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.
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.
