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.
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.
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.
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.
