s that a prediction? 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. 2023 Update. Yes! Most large retailers are de-inventorying. 
 
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. 2023 Update. We heard this mentioned a bit but not to the extent I believed. Inflation increases are slowing, employment is strong along with wage growth, and economic growth is also returning. I’d rate this prediction a miss. 
 
Four out of five ain’t - sorry Miss Penney, my 7th grade English teacher - bad!
 
Next week, I’ll strike out with some bold 2023 predictions. 
  
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.
 
 

Merry Christmas

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You’re likely reading this in your slippers and bathrobe surrounded by excited kiddos. After all, it’s Christmas! From our family to yours, may this season of giving be your best yet! 
 
It’s also Sunday - which caused me to ponder the last time the blessed day fell on this day - so I researched it. According to an answer by Jack Wallace in Quora: “If it were not for Leap Years, it (Christmas) would fall on Sunday once every 7 years. But because of Leap Year, it follows a general pattern of years: 6–5–6–11 (just like every other date but Leap Day). The first Sunday Christmas this century was in 2005 (and the last one before that was 11 years earlier in 1994). Christmas fell/falls on Sunday these years: 2005, 2011, 2016, 2022, 2033, 2039, 2044, 2050, 2061, and so on … until the lack of a leap year in 2100 messes up the cycle, producing Sunday Christmas in 2101, and then the pattern of 6–5–6–11 resumes again until (again) the lack of a leap year in 2200 interrupts the pattern.”
 
Ok. Great. But how does that relate to commercial real estate? Indulge me, dear elves and I’ll be your Santa Claus - except the coming down the chimney part.
 
2005. George W. Bush was inaugurated to a second term as President, the Kyoto Accord was forged and Michael Jackson was convicted. Katrina rocked the Gulf Coast as a Category 4 Hurricane and destroyed parts of New Orleans and beyond. Industrial land in north Orange County traded for around $14 psf, rents were in the $.40 NNN range and sales prices were in the mid $90s. Four years hence from the dot com bubble - industrial demand was active and investor appetites strong. Little did we know a parapice was approaching which would derail our commercial real estate market in 2008. 
 
2011. Arizona congresswoman Gabriel “Gabby” Gifford was gunned down while campaigning at a shopping mall in Tucson. She would survive. Not so for Muammar Gaddafi in Libya or Osama Bin Laden in Pakistan. Nuclear disaster was averted in Japan and the commercial real estate market was awakening from the ether of 2009-2010. Akin to Rip van Winkle, our industrial activity roared back to life and prices started to regain the losses incurred in the tough days. I’ll always remember an acquisition’s rep for Rexford told me - “we’ll look back on these days as the buying opportunity of our lifetimes.” And they and many others did!
 
2016. We elected a real estate developer to the office of President and recreational cannabis was legalized in California. An no, the latter didn’t precede the former. They happened during the same election. Industrial real estate started its historic march up the Everest of pricing - which would summit in June of 2022. Vacancies crashed below 2% as occupants scrambled to grab space and investors clamored to acquire it. Fueled by Eisenhower era interest rates and insatiable demand - values on commercial assets had no where to go but up. 
 
2022. We’ve not closed the year and sung Auld Lang Syne but it’s safe to review - recovering from a pandemic, eye popping values, then a Russian invasion, Carter era inflation, interest rates headed up with more to go and residential values hitting the skids were all experienced this year. 
 
What’s in store for 23? Next week I’ll review my predictions from this year and chart a few for next - so tune in. 
 
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.