Lack of Demand in Industrial Real Estate

Good day, dear readers! Today I feel a bit professorial. Therefore, I’ll discuss a phenomenon we’re witnessing in the industrial real estate market in Southern California—the lack of demand.
 
What is demand, you may ask? In this context, demand stems from a need created by external factors. Think for a moment about your own household. If you suddenly realize you’re out of coffee, you have a need created by an external factor—someone forgot to put coffee on the shopping list. Consequently, you rush to your corner Starbucks or neighborhood Albertson’s to get your caffeine fix.
 
Demand in industrial real estate works in much the same way. It arises from changes in business activity, external economic factors, or shifts in the marketplace. In the halcyon days of 2020 and 2021, as many of us were quarantined in our home offices, a surge in online shopping occurred. Retail giants like Amazon, Walmart, Costco, and Target ramped up their inventories to avoid stock shortages, leading to a massive boom in demand for warehouse space.

Two things happened:

1.       On-hand inventories swelled to unprecedented levels.
2.       This massive uptick in inventories led to historically low vacancy rates in industrial spaces, especially in logistics hubs. As a result, rents and sale prices for warehouse space soared, and smaller retailers began relying heavily on third-party logistics providers (3PLs) to manage distribution. These 3PLs also scrambled to lease more space to meet the growing needs of their customers.

But by the summer of 2022, everything changed. The business climate cooled, interest rates rose, and the once-voracious demand for industrial space slowed down. No longer could the industry count on Amazon absorbing millions of square feet of space to fuel growth.
 
However, today’s lack of demand feels different. It’s more systemic—driven not only by market corrections but by a deeper uncertainty. When businesses are uncertain about the future, they hesitate. They are less likely to acquire competitors, hire new employees, venture into new business deals, or lease additional space. And this hesitation is what we’re witnessing now.
 
What’s Causing the Uncertainty?

I believe several factors are at play that contribute to the lack of demand in industrial real estate:
1.       Upcoming Election: Political transitions and elections often lead to a wait-and-see approach from businesses. They want to know which policies will be implemented before making large commitments.
2.       Global Tensions: From trade wars to geopolitical conflicts, uncertainty on the world stage makes companies think twice before investing in new space or expanding operations abroad.
3.       Federal Reserve Moves: The Federal Reserve’s interest rate hike shave made borrowing more expensive, which in turn raises the cost of financing real estate transactions. This has caused both tenants and investors to hit the pause button on deals that previously made sense financially.
4.       Natural Disasters: The growing frequency of natural disasters—wildfires, hurricanes, floods—has added a layer of risk to real estate decisions. Companies are increasingly aware of the potential impact of these events on their operations and are cautious about committing to long-term leases or purchases in areas vulnerable to climate change.
5.       Record-High Rents and Sales Prices: After years of rapid growth, industrial real estate prices have hit record highs, making it difficult for tenants to justify paying such premiums, especially in uncertain economic times.
6.       Higher Interest Rates: With interest rates on the rise, the cost of borrowing for expansions, acquisitions, or even renewing current leases has significantly increased. This has forced many companies to reconsider their growth plans or downsize their space requirements.
7.        
What’s Next for Industrial Real Estate?

While this slowdown in demand is significant, it doesn’t spell doom for the industrial real estate market. Instead, it signals a recalibration—a moment to step back, assess, and adjust strategies for both owners and tenants.
For tenants, this cooling market could present opportunities to negotiate more favorable lease terms, secure rent reductions, or lock in concessions like tenant improvements or free rent periods. Meanwhile, for landlords, this is a time to consider flexibility—offering shorter lease terms, more aggressive incentives, or even speculative development that aligns with future market shifts.
 
As we move forward, it will be crucial to keep an eye on the macroeconomic factors—interest rates, geopolitical developments, and economic policy decisions—that continue to shape demand. The industrial real estate market has proven its resilience over the years, and while today we may be facing a lull in demand, tomorrow’s landscape may very well be different.
 
Conclusion
So, where does that leave us? While the current market conditions are challenging, this period of lower demand is not necessarily a long-term problem. Instead, it’s an opportunity—for businesses to secure better deals and for property owners to reevaluate and reposition their assets. As we all navigate through this uncertainty, one thing remains clear: industrial real estate will continue to adapt, evolve, and play a critical role in the broader economy.
 
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.

Executing a Purchase Escrow in Commercial Real Estate

As commercial real estate professionals, we facilitate both lease and sale transactions for our clients. While the steps leading to both types of deals are similar, the execution diverges significantly once terms are agreed upon. In leasing, once the document is signed, our role diminishes—aside from helping with city approvals or coordinating tenant improvements. However, in a sale, our involvement intensifies as we guide the process through escrow to ensure the transfer of title and ownership. 
 
Today’s column walks you through the essential steps in managing a smooth purchase escrow.
 
Deposit wired to escrow
One of the first actions after signing the purchase agreement is ensuring the buyer’s deposit is wired to the escrow holder. This demonstrates the buyer’s commitment and allows the formal escrow process to begin. Failing to make this deposit in a timely manner can result in delays or even jeopardize the entire transaction.
 
Sign the property information sheet
The property information sheet is crucial for ensuring the buyer has all necessary details about the property, such as zoning, utilities, and any existing conditions. It also serves as a checklist to confirm that both parties agree on the property’s specifics, preventing any last-minute surprises.
 
Engage consultants for due diligence
The property condition assessment (PCA) and Phase I environmental report are key to identifying any potential issues with the property. These assessments provide a comprehensive look at the building's structural integrity and environmental safety, ensuring that the buyer isn't inheriting hidden liabilities. Hiring reliable consultants early in the process avoids delays.
 
Get your lender moving
Lenders often require third-party reports, particularly appraisals, which can be time-consuming. Ensuring your lender begins these processes early can prevent bottlenecks later in the escrow period. Timing is critical here, as any delay in the appraisal or other required reports can push the closing date back.
 
Organize transaction documents
Creating a Dropbox or another shared platform for housing all transaction documents keeps everyone—buyer, seller, attorneys, lenders—on the same page. Having easy access to all documents allows for smoother communication and avoids the risk of lost paperwork.
 
Calendar key dates
Every purchase and sale agreement has specific timelines, from the deposit deadline to the closing date. It’s essential to calendar these dates to stay ahead of any upcoming deadlines. Missing a critical date could cause the deal to fall apart or, at the very least, complicate negotiations.
 
Create a lease between the LLC and the operating company
In cases where the buyer is an owner-occupant purchasing the property through an LLC, creating a lease agreement between the LLC and the operating company is crucial. This ensures the property remains properly structured from a legal and financial standpoint. Additionally, this arrangement can offer tax advantages and protect the buyer's personal assets.
 
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.

What Can the Desert Southwest Teach Us About Commercial Real Estate?

As our travels took us to Phoenix, Tucson, and Santa Fe over the past week - I had two colliding thoughts. The beauty of the desert southwest was consuming and our world at this time 16 years ago was consuming as well! Our commercial real estate market was side swiped by the financial crash of 2008! I wondered if the two were somehow related and if lessons could be leaned. 
 
So. Here goes. 
 
If you’ve ever spent time in the desert Southwest—Arizona, Nevada, New Mexico—you know that survival there is all about adapting to extremes. In the blistering summer, temperatures soar, and water becomes a precious resource. Yet life persists. Cacti, creosote bushes, and desert wildlife don’t just endure—they thrive because they’ve evolved to do so. They’ve learned to make the most out of the environment they’re in, maximizing every drop of water and adjusting to whatever comes their way.
 
Commercial real estate, like desert life, is a game of adaptation. Whether you’re a seasoned investor, an owner-occupant, or an industrial broker positioned in today’s dynamic market, the lessons from the desert are right there in front of us—if we’re willing to see them.
 
1. Resilience in the Face of Scarcity
The desert’s number one challenge is scarcity, and in real estate, it’s no different. In boom times, it’s easy to make deals—capital is abundant, credit is flowing, and everyone’s eager to move fast. But what happens when those resources dry up? Think back to the 2008 financial collapse. One moment, liquidity was everywhere; the next, it vanished. Deals died overnight, and only the most prepared, resilient players could weather the storm.
 
A desert cactus stores water for months, waiting for the right conditions to use it. As a commercial real estate professional, this is a reminder to build reserves—whether that’s in capital, market knowledge, or relationships. Like the cactus, don’t overextend yourself in good times. Prepare for downturns, and when they inevitably come, you’ll not just survive—you’ll thrive.
 
2. Know Your Environment
Brokering commercial real estate isn’t just about playing the market—it’s about knowing the environment. The desert has very specific climates, microclimates even, and if you don't understand those differences, you’ll fail. Phoenix, Las Vegas, and Albuquerque might all share the desert’s common traits, but each has its unique challenges and opportunities. What works in Phoenix won’t necessarily work in Las Vegas.
 
Likewise, industrial real estate in Southern California has its nuances. I often remind clients that even though SoCal is a booming market, the micro-markets of Long Beach, Inland Empire, and north Orange County, where I worked during the 2008 financial crisis, each require a tailored approach. Just like a desert traveler checks the conditions before setting out, commercial real estate practitioners must assess the specific terrain they’re in. Understanding the local economic, political, and market conditions can mean the difference between a deal’s success or failure.
 
3. Timing is Everything
The desert teaches patience. Rain doesn’t come when you expect it; it comes when the environment is ready for it. In commercial real estate, timing is just as critical. Sometimes deals fall apart not because of lack of interest, but because the timing isn’t right—either for the buyer, the seller, or the market itself.
 
I’ve seen this time and time again in my own experience. Back in 2008, during the height of the financial collapse, a promising buyer for a large manufacturing site suddenly lost financing when their Small Business Administration loan commitment disappeared. The market shifted almost overnight, and we had to wait until the right time to close a deal at a significantly reduced price. Understanding when to act—and when to wait—is a skill that separates the seasoned from the amateurs.
 
4. Innovation is Key
Despite the desert’s harsh conditions, innovation thrives there. Solar farms, sustainable architecture, and water conservation technologies are just some of the breakthroughs we’ve seen over the years. Similarly, commercial real estate is ripe for innovation. The industrial sector is adapting to a post-pandemic world by embracing e-commerce, automation, and green technologies.
 
Whether you're retrofitting older properties or designing new industrial spaces, the industry’s future depends on staying ahead of the curve. Just like innovators in the desert seek new ways to make life easier and more efficient, those of us in commercial real estate need to be thinking not just about the present, but about how to create spaces that will serve the future.
 
The Takeaway
The desert may seem like an unforgiving place, but it’s also full of lessons. Adaptability, patience, and resourcefulness are key to surviving—and thriving—in both the desert and in commercial real estate. As the market shifts, those who prepare, understand their environment, and are willing to innovate will be the ones who succeed. So, the next time you're out in the desert Southwest, take a moment to reflect. The landscape might be more like our industry than you’d think.
 
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 Dance of Commercial Real Estate: A Complex Waltz

Commercial real estate deals often appear as a bewildering tango of factors. Motivation, fear, greed, market conditions, financing, credit-worthiness, uncertainty, and economic outlooks all swirl together in a dizzying display. But strip away the complexities, and you're left with two essential players on the dance floor: an occupant and an owner.
An occupant might be a buyer looking to purchase or a tenant seeking to lease. On the other side, an owner could be a landlord with space to rent or a seller ready to part ways with their property. When these two parties, properly motivated, find each other, the real dance begins.
As a commercial real estate practitioner, my role is to choreograph this intricate performance. To do so effectively, I rely on five key elements:

1. Ownership: Knowing who holds the deed is the first step in any potential transaction.
2. Availability: What's on the market? What spaces are up for grabs?
3. Recent leases: Understanding the current rental landscape informs both occupants and owners.
4. Recent sales: These transactions set the tempo for property values.
5. Appeal: Identifying which occupants might be drawn to a particular building is crucial for a successful match.

But let's circle back to those factors I mentioned earlier. How do they fit into this dance?
Motivation is the music that gets everyone moving. Without it, the dance floor remains empty. Fear and greed? They're the rhythm section, driving the beat faster or slower, influencing how quickly deals come together or fall apart.

Market conditions and economic outlooks set the overall mood of the ballroom. Are we in a upbeat swing or a cautious waltz?

Financing and credit-worthiness act as the dancing shoes. Without them, even the most eager dancers might sit out a few numbers.

Uncertainty? That's the fog machine, adding an element of mystery and sometimes confusion to the proceedings.

When all these elements align - when the music is right, the rhythm is pulsing, the mood is positive, and everyone's got their dancing shoes on - that's when the magic happens. A motivated occupant and an equally motivated owner find each other on the dance floor, and a deal is struck.
As a commercial real estate professional, my job is to be part DJ, part dance instructor, and part matchmaker. I need to read the room, understand the music, and bring the right partners together at the right time.

It's a complex dance, indeed. But when it all comes together? There's nothing quite like it in the business world.
 
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.

Marshall Field’s Contribution To Retail

Our travels took us to the Windy City over the weekend to celebrate a milestone event in our marriage. To better understand one of America’s great cities and its origin - we took a walking city tour. I love the architecture of the bygone days and as a commercial real estate professional, the story behind how cities develop is fascinating to me. 
 
As we approached the corner of State and Washington, an immense fourteen story structure loomed. We found ourselves learning about a Chicago icon—Marshall Field. As we strolled through this bustling city, weaving through shoppers and gazing up at storefronts, I was reminded of just how much one man, more than a century ago, shaped the way we experience retail today. 
 
Things such as individual item pricing, customer service, purchase returns and the experiential approach stores such as BassPro and REI have adopted were all Field hallmarks. 
 
Field’s legacy is more than a department store; it’s a blueprint for modern commerce, and his influence is still alive in almost every retail experience we have today.
 
Marshall Field more than a retailer—he was a visionary. His store on State Street wasn’t just a place to buy things; it was a place to be. He understood, long before anyone else, that shopping should be more than a transaction—it should be an experience. Walking into his store was like stepping into another world, where beautiful displays and carefully curated products drew customers in, not just to buy, but to linger and enjoy. 
 
Field realized that the environment mattered as much as the merchandise. It’s no wonder department stores became destinations unto themselves, and that tradition endures in some of our most iconic retailers today.
 
But Field’s real genius was his deep respect for the customer. He’s the one who coined the phrase "The customer is always right," and he truly lived by it. He made it easy for people to return items if they weren’t satisfied, a policy that, at the time, was revolutionary. Field believed that if you treated people well, they’d keep coming back—and they did. 
 
His dedication to customer service laid the groundwork for the personalized, customer-first approach that we all expect from businesses now.
 
Field also understood something else that was ahead of its time: the value of offering a unique product mix. He built relationships with suppliers all over the world to bring exclusive, high-quality items to his stores. Instead of trying to be everything to everyone, he focused on offering carefully selected goods that reflected the taste and aspirations of his clientele. It’s a lesson that many retailers would do well to remember—especially in today’s landscape, where a well-curated selection often speaks louder than endless options.
 
It was more than the products or the atmosphere, though. Field also believed in running his business with integrity and treating his employees with respect. At a time when labor conditions were often harsh, he made sure his employees were paid fairly and worked in humane environments. This not only created a loyal workforce but also reinforced the values of his brand—integrity, quality, and care. It’s a reminder that the culture behind the scenes often shapes the experience in front of the store.
 
As I reflect on my own experiences—whether it’s walking through grand department stores in major cities or the charm of smaller, curated shops—I realize how much of what we take for granted in retail today can be traced back to Marshall Field’s vision. His legacy is a reminder that great businesses aren’t just built on products—they’re built on people, values, and an unwavering commitment to creating something special. 
 
So next time you’re enjoying a beautifully crafted window display or being greeted with a smile when you walk into a store, take a moment to think about Marshall Field, the man who helped make it all possible.
 
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 Thoughts on the State of Commercial Real Estate

Occasionally, it’s good to clear your inbox. Mine is particularly full as I’ve been out of state since mid-August. What follows are some random thoughts that are swirling around my consciousness. As someone famous once opined—they’re only opinions, but they’re all mine. So, here goes.

Traveling through the Northeast was inspirational! Our destinations included several cities in six states: Providence, Rhode Island; Boston, Massachusetts; Portsmouth, New Hampshire; Bangor, Maine; New York City; and New Haven, Connecticut.

The contrast between these historic cities and the rapidly evolving commercial real estate landscape back home is striking. In many ways, the old-world charm of the Northeast reminds me of the long-term value that well-located, enduring properties can offer. While shiny new developments and the latest logistics hubs dominate the conversation, there’s something to be said for the stability and reliability of properties that have stood the test of time.

Back in Southern California, the commercial real estate scene continues to shift. One of the more surprising developments this summer has been the unexpected uptick in leasing activity, particularly in the logistics sector. Chinese companies, spurred by the Trump-era tariffs and ongoing global supply chain disruptions, are snapping up warehouse space to better manage their inventories. It’s a trend that caught many off guard, especially considering we’re typically in the slower, vacation-heavy months of the year.

But this isn’t just a story of international companies adapting to geopolitical realities. It’s also a reminder that in commercial real estate, timing and market dynamics are everything. When supply exceeds demand, as we’ve been seeing with the glut of Class A logistics inventory above 100,000 square feet, price reductions inevitably follow. Yet, just as prices begin to soften, we’re witnessing renewed interest and activity. It’s almost as if the market itself is a living, breathing entity, responding to every nudge and shift in the global landscape.

Reflecting on these developments, I’m reminded that the commercial real estate market, much like the cities I visited, is a blend of the old and the new, the predictable and the unexpected. While it’s easy to get caught up in the latest trends or geopolitical shifts, there’s value in stepping back and considering the broader picture.

Perhaps that’s why I find travel so enriching. It offers a fresh perspective, a reminder that while the landscape may change, certain fundamentals—like the importance of location, timing, and adaptability—remain constant. So, as I clear my inbox and return to the day-to-day, I’ll keep these random thoughts in mind. They may be just that—random—but in the ever-evolving world of commercial real estate, they offer a lens through which to view the bigger picture.

And with that, it’s back to business as usual. Until the next trip, or the next unexpected shift in the market, these thoughts will keep swirling, reminding me that in real estate, as in life, it’s all about how you navigate the changes.
 
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.

Zero Sum Game in Commercial Real Estate: The Myth of Winning at All Costs

I’ve been reflecting lately on the term "zero sum game." It’s one of those phrases that gets thrown around often in business, particularly in negotiations. The idea is simple: in a zero-sum game, one party’s gain is another’s loss. If I win, you lose. If you win, I lose. The sum of our outcomes is zero. In this view, everything is a battle where only one can come out ahead.

 
This concept seems especially prevalent in commercial real estate transactions when the market is hedged in favor or a buyer or seller. Think about it—there’s a property on the table, and both buyer and seller have their own goals, often seemingly at odds. The seller wants the highest possible price; the buyer, the lowest. It’s easy to fall into the mindset that for one side to succeed, the other must suffer.
 
We’re often led to believe that every negotiation is a zero-sum game where our only option is to win, no matter the cost to the other party.
 
But is that really the case? Can a deal only close if someone loses?
I’ve found that in reality, this approach is not only limiting but often counterproductive.
 
Commercial real estate transactions are rarely a simple equation of plus one, minus one. The complexity of the deals, the relationships at play, and the long-term impacts on both parties are far too intricate to be boiled down to mere numbers on a scoreboard.
 
In my experience, the most successful transactions aren’t the ones where someone walks away feeling like they’ve “won” at the expense of the other. Instead, they’re the deals where both parties come away feeling satisfied, where both sides can say they’ve achieved something valuable. This is what we mean by a win-win situation.
 
A true win-win transaction takes into account the broader picture. It’s about finding common ground, identifying shared interests, and creating value for both parties. It might mean being flexible, thinking creatively, or looking beyond the immediate financials to consider the long-term relationships and potential future opportunities.
 
For example, a seller might accept a slightly lower offer if it means a quicker close or if the buyer is a local business that will positively impact the community—something that, in the long run, could enhance the value of other nearby properties the seller owns. A buyer might agree to pay a bit more if it means securing a property that perfectly suits their needs, saving them future relocation costs or renovations.
 
These are the kinds of
compromises that lead to deals where both sides feel they’ve won.
 
I’ve often seen negotiations where both parties dig in, each determined to get the upper hand. They see every concession as a loss, every gain as a victory. But this mindset overlooks the bigger picture. It ignores the fact that a deal where one party is left feeling resentful or cheated is less likely to hold up in the long run. Relationships sour, deals fall apart, or the animosity lingers, affecting future interactions.
 
On the other hand, when both parties feel like they’ve won something, the outcome is more sustainable. The buyer and seller leave the table not as adversaries, but as partners in a transaction that benefits them both. This isn’t just a feel-good sentiment—it’s good business.
 
So, where does the zero-sum game fit in commercial real estate? It doesn’t. Not if you’re in it for the long haul. Not if you’re looking to build lasting relationships, create value, and grow your business in a way that benefits everyone involved.
 
The next time you’re sitting at the negotiation table, try to move away from the mindset of “if I win, you lose.” Instead, ask yourself: What does winning really look like? How can we both walk away from this deal feeling like we’ve gained something of value? The answer might just lead to better deals, stronger relationships, and more sustainable success.
 
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.

What New England Can Teach Us About Commercial Real Estate

As someone who has spent considerable time exploring the winding roads, charming villages, and bustling cities of New England, I’ve come to appreciate that this region offers more than just scenic beauty and history. There’s a certain rhythm here, a way of doing things that’s deeply rooted in tradition yet surprisingly innovative. And as I reflect on my experiences, I can’t help but see parallels between the lessons New England offers and the world of commercial real estate.

Lesson 1: Value in Preservation
New England is a region that values its history. Whether you’re walking the cobblestone streets of Boston or admiring the colonial architecture in towns like Portsmouth, New Hampshire, you quickly realize that preservation isn’t just a buzzword here—it’s a way of life. The same can be said for commercial real estate. Often, the most valuable properties aren’t the new builds with all the latest amenities but the ones that have stood the test of time. Just as New Englanders know the value of a well-preserved historic home, real estate investors should recognize the potential in older buildings. With a little care and strategic renovation, these properties can become not only profitable but also integral parts of the community.

Lesson 2: Embrace Seasonality
One of the most charming, and sometimes challenging, aspects of New England is its distinct seasons. The region goes from vibrant fall foliage to harsh winter snow, followed by the gentle thaw of spring and the warmth of summer. This seasonality teaches resilience and adaptability—traits that are equally important in commercial real estate. Markets, like seasons, change. There will be highs and lows, periods of growth, and times of stagnation. The key is to embrace these cycles, prepare for them, and adjust your strategies accordingly. Just as New England businesses might shift their focus from skiing in the winter to coastal tourism in the summer, commercial real estate owners need to be nimble, adjusting their property management and marketing strategies to the ebbs and flows of the market.

Lesson 3: Community is King
In New England, community isn’t just an idea; it’s a lived experience. Town meetings, local businesses, and neighborhood gatherings are the lifeblood of this region. It’s a place where people know their neighbors and where local businesses are fiercely supported. In commercial real estate, fostering a sense of community can be just as crucial. Whether you’re managing a mixed-use development or a single office building, creating spaces where people want to gather—where they feel a sense of belonging—can dramatically increase the value of your property. Think of your tenants as community members, not just rent checks. When you invest in their success, you’re also investing in the long-term success of your property.

Lesson 4: Respect for the Land
New Englanders have a deep respect for their natural surroundings, whether it’s the rugged coastline of Maine or the rolling hills of Vermont. This respect translates into a thoughtful approach to land use—something that’s increasingly important in commercial real estate. Sustainable practices, from energy-efficient buildings to green spaces, aren’t just trends; they’re becoming necessities. Properties that align with these values are more attractive to tenants, investors, and regulators alike. Just as New England’s landscapes have been carefully maintained for centuries, so too should our commercial properties be developed with an eye toward long-term sustainability.

Lesson 5: Innovation Rooted in Tradition
Finally, New England is a region that innovates while honoring its roots. From the tech hubs of Cambridge to the traditional craftsmanship in Vermont, there’s a unique blend of old and new here. In commercial real estate, this balance is crucial. While it’s important to stay ahead of the curve with the latest technologies and trends, there’s also value in holding onto the tried-and-true practices that have proven successful over time. Whether it’s a new smart building or a classic brick-and-mortar storefront, the key is to integrate innovation in a way that respects the property’s history and purpose.
In the end, what New England teaches us about commercial real estate is that success isn’t just about the latest trends or the most modern designs. It’s about understanding the value of history, the importance of community, and the need for resilience and adaptability. It’s about respecting the land, embracing change, and finding that delicate balance between innovation and tradition. So, the next time you’re faced with a real estate decision, take a page from New England’s book—you might just find the inspiration you need to succeed.
 
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.

Owner Mistakes Part 2

Last week’s column struck some nerves as I discussed the two most common mistakes I’ve seen owner occupants make with their commercial real estate. To refresh, not charging the operating entity a market rent and an absence of agreements between the ownership and occupant were the two mistakes discussed. 
 
Consistent among the emails I received were questions as to how. How should I go about determining a market rent and what form should the agreement take? 
 
What follows are some suggestions on how to accomplish both. 
 
Determining Market Rent
Let’s tackle the market rent question first. The key to setting a market rent is to think like an impartial third party. Imagine you don’t own the building, and you’re simply looking at it as an investment. What would you expect to pay if you were leasing the space from someone else? This mental shift can help you approach the task with objectivity.
 
A great place to start is by doing a bit of local research. Look at similar properties in your area that are available for lease. You can gather information from commercial real estate listings, or better yet, have a conversation with a local commercial real estate broker who specializes in your property type. Brokers live and breathe this data, and they can provide valuable insight into current market conditions and comparable rents.
 
Once you’ve gathered a range of rents for comparable properties, it’s time to adjust for any differences. Consider factors like the location, size, condition, and any special features your property might have that others do not. The goal is to arrive at a rent that is fair and reasonable for both the operating entity and the ownership entity.
 
Drafting the Agreement
Now, onto the agreement. This part can seem daunting, but it’s critical for protecting both parties involved—yes, even when both parties are you! The agreement should clearly outline the terms of the lease, including the amount of rent, payment schedule, length of the lease, and any responsibilities each party has regarding maintenance, repairs, and improvements.
 
While it’s tempting to simply draft something up on your own, I’d strongly recommend engaging a real estate attorney to help with this step. They can ensure the agreement is not only legally binding but also covers all the bases you might not have considered. Think of it as an investment in avoiding future headaches.
 
Putting It All Together
Once you’ve established a fair market rent and formalized the lease agreement, you’ll be in a much stronger position. Not only will your financial records reflect a more accurate picture of your business’s performance, but you’ll also have peace of mind knowing that both the ownership and the operating entity are protected by a clear, mutually beneficial agreement.
It might seem like extra work, but these steps are essential to ensuring your commercial real estate works for you, not against you. So, take the time to do it right—your future self will thank you.

Owner Occupants Mistakes - Two Biggest

Owning the building where your business operates is indeed a smart move, and many entrepreneurs find it to be a beautiful arrangement.
 
Typically, the process involves creating an entity like a limited liability company (LLC) to take title to the real estate. Then, the business operation “rents” the address from the LLC, often as a separate corporation. This setup offers some distinct advantages: tax benefits, depreciation, interest deductions, and the ability to build equity. However, many owner-occupants make critical errors that can undermine these benefits. Let’s delve into two of the most significant mistakes:
 
Not Paying Market Rent
When acquiring a building, businesses often finance the purchase, frequently through the Small Business Administration, which allows financing up to 90% of the purchase price. With only 10% equity needed for the buy, the resulting debt service typically dictates the rent the business pays to the LLC. This means the rent is often set based on debt service requirements rather than market rates. While this might seem convenient, it can lead to significant financial discrepancies over time.
Consider this: as the debt decreases, the rent often remains static, potentially falling below market value. This discrepancy can create substantial financial issues. For instance, if the rent is significantly below market rate, the business’s profits appear artificially inflated. This can complicate matters if the owner decides to sell the company. Potential buyers might see an inflated profit margin that isn’t realistic once market rent is factored in.
 
I’ve seen this firsthand with a company that owned its building since 2001. They enjoyed under-market rent for over 20 years. When it came time to sell the business, the profit appeared much higher than it actually was, creating a challenging situation for both valuation and sale. Keeping rent aligned with current market rates is essential to avoid these pitfalls and ensure the financial health of both the business and the real estate entity. 
 
Regularly reviewing and adjusting the rent to reflect current market conditions is crucial for maintaining an accurate financial picture.
 
Not Having an Agreement Between Owner and Tenant
Another common mistake is overlooking the necessity of a formal rental agreement between the real estate entity and the operating business. Many owner-occupants assume that since they control both entities, a formal agreement is unnecessary. They think, "I own the company and the building, so why do I need a contract?" This mindset can lead to severe complications, especially during unexpected events like death, divorce, or a sale.
 
I recall a particularly extreme case involving a manufacturing company. The owner, who also owned the building, passed away suddenly. Unbeknownst to the company, the owner had altered the building’s ownership, distributing it among several heirs. None of these heirs wanted to continue the business, and without a lease agreement in place, the business was evicted so the building could be sold. This resulted in a costly and disruptive relocation for the company.
 
Having a written agreement between the owner and tenant entities is crucial to avoid such scenarios. It ensures that both parties are clear on their obligations and protects the business from unforeseen events. 
 
This agreement should outline the terms of the lease, rent amount, duration, and any other pertinent details. It’s a simple step that can prevent significant headaches down the line.
 
Owning the building where your business operates can be incredibly advantageous, offering tax benefits and the ability to build equity.
 
However, it’s essential to avoid these two common mistakes: not paying market rent and not having a formal agreement between the owner and tenant. By addressing these areas, owner-occupants can better safeguard their investments and ensure smoother operations, regardless of future uncertainties. Regularly reviewing rental rates and maintaining clear agreements will help keep both the business and real estate entity on solid financial footing.
 
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. 

What Colorado Can Teach Us About Commercial Real Estate

We just spent a marvelous week in the Rocky Mountain area of Colorado. Vail, Colorado was our homebase from which we ventured out onto a number of remarkable excursions. We floated the Colorado river, we rode horseback through rolling hills to observe grazing elk, soaring eagles, and beautiful wildflowers . We fished for the bounties of the Eagle and Colorado rivers. Finally, we practiced goat yoga in the shadows of Vail Mountain. We adopted the phrase baaaa-maste. Sorry! 
 
So you may be wondering, what any of this has to do with commercial real estate? Bear with me and allow me to draw a few parallels.
 
Strategic Location: 
Just as Vail is strategically located to offer access to various outdoor activities, commercial real estate must consider location as a critical factor. Properties situated in prime locations with easy access to amenities, transportation, and attractions are more likely to thrive.
 
Experiential Value: 
The unique experiences we had in Colorado, from floating the river to goat yoga, underscore the importance of offering memorable experiences in commercial real estate. Retail properties that provide unique and engaging experiences can differentiate themselves in a competitive market and attract loyal customers. Think Bass Pro and REI as examples. You go to experience - not just buy. 
 
Collaboration and Partnerships: Many of our activities were facilitated by local guides and businesses working together. Similarly, commercial real estate can benefit from strategic partnerships and collaborations with local businesses and organizations to create a vibrant and interconnected community. 
 
Connection to Nature: 
Our adventures emphasized the value of connecting with nature. Commercial real estate can integrate green spaces, rooftop gardens, and natural elements to create a calming and attractive environment for tenants and visitors. Most class A office developments - such as Boardwalk in Irvine - understand this. 
 
Seasonal Flexibility: 
Colorado's attractions vary by season, from skiing in winter to myriad summer activities. Commercial real estate properties can also adapt to seasonal changes by offering different services or promotions throughout the year, ensuring continuous engagement and relevance.
 
Cultural Integration: The rich cultural backdrop of Colorado, with its mix of Western heritage and contemporary influences, adds depth to the experience. In commercial real estate, integrating local culture and history into the design and branding of a property can create a unique identity that resonates with the community and visitors alike. The District in Tustin has done a good job integrating local history into its buildings. 
 
Industry Creation and Innovation: The development of the ski industry in Colorado transformed the region into a world-renowned destination. This innovation parallels the rise of new industries, like Silicon Valley tech, which created a whole genre of commercial real estate - the Research and Development buildings of the mid 1980s. Embracing and supporting emerging industries can lead to the creation of dynamic, economically robust communities that attract investment and talent. The boom in logistics spaces with high cube warehouses, enhanced fire suppression and room for trucks to maneuver is a recent example.  
 
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.

Activity Levels

I’ve often been asked if the commercial real estate business is seasonal. By this, I mean, do we see an uptick in activity comparable to our residential brethren. As you’re aware, house sales tend to ebb and flow based upon seasonality. As the summer months approach and families near the end of school, they use the summer months as an advantageous time to relocate. 
 
Commercially - short of an economic downturn - we tend to see several peaks and lows with leasing and sales volume. As the year begins, we encounter companies who are interested in finding a new location. Our activity tends to wain preceding tax time from mid March to mid April. We experience robust volume through the middle of June. Vacation time from mid June through Labor Day is historically slow. Finally, as autumn approaches, and before the holidays begin, there is a mad dash for the exits to get transactions accomplished before the end of the year.
 
However, this year has been a bit different. We should be slow now as we are in the vacation mode for most businesses. But, we have seen a fairly significant increase in tire kicking this summer. 
 
As I have written in this column, ad nauseam, we are experiencing a glut of class A logistics inventory above 100,000 ft.². Orange County certainly has more supply than the present demand but this trend is much more acute in the Inland Empire areas. Within the last 30 days, we have seen a tremendous amount of space leave the market as evidenced by five deals in Huntington Beach and Garden Grove and a comparable number in the IE. 
 
So what gives? Here are my theories as to why. 
 
Pricing:
One of the primary factors driving the recent uptick in activity is pricing. With an oversupply of large logistics spaces, landlords are becoming more flexible in their negotiations. This has created attractive opportunities for companies looking to secure favorable lease terms. Lower rents and attractive concessions are enticing businesses to move now rather than wait. We’ve seen a decrease in asking lease rates of approximately 18%. Owners are coupling these aggressive rates with an abundance of free rent and enhanced brokerage fees.
 
Chinese companies absorbing space for inventory:
Another contributing factor is the activity from Chinese companies. These firms are strategically securing warehouse space to better manage their inventory. The Trump presidency had a significant impact on tariffs, with increased tariffs on Chinese goods prompting these companies to rethink their logistics strategies. With the events of last weekend, adding some clarity to the November Choice, Chinese third-party logistics providers are securing as much space as possible to move inventory into the United States pending future tariffs. This is an interesting debt because our election is still over three months away. With global supply chains already experiencing disruptions, having additional storage capacity close to major markets like Southern California has become even more advantageous. This combination of tariff impacts and supply chain challenges has led to a noticeable increase in leasing activity, particularly in the logistics sector. Within the last 30 days, Chinese occupants have consumed over 2,000,000 ft.² of space in four transactions.
 
Pent-Up Demand:
Finally, there is a significant amount of pent-up demand. The uncertainties of the past few years, including economic fluctuations and the pandemic, have caused many businesses to delay their expansion plans. Additionally, the Trump presidency and its impact on tariffs played a crucial role. Increased tariffs on goods imported from China prompted many companies to rethink their supply chains and logistics strategies. As a result, businesses are now moving forward with their plans to secure warehouse space in strategic locations like Southern California. This shift has led to a surge of activity as companies seek to mitigate the impact of tariffs and capitalize on current market conditions.
 
While commercial real estate may not follow the same seasonal patterns as residential real estate, there are certainly periods of increased and decreased activity. This year, contrary to the usual summer slowdown, we are witnessing an unexpected boost in leasing and sales. Factors such as attractive pricing, strategic moves by Chinese companies, and pent-up demand are driving this trend.
 
 
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 Thoughts

Occasionally, it’s a great idea to clear your mind, empty the inbox, and allow your thoughts to be random. Today, dear readers is such a moment. 
 
It's fascinating how the mind can wander through a labyrinth of thoughts, each one seemingly unrelated yet all part of the same intricate web of our daily lives. 
 
Today, I'm embracing the randomness and sharing a glimpse into the eclectic musings of a commercial real estate broker's mind. 
 
Someone famous once opined, they’re only opinions, however, they’re all mine.
 
Here goes. 
 
Presidential Election
The political climate is heating up as we approach the next presidential election. The decisions made at the polls will ripple through various sectors, including real estate. Policies on taxes, environmental regulations, and economic incentives could dramatically shape the landscape of commercial real estate. It’s a waiting game now, as we brace for the changes that a new administration might bring.
 
Interest Rates
Interest rates are the heartbeat of real estate investment. Recently, there’s been a lot of speculation about whether the Federal Reserve will adjust rates again. Lower rates have made borrowing cheaper, fueling investment and development. However, the potential for rising rates could cool the market, making it more challenging for buyers to secure favorable financing terms.
 
Owner Occupant Activity
There’s a noticeable trend of increased owner-occupant activity. More businesses are opting to purchase their spaces rather than lease. This shift is driven by the desire for long-term stability and control over their work environments. It also reflects confidence in their growth prospects and a strategic move to build equity in their properties.
 
Vacation Schedule
Even commercial real estate brokers need to unwind. Planning a vacation amidst a busy schedule can be a challenge, but it’s essential for maintaining balance. Whether it’s a beach getaway, a mountain retreat, or exploring a new city, taking time off to recharge is crucial. This summer, I’m hoping to strike that perfect balance between work and relaxation.
 
What to Expect This Summer
Summer often brings a mix of excitement and uncertainty. The market tends to slow down slightly as people take vacations, but it also presents opportunities. This year, I’m anticipating a few surprises – perhaps an unexpected deal or a new trend emerging. Staying adaptable and ready to seize opportunities is key.
 
Embracing the randomness allows for a broader perspective. It’s a reminder that in the midst of our busy lives, taking a moment to reflect on the myriad thoughts and events can be incredibly grounding. Here’s to the journey and all the unpredictability it brings!
 
 
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.
 

2024 Predictions - A Mid Year Update

Today marks the end of the first half of 2024. Wow! Christmas decorations will grace the shelves of do it yourself retailers in no time. Be sure and buy yours early. After all, you’ll want to make sure your Christmas lights are donned by Labor Day. But, I digress.  Today, I thought it would be interesting to take a look at the predictions I made in January of this year to see how they are progressing. It’s always a good idea to make sure you’re on the right track - especially when advising owners and occupants of industrial real estate in Southern California. 
 
So with that as a backdrop, let’s review what I had to say six months ago, how those predictions are faring, and what’s in store for the balance of the year, shall we?
 
Here’s what I had to say in January 2024. Industrial lease rates will soften. This time last year, a client of ours was facing an expiring lease. We tried to find a suitable alternative to move his operation. Nothing was ideal. We advised him to stay put, negotiate a short term fix - 6-12 months and continue our search. His owner would only agree to six months so we had a new deadline - June of 2023. We nearly struck pay dirt in March but jettisoned the opportunity due to its size - just not quite big enough. Once again, we approached his owner asking for some more time. He agreed to extend through December. Our gamble paid off as we secured a suitable building at a 15% discount! Why, you may wonder? Simple economics. We tracked new avails and ones leaving the market and noticed an imbalance. Yep. More was coming than going. We knew someone would drop their rate to secure a great tenant. Expect more of the same this year - especially with Class-A buildings above 100,000 square feet. At last count in the OC - eleven were open for business and seeking a resident. Two left the market last year. Hmmm. Someone will get motivated and make a deal, comps will reset to the new level and the frenzy will begin. What’s happening now. Yes! If you read my column from last week, where I discussed the stages in which price reductions occur, you will realize that we are in the concession stage of price reductions. By that I mean, owners, in order to get their industrial buildings leased, are offering more concessions, such as free rent, enhanced brokerage fees, and potentially moving allowances to attract occupants to their vacancies. I would expect this trend to continue until all of the class a inventory above 100,000 ft.² is absorbed. How long will it take you may be wondering? It’s difficult to say, but I suspect by February or March 2025, will be in a short supply situation once again.
 
Here’s what I had to say in January 2024. Expect sales volume to increase. The forces outlined in the paragraph above will trickle into the sales world. By that, I mean  an owner awaiting a tenant may choose to sell. A further catalyst could be the underlying debt on the asset. Imagine you’ve originated a short term construction loan to build a class A structure. You considered construction costs, time to build and lease. Your calculus was based upon conditions in early 2022. You’ve delivered a new building into an entirely different market - longer vacancy and lower rates. Your lender might be getting a bit nervous. When will the maturing debt be repaid? Thus pressure to dispose of the new build. What’s happening now. In the inland areas of Southern California, such as the inland Empire, we are seeing some institutional owners opt to sell their vacancies as opposed to waiting for that elusive tenant. In this manner, they are able to re-deploy the money into a different market with better fundamentals or return principal investment to their investors. If a building has near term vacancy, meeting a year or two, expect this trend to continue.
 
Here’s what I had to say in January 2024. Recession or no? I say no. Last year I took a contrarian approach and predicted we would avoid a recession in 2023. Recall, recession is a decline in gross national product for at least two quarters. I believed in the resiliency of the United States economy, especially the consumer, and we skated by a recession in 2023. As I write these predictions today, the only storm clouds I see on our horizon, are global uncertainty in the Middle East. Specifically, will the Red Sea shipping lane disruption cause inflationary pressures on goods delivered? If this proves to be the case, the federal reserve may be persuaded to delay cuts in interest rates, which are predicted for this year. However, I’m reminded of our status in January 2020. We were rocking along when a microscopic foe sent us to our spare bedrooms. Therefore, beware of the Black Swan event. What’s happening now. So far, so good. In fact, aside from retail sales, our economy seems to be performing fairly well. Unemployment has crept up slightly, but is still at historic lows. Granted, interest rates are higher than they were two years ago, but still much lower than we have experienced in other decades. Will the federal reserve choose to cut interest rates later this year? Only time will tell, but I believe we may see an interest rate cut after the election.
 
Here’s what I had to say in January 2024. Interest rates. Last year, for the first time in a couple of decades, you could actually make money on idle cash. We saw a peak in Treasuries occur last year when the 10 year T-note eclipsed 5%. The rate this morning is slightly above 3.8%. This is good news for borrowers, bad news for savers and could cause an uptick in institutional buying activity. These behemoth money managers are constantly seeking return and might view commercial real estate as a safe haven to earn some additional juice. I believe the 10 year notes will level at around 4 to 4.25% percent this year. What’s happening now. As of this writing, the ten year T note is hovering around 4.2 to 4.3%. This is significantly lower than the 5% we saw at the end of 2023. As mentioned, Treasury interest rates are a great metric for savers but not such a good metric for those reliant upon borrowing - expanding businesses which need to lease space, buy a facility or machinery and hire. I still believe we will end the year with 10 year rates well below 4.5%.
 
So there you have it., What I said, what’s happening now, and what I expect for the balance of 2024 I wish you and yours a very safe and sane Fourth of July. Let’s make the second half of 2024 the best ever! 
 
 
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.
 

Pricing - Steps To Anticipate

Recently, we discussed price reductions and the factors which cause them. In short, when supply exceeds demand, a shortage occurs - also called an imbalance. This imbalance is like a seesaw - it’s hedged toward either side with one side up and the other down. In our industrial market, the number of occupants needed to fill our vacancies is surpassed by the addresses available. Ok. One of the ways to absorb the excess is through price reductions. Today, I’ll take an in depth look at the steps you can anticipate when lease rates soften as outlined by the stages of an economic cycle. 
 
The Economic Cycle Stages:
1. Vacancies Narrow: Initially, as the market tightens, available spaces get leased quickly. Businesses expand, new companies move in, and the surplus of vacant buildings decreases.
 
2. Rents Grow: As vacancies narrow, landlords gain pricing power. Increased demand leads to higher rents. Businesses are willing to pay more due to the scarcity of available spaces.
 
3. Developers Build: Seeing rising rents and low vacancies, developers enter the market. New projects are initiated to capitalize on the high demand and favorable leasing conditions.
 
4. Leasing Activity is Robust: With new developments and a thriving economy, leasing activity peaks. Companies scramble to secure space, often agreeing to higher rates and fewer concessions.
 
5. Developers Over-Build: Eventually, enthusiasm leads to overbuilding. Developers, eager to take advantage of the booming market, construct more spaces than the market can absorb.
 
6. Vacancies Increase: As the new spaces come online, the market shifts. The supply of available buildings starts to outpace demand, leading to increased vacancies.
 
7. Time on Market Expands: With more options available, properties take longer to lease. The average time a building sits on the market extends as businesses take their time to choose the best deal.
 
8. Concessions Appear: To attract tenants, landlords begin offering concessions—such as free rent periods, tenant improvement allowances, and other incentives. These concessions aim to make properties more appealing in a competitive market. By the way, this is where we are. 
 
9. Prices Soften: As vacancies continue to rise and concessions become standard, lease rates start to soften. Landlords adjust their pricing expectations to align with the new market reality.
 
10. Demand Returns: Over time, the lower prices and favorable leasing terms attract new tenants. Businesses take advantage of the softened market to expand or relocate.
 
11. Vacancies are Absorbed: As demand picks up, the surplus of vacant buildings gradually diminishes. The market starts to balance out, with supply and demand reaching equilibrium.
 
12. Rents Start to Grow: With vacancies absorbed and demand steady, rents begin to rise again. The cycle comes full circle as the market moves back toward a landlord's market, setting the stage for the next economic cycle.
 
Conclusion:
Understanding these stages helps businesses and investors gauge the ever-changing industrial real estate market. By recognizing where we are in the cycle, you can make informed decisions—whether it’s the right time to negotiate a lease, start a new development, or make strategic investments. In today’s market, with lease rates softening, it’s essential to stay informed and adaptable. The key to success lies in anticipating the next phase of the cycle and positioning yourself to take full advantage of the opportunities it presents.
 
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.