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.
 

Negotiating The BEST Deal

Last week, we spent some time discussing the morphing industrial market and its impact upon pricing. To review, north Orange County - especially in large logistics boxes - approaching an imbalance weighted upon those who occupy. Supply exceeds demand. Only time will tell if price drops will spur demand - also known an elasticity. 
 
With that backdrop, today I’d like to offer some suggestions if you find your company heading out to make a deal - either a purchase but especially a lease. 
 
Know the market. Let’s say your requirement is 100 to 150,000 ft.² of logistics space in North Orange County. You should be keenly aware of everything that currently exists or will become available during your search time. By this, I mean, what tenants will vacate spaces that you could backfill. Coupled with an understanding of the available inventory is knowledge of the transactions that have recently occurred. By the way, transactions occur as sales, direct leases, subleases, and renewals. Sales are a matter of public record - their terms are easy to determine. Direct leases and subleases are more difficult to track because no deed is recorded. Renewal deals are the most difficult to review as frequently renewal deals occur between an owner and his occupant. These are typically not marketed and therefore difficult to gauge. It is imperative that you engage a commercial real estate professional, who really understands the marketplace in which your requirement will compete. Another factor with which you should be aware is the type of owner holding title to the property. An institutional property owner such as a pension fund advisor or a real estate investment trust will likely have more guard rails around the terms and conditions under which they can negotiate. A private owner may be more flexible in agreeing to favorable terms. Regardless, you must understand the owner’s motivations in order to secure the best possible sale price or lease rate and terms.
 
Know your capabilities. Things such as how long you will be able to commit to the space, what variances from the typical amenities will you require, what is the timing of your present lease expiration, do you own a facility that must be sold prior to transacting, is there anything unique about your use of the building that might cause a timing delay, and other questions should be seriously considered with carefully thought out answers. We recently represented a tenant who was able to sign a 10 year lease, use the improvements in the building largely as they existed and had a lease that expired with enough time to enable the building to become market ready. We were an ideal match for the owner. Had any of these components been lacking, our requirement would not have been as favorable. 
 
Understand your strong suit. If your company is ready to move upon closing a sale or signing a lease, and the building you are pursuing is vacant, you are potentially golden. However, the converse could be true if you are ready to make a deal yet the building won’t be available for another nine months. As you can see, something would have to change with this set of circumstances. Either you would have to delay possession or the owner would have to figure out a way to make the building available sooner. Is your company financially strong? In this rapidly changing market, credit is king. The last thing an owner wants to do these days is sign a long-term commitment with a financially shaky occupant. Turnover is expensive and owners want to avoid this at all cost. 
 
Be aware of your blind spot. If all of the interest in a particular piece of property were laid side-by-side, how does your interest compare? By this I mean, do you require bank financing in order to complete the deal? Is board approval a part of your process? Is there anything particular about your requirement, which could add time to your ability to say yes? Will a hefty legal review of all of the documents ensue upon the handshake? How does the purchasing or leasing entity look financially? Let’s say you want the very best purchase price available yet are hamstrung because of your need to procure financing. This adds an uncertainty to the transaction which may cause a seller to go a different direction. Of course, this assumes there are other potential purchasers. If your sense is you are his only alternative, you may be able to get a great price and the timeframe needed to close the deal. Certainty of clothes these days is more important than the very highest price. Consequently, structure your deal accordingly.
 
Don’t get greedy. The biggest mistake I see occupants make in this rapidly changing market, is trying to take advantage of an owner. Owners of commercial real estate are generally sophisticated entities with tons of market expertise. It’s safe to assume they’re acutely aware of their situation. If you are trying to extract the best sales price, lead with data. By understanding the owners exit strategy - lease up and sell or hold long-term, you can chart the course to completion. Using the lease up and hold exit, an owner will have to procure a tenant for his building before selling it to an investor. Therefore, understanding the rental market - rate, concessions and terms - you have a starting point. Once a tenant is in place, what is the market capitalization rate for this income. Assume $21.60 NNN annually and a 6% cap. The resulting price per square foot value would be $360 ($21.60 / .06). But the tenant is not there yet. So, it would be reasonable to expect some origination costs should be subtracted. After all, to procure the tenant will require some free rent, potential modifications to the building such as lighting or dock levelers, and brokerage fees. To compute this cost requires assumptions. Overestimate and the greed enters the picture. 
 
Thus, negotiating the best deal in today’s industrial real estate market requires thorough market knowledge, a clear understanding of your capabilities, and strategic negotiation. By focusing on data-driven decisions and avoiding greed, you can secure favorable terms in a challenging market.
 
 
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.
 

Price Reductions

Our industrial market in Southern California is rapidly morphing into a buyer’s/tenant’s market. By that I mean, a supply of available buildings which exceeds demand and a softening of prices. We’re seeing this especially in the large logistics spaces constructed in the last building craze. At their peak, rents topped $2.10 per square foot triple net for these concrete caverns. On a 100,000 sf building, that’s $210,000 per month plus an additional $40,000 for operating expenses. In context, these rents for a seemingly lower and lesser use - industrial - than an office building eclipsed the price paid for a suite of office space. 
 
Prior to June 2022, these boxes were devoured by hungry occupants before construction was completed. Now they sit. In some cases for months. Those deals that have transacted are much less than the halcyon days of two years ago. Now a credit worthy tenant can expect to pay $1.75-$1.85 triple net for the same address which commanded 17% higher numbers not that long ago. 
 
What about the sale market? In north Orange County - Anaheim, Placentia, Brea, Orange, Yourba Linda, Fullerton and la Habra - we’ve also seen softening. However, not to the extent rents have decreased. The inland areas tell a different story. 
 
Factors Contributing to the Shift:
1. Increased Supply: The recent building boom has resulted in an oversupply of large logistics spaces. These buildings, once in high demand, are now struggling to find tenants. This surplus is driving down rental rates as owners compete for a shrinking pool of occupants.
2. Economic Uncertainty: Economic factors, including inflation and rising operational costs, have made businesses more cautious about expanding their industrial footprints. Companies are re-evaluating their space needs and, in many cases, opting for smaller or more flexible leasing arrangements.
3. Changes in Consumer Behavior: The rapid shift towards e-commerce during the pandemic has now stabilized. As consumer behavior normalizes, the frantic demand for massive warehouse spaces to accommodate inventory surges has waned.
4. Financing Challenges: Higher interest rates and tighter lending conditions have made financing new acquisitions and developments more challenging. This has tempered the pace of new investments and developments in the industrial sector.
 
Opportunities for Tenants and Buyers:
1. Bargaining Power: With a glut of available spaces, tenants have greater bargaining power. They can negotiate more favorable lease terms, including lower rents, longer rent-free periods, and tenant improvement allowances.
2. Strategic Acquisitions: For buyers, especially those with readily available capital, this market presents opportunities to acquire properties at more reasonable prices. Investors can capitalize on distressed assets or properties that have been sitting vacant.
3. Long-Term Planning: Businesses can take advantage of the current market conditions to secure space for future growth at attractive rates. Locking in long-term leases now can provide stability and cost savings in the years to come.
 
Challenges Ahead:
1. Vacancy Rates: High vacancy rates can strain property owners who rely on rental income to meet their financial obligations. This could lead to increased property turnover and potential distress sales.
2. Maintenance Costs: Maintaining large, vacant industrial properties can be costly. Owners must continue to invest in upkeep to attract potential tenants, even as rental income declines.
3. Market Uncertainty: Continued economic uncertainty and potential regulatory changes could further impact the industrial real estate market. Stakeholders need to stay informed and adaptable to navigate these challenges.
 
Conclusion:
The Southern California industrial real estate market is undergoing a significant transition into a buyer’s/tenant’s market. While this shift presents challenges for property owners, it also offers opportunities for tenants and buyers to secure favorable terms and strategic investments. By understanding the factors driving this change and staying adaptable, stakeholders can navigate the evolving landscape and capitalize on new opportunities.
 
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.
 

Midwest Meanderings

Our travels took us to the upper Midwest to witness the nuptials of our dear friend’s daughter. We found ourselves in the land of Lincoln - Illinois and Wisconsin. 
 
You may be wondering what a trip to the Midwest has to do with Southern California commercial real estate. Please indulge me as I recap a few lessons learned. 
 
One of the most striking aspects of our visit was the strong sense of community and local support in the Midwest. Small towns thrive on mutual support and engagement, from local businesses to community events. In Southern California, fostering a similar sense of community within commercial developments can lead to more vibrant projects. Investing in local events, supporting small businesses, and creating spaces where people can connect can enhance the value and appeal of commercial real estate.
 
The Midwest is known for its unpredictable weather and the resilience of its people. This adaptability is a valuable lesson for commercial real estate in Southern California. As we face challenges such as economic fluctuations, environmental concerns, and changing market demands, the ability to adapt and remain resilient is crucial. Incorporating flexible design elements and sustainable practices into commercial projects can help buildings withstand various challenges and remain valuable assets over time.
 
Illinois and Wisconsin boast a rich heritage, with a blend of historical landmarks and modern innovations. Similarly, in Southern California, balancing preservation with progress is key. Renovating historical buildings to meet modern standards or integrating innovative technologies into new developments can create unique and appealing commercial spaces. Embracing both heritage and innovation can attract diverse tenants and visitors.
 
During our travels, we noticed the importance of efficient transportation and accessibility. Whether it was the well-connected highways or the ease of navigating small towns, getting around was convenient. In Southern California, prioritizing transportation infrastructure and accessibility within commercial developments can significantly impact their success. Ensuring easy access for customers, employees, and goods can enhance the overall functionality and attractiveness of a property.
 
Lastly, our trip was a reminder of the power of personal connections. The warmth and hospitality we experienced highlighted the importance of building strong relationships, whether in business or personal life. In commercial real estate, nurturing relationships with clients, partners, and the community can lead to long-term success. Personal connections often translate to trust, loyalty, and opportunities for growth.
 
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.
 

Capital Markets - Institutional Investors

Commercial real estate ownership is divided into those that use it for their operations and those who rely upon the occupant to pay rent - also referred to as investors. Sure. There is a subset of occupant investors - those who own the building from which their business operates. But today’s column focuses upon another type of investor - the institutional investor. 
 
First, a bit of background on the characteristics of this genre. Generally, the institutional investor sources its capital through other people. You may be thinking, ok. My neighbor encouraged me to invest alongside him in acquiring a neighborhood shopping center. Is he an institutional investor? The answer is no. The “other people” mentioned refers to large buckets of money - the capital markets - amassed by pension funds, life insurance companies, and the stock market. If you’re a teacher, a police officer, a fire fighter or work in city hall, a portion of your paycheck is deducted. These dollars flow into funds which are then invested in stocks, bonds, and yes - commercial real estate. Those annual premiums paid to insure your life must be deployed into vehicles that earn a return. Once again, commercial real estate. Finally, you may have heard of a real estate investment trust or REIT. Publicly traded versions of REITs find money through the stock market. Prologis and Rexford are examples of REITs that develop, purchase, own, and manage commercial real estate. And more specifically, industrial. 
 
So, with that explanation as a backdrop, what are institutional investors experiencing these days? 
 
Capital for industrial purchases is returning. After a period of caution, capital is once again flowing into industrial real estate. Institutional investors are seeing renewed interest from their funding sources, driven by the stability and long-term growth potential of the industrial sector. Remember, investment activity came to a screeching halt two years ago as the Fed started its tightening pilot to tame decades high inflation. 
 
Demand for coastal gateways is increasing. Coastal gateway markets, such as those in California, are experiencing heightened demand. These markets are crucial for import/export activities and provide strategic advantages for distribution and logistics operations.
 
The leasing picture has become clearer. With the economic uncertainties of the past few years beginning to settle, leasing is becoming more predictable. Institutional investors now have a better understanding of market dynamics and tenant demand, allowing for more informed decision-making.
 
Interest rates are declining. After a period of rising interest rates, we’re seeing a trend towards stabilization and even slight declines. This shift makes financing more attractive and affordable, spurring increased activity in property acquisitions and developments.
 
Expectations for rent growth. Institutional investors are optimistic about future rent growth. Factors such as limited supply of industrial space, growing e-commerce demand, and strategic locations near major transportation hubs are expected to drive rents upward.
 
In conclusion, institutional investors play a significant role in the commercial real estate market, especially in the industrial sector. With capital returning, increased demand for strategic locations, clearer leasing dynamics, favorable interest rates, and expectations for rent growth, the future looks promising for these major market players. Understanding their impact helps us all appreciate the broader trends shaping the commercial real estate market today.
 
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.
 

SIOR Meanderings

From SIOR.com - “For more than 80 years, the Society of Industrial and Office Realtors® (SIOR) has been the leading global professional office and industrial real estate association, and continues to move the industry and our members' business forward as we drive the future of Commercial Real Estate. With 3,900 members in over 50 countries, SIOR represents today's most knowledgeable, experienced, ethical, and successful commercial real estate brokerage specialists.” 
 
I’ve been a proud member of this organization since 2018. The semi-annual conferences are epic, the destinations are glorious, the education is unparalleled, and the networking unsurpassed! We returned from this spring’s gathering last week and I’ve now had time to decompress and reflect on what I learned. This column will share some insights. 
 
Industrial breakout. I spent time with industrial real estate brokers from around the United States and the world. Monday afternoon’s conversation was quite eye-opening. Discussed was occupant’s use of Automated Storage and Retrieval Systems - ASRS. These high-tech inventory management arrangements cause a modern logistics provider to be more efficient, timely, and they require fewer employees. Many in the cold storage space are utilizing an ASRS to more strategically manage their inventories. In one instance, an occupant called AmeriCold constructs their new buildings around such a system and in many cases, they stretch 150 feet in height. To put this in context, that is approximately twelve stories high, and roughly four times the height of the modern concrete behemoths we see being erected in the Inland Empire.
 
Data centers, which power artificial intelligence are springing up around the United States, as well as chip manufacturing fabs as they referred to. The underlying challenge of both industrial real estate applications is the acute need for power.developers of these buildings seek power first and communities that can provide the power as opposed to the cost of land under which the building is constructed. A new concept called mini grids are appearing around the United States. These systems are encapsulated power serving a specific site with the juice generated by solar, wind, or other forms of renewable energy.
 
Industrial roundtable.  We heard from agents representing Mexico, Tampa, Florida, Atlanta, Georgia, Charlotte, North Carolina, Nashville, Tennessee, Dallas, Texas, Houston, Texas, Rotterdam, the Netherlands, Toronto, Canada, Laredo, Texas, Columbus, Ohio, Indianapolis, Indiana, and Los Angeles, California. Curiously absent from this round up was anyone from the middle part of the west such as Denver, Salt Lake City, and Phoenix. Certain themes were repeated. Much like Southern California - large scale inventory between 100,000 and 500,000 ft.² has been dramatically over built and therefore more supply than demand exists. In buildings larger than 500,000 ft.², a shortage exists. And there is still quite a demand for large boxes. The most robust size range nationally are buildings under 50,000 ft.². Most mentioned power and the lack of a sustainable source to be an existing in future challenge. All of the markets have experienced occupant demand waning as a result of inflation, higher borrowing rates, and the de-inventory after the Covid pandemic. The representative from Los Angeles, California opined that we are at the bottom in terms of rental rates as rents have decreased 30 to 40%. He echoed that 800,000 ft.² and larger is a hot size range as well as buildings below 50,000 ft.². The Los Angeles ports are doing a record amount of business. Third Party Logistics operators - 3PLs - are renegotiating leases that they originated in 2020, 2021, and 2022. Finally some local insurance carriers are requiring electrical panels be replaced in order to lessen the possibility of fire.
 
It’s very interesting to hear about the successes and struggles of other SIOR brokers around the United States. I’ll look forward, with great interest, to our fall conference which will be a home game as it will be based in Hollywood California. 
 
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 Southeast Teach Us About Commercial Real Estate

Semi-annually, an organization called Society of Industrial and Office Realtors - SIOR - gathers to compare notes on what’s happening around the country. This year’s soirée is in Florida and begins today. I’ll have more on this year’s spring conference in next week’s column. However, having not seen places like Savannah, Charleston, and Hilton Head - we decided to get our wanderlust on and cover some turf. The weather cooperated beautifully as did the bugs. I’ve rarely seen such beauty in the architecture and countryside or encountered such a nice group of people. We’ll be back!
 
You may be wondering what a sojourn to the southeast has to do with commercial real estate? Only these. 
 
The Southeastern region of the United States - including Florida, Georgia, and South Carolina, boasts a diverse economy, significant population growth, and varied market conditions. For instance:
 
Population Growth. The Southeast has been experiencing rapid population growth, driving demand for various types of commercial real estate, such as retail spaces, office buildings, and residential developments. The deep water ports in Savannah and Charleston receive and distribute goods from around the globe
 
Economic Diversity. From technology hubs like Atlanta to tourism-driven markets like Orlando, the Southeast showcases a diverse range of industries. Augusta, Georgia has become a cyber security hub. These economic drivers can provide demand for all sectors of our industry - office, retail and industrial spaces. 
 
Infrastructure Development. The Southeast has seen significant infrastructure investments, including new highways, airports, and ports. These developments cause a need for industrial and logistics properties.
 
Resilience to Natural Disasters. The region's resilience to hurricanes and other natural disasters has prompted innovations in building design and construction techniques, which can inform risk management strategies for commercial real estate investors.
 
Regulatory Environment. The regulatory environment varies across states in the Southeast, impacting zoning laws, tax incentives, and development regulations. Florida has no state income tax and other states provide incentives for relocating a business here. Understanding these nuances is crucial. 
 
Overall, studying the Southeast's commercial real estate market can provide valuable lessons in adapting to demographic shifts, economic trends, and regulatory changes that affect the industry.
 
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.
 

Top Ten Killers of Commercial Real Estate Deals

Today I must get my David Letterman on and discuss the top 10 reasons commercial real estate deals fail to close. As I have discussed in this column, ad nauseam, commercial real estate transactions are simply leases or purchases. We differ from our residential brethren, in that a large percentage of our transaction volume is comprised of leases. Specifically, some agents ply their entire trade negotiating leases either in renewal, direct, or sublease fashion. These professionals are known as “tenant rep” brokers because the majority of their work is on the occupant side of the table. Notably, as interest rates have risen over the past year and a half, we’ve witnessed a reduction in sales to the benefit of leases. Fortunately, a commercial occupant has a choice! Also, present in the industrial arena this year is a plethora of sublease business - an occupant no longer needs the space from which they operate and must locate a surrogate to fulfill their obligation. 
 
Today, I’ll illuminate the top ten reasons these deals - sales and leases - fail to consummate. 
 
Financing Issues. Difficulties in securing financing or unexpected changes in lending terms can jeopardize a deal. Issues such as insufficient funds, a spike in interest rates, or stringent lending requirements can lead to deal termination.
 
Due Diligence Concerns. Discoveries made during the due diligence process - that free look period occupants have to study a property - such as environmental issues, zoning violations, or property defects, can cause buyers to walk away from the deal or renegotiate terms.
 
Title Problems. Title defects, unresolved liens, or disputes over property ownership can delay or derail a commercial real estate transaction.
 
Appraisal Shortfalls. If the property appraises for less than the agreed-upon purchase price, buyers may struggle to secure financing or may seek to renegotiate the deal terms.
 
Environmental Issues. Environmental contamination or concerns about potential liabilities related to hazardous materials on the property can complicate or prevent a sale or lease from closing.
 
Legal Challenges. Legal disputes, such as zoning violations, boundary squabbles, or recorded lease agreements, can delay or derail a commercial real estate transaction.
 
Market Volatility. Changes in market conditions, such as uncertainty, shifts in supply and demand, fluctuations in interest rates, or economic downturns, can impact deal viability and cause parties to reconsider their positions.
 
Renegotiation Attempts. One party may attempt to renegotiate deal terms after an agreement has been reached, leading to a stand off and potential deal collapse if both parties cannot come to a satisfactory resolution. We’ll typically see this after an occupant has completed their due diligence and found an issue. 
 
Contingencies. Contingencies outlined in the purchase agreement, such as the sale of another property or obtaining necessary permits, may not be met within the specified timeframe, leading to a cratered deal.
 
Buyer or Seller Cold Feet: Sometimes, one party may simply have a change of heart or lose confidence in the deal for personal or business reasons, leading to deal cancellation. We once had a buy requirement pause because he contracted Covid-19. This caused him to re-think his entire life and business. 
 
And. Not among the top ten but certainly a thing. Sometimes, you just don’t see it coming! But boom, there it is. The death of a principal, collapse of the financial system - 2008, a pandemic - 2020, or a company is sold during your negotiations. Yes! We’ve seen all of these. 
 
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.
 

Occupant Mistakes

Occupants of commercial real estate, also referred to as users or occupiers fall into two categories - tenants or owners. To draw a finer distinction - both are tenants - however one genre pays rent to an unrelated third party, a landlord and the other pays rent to a related owner of the building. Most common in the second type, is a real estate ownership structured as a limited liability company, LLC, and the occupier a corporation. 
 
Today, I want to focus upon some common mistakes I witness occupants make in their commercial real estate decisions. 
 
No agreements. Too frequently, I see this with occupants whose building ownership is synonymous with that of the operation. A building is purchased, many times with debt, and a mortgage payment is originated. Additionally, property taxes, insurance, and maintenance are incurred. Resulting is a payment - rent - which ownership charges the resident. Unfortunately, the payment has no relation to a market rent for a comparable building. The owner has her costs covered and believes everything is golden. Unfortunately, a subsidy - charging the company less than market - devalues the operation. If a market rent was charged, a deduction in profit results. Conversely, billing too much places undo strain upon the occupant and ready sources of capital are consumed. This can limit the ability to hire, buy machinery, and grow sales. 
 
Once a satisfactory market rent is determined, it’s critical to have a written agreement between the parties - outlining the rent, expenses, term, increases, and options. 
 
I once had a client forced to move because no written agreement existed between the owner and occupant. Unbeknownst to the occupant, the owner had deeded small portions of the building ownership to various entities, such as ex-wives, charities, ex-girlfriends, and the like. When the owner met his untimely demise, the occupant - who was also a small owner of the building - found himself without an agreement and many different factions wanting their equity. A trustee was appointed to sort out the mess. The trustee’s only course of action was to sell the building and force the tenant to relocate. Extreme, but it can happen.
 
Extension rights. Extension rights fall in to numerous categories including options to renew a lease term, options to purchase the building, options to terminate the lease, options to take additional space, rights of first refusal to purchase and lease, as well as rights of first refusal and rights of first offer to purchase the real estate. Clearly, these understandings must be in writing in order to avoid conflict. However, one of the problems I see is the agreements are too vague. As an example, maybe an occupant has the option to renew the term of their lease for five years upon the expiration of the original lease term. If the language simply says - and occupant can stay for an additional five years at a mutually agreeable rate, disagreements can occur -  because no mechanism exists to determine a fair rental rate. Therefore, it’s important for options to not only be in writing, but also have clear definitions as to how rents and purchase prices are to be calculated. I’m involved in one such exercise currently where the language is very specific. If the landlord and tenant cannot agree upon a rate, each appoints, an arbiter to make an independent evaluation of the market. If those two arbiters cannot come to an agreement, a third arbiter is appointed by the previous two and her determination is final. This is a cumbersome process, but one which will avoid any disagreement. Finally, make sure the market lease rate or market purchase price is based upon comparable buildings within a comparable sub-market with similar amenities. In other words, it’s unfair to compare a 4000 square-foot address in the Irvine Spectrum to a 100,000 square-foot building in Santa Fe Springs.
 
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

Ahh, springtime. Longer days, warmer temps, flowers abloom, the crack of the bat on opening day of MLB, NCAA final four, and the Masters golf tournament. You may be wondering how I have time to make any deals with all the sports happening this time of year. It’s tough. But in light of the screen time I’m spending, my thoughts these days are random. 

 
Please stay tuned as I run through a few thoughts I have clouding my consciousness. Someone famous once said - they’re only opinions, but they’re all mine”. 
 
Seller/buyer disconnect. I wrote an entire column on this topic last week. If you missed it, you can catch it online.
 
Not terribly long ago, we were immersed in a seller’s market. Occupant demand outstripped supply and sellers were bullish. Multiple offers were the norm. Asking prices were abandoned for the dreaded TBD in case pricing was pegged too low and money was left on the table. The amount of buyer activity determined the ultimate strike price. In order to compete in this frenzy, occupants were forced to shorten due diligence periods, jettison financing contingencies, and seemingly overpay. A listing translated into a guaranteed paycheck. 
 
My how the world has changed in two short years. The only thing keeping sales prices relatively stable is a lack of availabilities. 
 
Impact of our Presidential election. I get asked quite often what to expect if Mr. Trump is elected vs Mr. Biden. Generally, a republican administration can portend tax cuts, an increase in defense spending, loosening of government regulations, and the appurtenant boom in the economy. To the extent this boom causes prices to rise - interest rates must be hiked in order to cool the fever. 
 
Counter to this would be a democratic administration with higher taxes, cuts in defense, more regulation, and a weakening economy.   
 
Yes. I’m oversimplifying. I can hear the detractors screaming - we have a democrat in office and the economy is just fine. In our most recent republican tenure, government debt increased dramatically. So the above are only generalities. 
 
Bottom line. Who knows? 
 
What’s happening with our economy? Speaking of said economy, what’s up? Consumer confidence is high, over 300,000 jobs were added in March, labor participation rate is now close to two thirds. If the economy is in the doldrums - why are employers adding so many jobs? Granted a big portion of the new employment is in the service industry where folks are spending money to dine out, take trips and buy experiences. Meanwhile, we expected a declining interest rate market this year as we anticipated the Federal Reserve would start the march down with inflation coming to heel. As of this writing, our benchmark ten year treasuries are topping 4.4% - bad for borrowers, good for savers. Retailers in the beauty trade are taking their lumps as well. 
 
Bottom line. Who knows. 
 
Springtime spells new beginnings. Another year and another batch of things to ponder. Should be an eventful balance of 2024. 
 
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.
 

Education of Buyers and Sellers As The Market Adjusts

In order for a real estate transaction to close - whether it is a lease or a sale - a properly motivated buyer and seller must be present. By this I mean you need an owner ready to make the next deal and an occupant who’s kicked the tires and is prepared to sign. Ideally, these motivations mesh into a synchronicity that is melodious. 
 
Currently, in our Southern California industrial real estate market we have a mismatch of expectations. Owners tend to remember how things were in early 2022 when occupant demand was robust, inventory was scarce, and interest rates were affordable. Folks who lease and buy these buildings perceive the opposite - a downturn in their business (less need for space), more addresses sitting vacant for longer, and borrowing costs that have doubled. A standoff akin to an old west gunfight has ensued. Fortunately, no one will be bodily harmed in said showdown. However, owners late to the fight may suffer financial losses. 
 
Today, I’d like to discuss our biggest task as commercial real estate brokers. That is educating owners and occupants to current market conditions. 
 
Understanding Market Dynamics. To grasp the current state of affairs, we need to delve into the factors shaping the industrial real estate market in Southern California. In the recent boom, investors favored constructing large warehouses for logistics operators, who primarily lease these spaces. Initially, the demand surged as online shopping soared, prompting distributors to expand their inventory storage. However, as the frenzy settled, warehouses across all submarkets now sit vacant, competing for tenants. While reducing rental rates seems a logical solution, constraints like promised returns to investors or fixed cost structures complicate matters.
 
Challenges Faced by Owners. Owners are grappling with the challenge of reconciling past experiences with present realities. Many are holding onto outdated expectations, hoping for a return to the heyday of early 2022. However, failing to acknowledge the shifts in demand, supply, and financing could lead to missed opportunities and financial losses.
 
Perspective of Occupants. Occupants, on the other hand, are feeling the impact of changing market conditions firsthand. With businesses adapting to new norms and uncertainties, the need for commercial space has shifted. This shift in demand has implications for leasing and purchasing decisions, as occupants navigate a landscape fraught with uncertainties.
 
The Broker's Role in Education. As brokers, our role extends beyond facilitating transactions; we are educators and advisors. Providing owners and occupants with comprehensive market insights, backed by data and analysis, is essential for setting realistic expectations and making informed decisions. By bridging the gap in understanding, we empower our clients to navigate market shifts with confidence.
 
Building Synchronicity and Moving Forward. Ultimately, success in commercial real estate hinges on collaboration and adaptability. By fostering open communication and collaboration between owners and occupants, we can work towards mutually beneficial outcomes. Embracing flexibility and adaptability allows us to navigate market shifts and seize opportunities as they arise, paving the way for continued success in an ever-changing landscape.
 
Education of owners and occupants is key to success in commercial real estate. By equipping buyers and sellers with the knowledge and insights needed to weather market shifts, we can bridge the gap in expectations and reach agreement. I’ve often opined - “allow the market to be the bad guy”. If I tell an owner - here’s how it is, I’m asking that reliance’s be placed upon my experience and credibility. I could be wrong. However, if we engage in a process of discovery - the market is sending the feedback. 
 
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 Little House on the Prairie teach us about Commercial real estate

Fifty years. Wow! Has it really been that long since Half Pint, Ma, Pa and Almanzo graced our tv screens? In a word, yes. Little House on the Prairie, the iconic 1970s series about a pioneer family struggling to make their way on the prairies of Minnesota just celebrated its golden anniversary. Little did I know the series was filmed in our very own Simi Valley, California right down the road from the Ronald Reagan presidential library. Admittedly, my wife is a larger “bonnet head” than I - but I cooperatively loaded the car with water and snacks and left the house at 6:30 in the morning in order to make an 8:45 bus tour of the original filming location. The day unfolded with sights, sounds and scenes from another era - that of our youth and unspoiled innocence shared by many of us in the seventies. I’m officially now a Landon head. 
 
You may be wondering what any of this has to do with commercial real estate? Indulge me as I draw a few parallels. 
 
Sense of Community. In the rolling hills of Simi Valley - err, Walnut Grove - community wasn't just a concept; it was a way of life. The Ingalls family relied upon their neighbors for support and camaraderie, facing challenges together and celebrating victories with a common goal - survival. Commercial real estate brokers also enjoy a strong community forged by transacting together. You quickly discover on whom you can rely, and those that require a bit more caution. Reputation is hallmark. Commercial real estate transactions can be long, difficult, and stressful. If there is enjoyment with your colleagues on the other side of the deal, the journey is so much more fun.
 
Pioneering Spirit. The pioneer spirit runs deep in the veins of characters like Charles Ingalls and his family. Their courage, resilience, and willingness to venture into the unknown embody the essence of taking a risk. The career of a commercial real estate broker is pioneering as well. You see, we are not paid a salary, but rely upon revenue generated from closing transactions. In effect, we eat what we grow. We experience a harvest, similar to the Ingalls, after - many times - a long growing season. But harsh winters or early spring rains can destroy our efforts and crater our work. 
 
Hopeful Attitude. Despite the harsh realities of frontier life, optimism never waned in the Ingalls household. Their hopeful outlook and unwavering determination served as examples to others. Longevity as a commercial real estate broker must start with an optimism for positive outcomes. You simply must look at every situation and know in your gut that something great is going to occur. If you allow negativity to creep into your brokerage, the universe will deliver less than stellar results. Many in our trade are quite superstitious and will not discuss transactions in progress until after they have closed. Pioneering families in the 1800s were also superstitious but relied upon a deep faith in God to carry them through difficult times.
 
Adaptation to Change. Change was a constant companion for the Ingalls family as they navigated through shifting seasons, economic fluctuations, and societal transformations. Their ability to adapt and evolve in response to change was instrumental to their survival and prosperity. Likewise, in commercial real estate, adaptability is key to staying relevant and resilient in a dynamic industry. Who would have imagined the advanced technologies today that allow us to work from anywhere and achieve wonderful outcomes. 
 
Long-Term Vision. Beyond the immediate struggles of pioneer life, the Ingalls family held onto a vision of a brighter future - a vision that fueled their determination and guided their actions. In commercial real estate, having a clear long-term view is essential for success. Setting specific actionable goals is paramount. Necessary for success must be an attitude of “playing the long game” and not getting consumed with short term distractions. 
 
The day resonated deeply with me. I came away with an appreciation of Michael Landon’s legacy, his style and un-compromised standards. His creative character development, attention to detail, and sense of humor gave us a glimpse into the harsh life in the prairie. So, as we celebrated fifty years of Little House on the Prairie, let us also celebrate the enduring wisdom it imparts, guiding us forward on our own journey through the prairies of commercial real estate.
 
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.