Gauging the Market

As commercial real estate  practitioners, we spend our days advising owners and occupants of locations. These may be office, retail or industrial. I’ve plied my trade industrially for over four decades in Orange County and the Inland Empire. Over time, I’ve seen some wild swings in market activity - also known as buying and leasing. 
 
The early nineties were mired in a deep sleep caused by the invasion in Iraq and the savings and loan implosion. We dealt with tepid demand until the middle part of the decade when velocity returned. The dot com bubble bursting and the financial - err - adjustment of the early and mid 2000s caused quite a ruckus as well. What followed was a spate of activity like no other we’ve  seen until - well 2020-2022. Now we sit with a lack of demand precipitated by uncertainty. Recall, I wrote about that last week. If you missed the column, you can refresh here. 
 
Today, I’d like to discuss a simple way to figure in which way we’re headed - up or down - with the scale pushed in favor of occupants or owners. 
 
If there’s one thing I’ve learned over the years, it’s that gauging the market isn’t just about looking at vacancy rates or rent trends—it’s about understanding the balance of power between owners and occupants. 
 
A simple, albeit informal, method I’ve used is what I call the "Sentiment Index." Essentially, it’s a measure of who feels the pain—or the confidence—more sharply: those with the space to lease or sell, or those seeking to occupy it.
Right now, what I’m seeing and hearing suggests the scales are tipping in favor of occupants. How do I know? Conversations with landlords have turned from boastful pride to cautious consideration. When owners and their representatives are more eager to have a “productive chat” about lease terms, you know we’re moving into a phase where flexibility and concessions might be on the horizon.
 
Lessons from the Field: The Subtle Shifts in Conversations
In fact, these shifts in tone can often signal broader trends before the numbers catch up. Let me give you an example: Back in the early 90s, during what many in the industry refer to as the post-S&L era, the signs of a cooling market weren’t apparent in the stats just yet. But for those of us on the ground, it was clear as day. What tipped us off? The tone of conversations with owners changed from assertive to inquisitive: “What’s happening out there?” took the place of “We’re holding firm at this price.”
Today, I’m noticing a similar shift. In the Inland Empire, where logistics had been king over the last five years, conversations that were once about jockeying for the best price per square foot have turned into careful discussions on structuring deals that create longer-term value. For example, some owners are asking about the implications of rent abatement periods or tenant improvement allowances—areas where, in stronger markets, the negotiation wasn’t as flexible.
 
Keeping a Pulse on Indicators Beyond the Numbers
But why focus so much on sentiment? Because market reports and metrics, while useful, can lag behind the reality on the street. When deals are being renegotiated, terms are becoming more flexible, and incentives are starting to creep back in, it suggests that demand is softening relative to supply. And that’s exactly what I’ve been noticing lately.
 
For example, last month, I saw a deal come together for a mid-sized logistics tenant in Riverside. The lease was inked at a rate that, six months ago, would have raised eyebrows among the ownership crowd. But with looming uncertainty, the landlord chose certainty of occupancy over a speculative holdout for higher rents. To me, that’s an early indicator of where we’re headed.
 
Occupants: A Window into Demand Dynamics
On the occupant side, I find their actions can tell us just as much about market direction. When they start negotiating harder on expansion options or holding off on committing to large leases, it’s clear they’re sensing future uncertainty. Right now, I’m seeing this play out with clients in the Inland Empire who are recalibrating their growth strategies to align with supply chain volatility and interest rate hikes.
 
If you ask an occupant why they’re hesitating, they won’t often point to market reports. Instead, you’ll hear things like, “We’re waiting to see if interest rates stabilize,” or “We’re worried about carrying costs if demand slips.” These concerns are less about where the market is now and more about where it’s headed.
 
Conclusion: Listening to the Market’s Whispers
In commercial real estate, the market doesn’t always shout its intentions—it whispers them through subtle cues. Right now, the whispers are pointing to a delicate balance, one that could easily tip in favor of occupants if uncertainty persists. The key is listening closely and responding proactively.
 
So, if you’re trying to gauge market activity, don’t just look at the metrics. Tune in to the conversations and observe the changes in sentiment. Those shifts can tell you more about where the market is headed than a spreadsheet ever could.
 
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.

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.