Seasons greetings dear readers as
we eye Christmas in the rear view mirror, and Kwanzaa and Hanukkah as
they’re proceeding! It’s truly the season of giving and from all of ours to
all of yours - best wishes!
Two of my favorite columns to
write each year occur during this time - my previous year scorecard and my
predictions for the year to come. Last year, I wrote my 2024 prognostications
on the heels of an Alabama football defeat - which as a native Arkansan -
warmed my heart. We’ll have to wait much longer this year as the NCAA football
champ will be crowned in a few weeks. But I digress. On to how I did in
2024.
In 2024, I wrote: 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. BOOM! Nostradamus
take note. In the IE where big boxes prevail, a precipitous increase in
concessions has occurred - free rent, tenant improvements, beneficial
occupancy, etc. Rates have dropped another 15%. Expect more of this as we
absorb the remaining spaces.
In 2024, I wrote: 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. YES! Selling in the
beginning of 2024 was a pipe dream - no one was a seller. Now, sales are
happening at a higher clip.
In 2024, I wrote: 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. WOW! Three for three. In fairness, I
did walk this back a bit in my mid year adjustments, but alas, we avoided a
recession and stuck the landing. J Powell in da house. But will he be there
next year?
In 2024, I wrote: 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. MIC
DROP! OK. We’re a bit above the 4.25% level but significantly below the 5% we
eclipsed this time last year. Plus the yield curve has flattened so that short
term rates are below long term rates - a good thing for lenders.
So? I’ll give myself a 3.5 out
of 4. Not bad for a rookie. Stay tuned for next week when I’ll see what’s in
store for 2025.
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.
We are
embroiled in a lease negotiation currently. Discussions can vary depending upon
the size of the building being leased, the complexity of the terms, and the
sophistication of the parties.
Sometimes
known as the “second negotiation,” the process can be mind-numbing. What is the
first negotiation, you may be wondering? Typically, it’s the agreement upon
business points such as the amount of rent that the tenant will pay, how the
rent will escalate throughout the lease, abated rent, the length of commitment,
and the condition in which the premises will be when the lease commences and
expires. As brokers, we do this first negotiation work.
These
business points are generally debated, and an agreement is forged. From there,
a non-binding letter of intent forms the basis from which a binding lease
document is crafted. And let the games—or in this case, the second
negotiation—begin!
You’ll
witness both sides lawyer up and “turns” will be swapped. Normally, the
landlord will submit a draft document to the tenant and tenant’s counsel. The
first turn occurs when the lawyer representing the tenant presents her proposed
edits, changes, and language insertions to the draft. The turns continue until
one side says uncle or until the parties agree upon a satisfactory
compromise.
As
commercial real estate professionals, we sit by idly as the fate of our
carefully authored business deal gets scrutinized.
So what
are some of the most common sticking points for counsel to volley?
1.
Operating Expenses (CAM Charges)
One of
the most contentious areas of negotiation is who pays for what when it comes to
common area maintenance (CAM). Tenants want predictability and often request a
cap on controllable expenses or exclusions for certain costs, like capital
improvements or management fees. Landlords, however, prefer flexibility,
leaving expenses broadly defined to ensure full cost recovery.
2.
Repairs and Maintenance
The
question of who repairs the roof, maintains the HVAC system, or resurfaces the
parking lot can lead to significant back-and-forth. Tenants naturally prefer
landlords to shoulder the burden of major repairs, while landlords aim to push
as much responsibility as possible onto the tenant. In multi-tenant buildings,
this can be especially complex.
3.
Tenant Improvements (TIs)
When
tenant improvements come into play, the scope of work, completion deadlines,
and cost overruns are often debated. Additionally, tenants and landlords may
spar over whether improvements become the landlord’s property upon lease
expiration or if the tenant has the right to remove them.
4.
Assignment and Subletting
Businesses
evolve, and tenants often seek the ability to assign their lease or sublet the
space if needed. Landlords, however, want assurance that the financial strength
and operational nature of any new occupant won’t negatively impact the
property. Negotiations can revolve around the conditions under which these
transfers are permitted.
5.
Default Remedies
Default
clauses are where things can get tense. Landlords seek broad definitions of
tenant default and swift remedies, while tenants want narrowly defined defaults
with ample notice and grace periods before penalties kick in. Finding the
middle ground here can take time—and creativity.
6.
Casualty and Insurance
Recent
natural disasters have made casualty clauses a critical focus. Who pays for
repairs after a fire, flood, or earthquake? How much insurance is required?
Landlords may push for expansive tenant obligations, while tenants demand
clarity to avoid unexpected liabilities.
7.
Option Terms
Options
to renew, purchase, or expand are like mini-negotiations within the lease.
While tenants value flexibility, landlords worry about limiting their future
rental or sale opportunities. Every word in these clauses matters, which is why
lawyers scrutinize them so heavily.
A
Broker’s Perspective
As
brokers, our role during the second negotiation is both limited and crucial.
While we’re not in the room debating legalese, we can act as
interpreters—helping our clients understand the practical implications of
proposed changes. Often, our experience allows us to suggest creative
compromises that bring both sides back to the table when they’re at an impasse.
I’ve
seen deals stall for weeks over seemingly minor details. One tenant once
insisted on two reserved parking spaces, a request that cost the landlord
almost nothing but became a symbolic sticking point. It took some gentle
nudging to remind both sides of the bigger picture.
Tips
for Navigating the Second Negotiation
If
you’re heading into lease negotiations, here are a few tips to keep in mind:
1. Hire experienced
counsel. A seasoned real estate attorney
understands the nuances and can save you time and money.
2. Pick your battles. Focus
on clauses that directly impact your business operations and bottom line.
3. Stay flexible. Compromise
is the name of the game. A deal where both sides win a little often lasts
longer than one where one side feels steamrolled.
4.
In the
end, a well-negotiated lease sets the foundation for a successful
landlord-tenant relationship. And for brokers, there’s no better feeling than
seeing a deal come together—twice.
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.
Last
week we celebrated ChatGPT’s second year birthday with a review of how Chat can
be used in commercial real estate. Today, I’d like to zero in on some specific
tools that we as commercial real estate professionals are using to make the day
to day easier and more efficient.
For
industrial real estate, AI tools and technology solutions are tailored to
address the unique challenges and opportunities in logistics, warehousing,
manufacturing, and distribution. Here’s a breakdown of recommended tools
specifically for the industrial real estate sector:
1. Market Analysis and Site
Selection
·
CoStar/LoopNet:
Industry-standard platforms offering market analytics, property listings, and
comparable data for industrial real estate.
·
Reonomy:
Uses AI to analyze industrial property data, including ownership records,
zoning, and historical trends, helping identify off-market opportunities.
·
Crexi PRO:
Provides industrial market insights, listing exposure, and data analytics to
identify emerging opportunities.
1. Predictive Analytics for
Industrial Trends
·
Placer.ai:
Analyzes foot traffic, demographic patterns, and market shifts, helping assess
industrial site viability based on logistics trends.
·
Orbital Insight:
Uses satellite imagery and AI to track industrial activity such as construction
progress, inventory levels, or logistics hub demand.
1. Workflow Automation and
Property Management
·
Yardi Breeze:
Tailored for industrial property management, offering lease tracking, expense
monitoring, and automated workflows.
·
Building Engines:
Provides tools to streamline maintenance requests, tenant communications, and
operational efficiency for industrial portfolios.
·
Prologis Essentials
Marketplace: Offers asset management solutions specific to
industrial spaces, such as energy monitoring and warehouse optimization.
1. Supply Chain and
Logistics Optimization
·
JDA Software (Blue
Yonder): Uses AI for supply chain management,
optimizing warehouse operations and logistics hubs.
·
Flexe:
Facilitates on-demand warehouse solutions, using AI to match available
industrial space with logistics needs.
·
FourKites:
Real-time AI-powered tracking and visibility for freight and supply chain
logistics, crucial for industrial occupiers.
1. Lease Management and
Financial Analysis
·
VTS Rise:
Integrates industrial property leasing workflows with AI-driven insights,
including tenant demand and market trends.
·
Argus Enterprise:
Advanced modeling and valuation for industrial real estate portfolios,
including lease comparisons and pro forma analyses.
1. Tenant/Occupant
Management
·
EliseAI:
Automates tenant communications, lease renewals, and occupancy tracking,
enhancing tenant relationships in industrial spaces.
·
Basking.io:
Monitors warehouse occupancy and operational patterns, helping optimize space
usage and reduce costs.
1. Marketing and Outreach
·
Matterport for
Industrial: Creates immersive 3D virtual tours of
warehouses and manufacturing facilities, enhancing marketing efforts and
reducing time spent on physical site visits.
·
Brokermint:
Provides industrial property marketing tools, including proposal generation and
automated deal tracking.
1. Drone Technology and
Inspection
·
DroneDeploy:
Integrates drones with AI to inspect industrial properties, track construction
progress, and map large industrial sites.
·
Skycatch:
Provides high-resolution site imaging and 3D modeling for industrial property
evaluation and planning.
Each of
these tools addresses specific aspects of industrial real estate, from
acquisition and management to logistics and sustainability. By incorporating
these technologies, you can streamline operations, improve decision-making, and
enhance client service in this specialized sector.
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.
Chat GPT, Open Source’s
artificial intelligence model, broke onto the mass market approximately two years
ago. When Microsoft invested billions of dollars into an unproven technology,
you knew this was a big deal.
You can’t talk about the future
of commercial real estate without recognizing the massive impact artificial
intelligence is already having. ChatGPT, OpenAI’s groundbreaking model, burst
onto the scene just two years ago, and the ripples have been impossible to
ignore. When Microsoft poured billions into OpenAI, it became clear this wasn’t
just another passing tech trend.
I wrote one of the preceding
paragraphs. Can you guess which one? Exactly!
So. There is one example. Using
AI to draft long form narratives - blogs, stories, property descriptions, case
studies and the like.
But to only highlight this
function would be to dramatically understate its capabilities.
Recently, our office of Lee
& Associates selected a new President. A committee was formed of which I
was a member. We used AI to craft a job description for the position. We asked
each candidate to prepare a business plan. These plans were poured into the
engine and asked to compare and contrast each candidate based upon their plans
vs the job description. Created from Chat were ten interview questions and a
scoring system based upon each response. Chat even chose the most likely to win
the ratifying vote. How’d it do, you may ask? Well, the candidate it chose
wasn’t the candidate selected by the vote. Suffice it to say - we humans still
reign.
To explore how AI will impact
the eight key steps of brokerage, let’s break it down step by step. AI isn’t
just a buzzword—it’s a tool that can enhance every phase of the process, making
agents more efficient and effective while providing deeper insights. Here’s
how:
1. Sourcing. AI excels at combing through massive datasets, from public records
to online listings, to identify properties or clients that align with specific
criteria. Machine learning models can analyze market trends, demographic
shifts, and historical data to pinpoint opportunities agents might otherwise
overlook. Tools like predictive analytics can even forecast areas primed for
development or investment.
2. Finding. AI-powered platforms streamline the property search process by
matching client needs with available options. Imagine entering a set of
requirements—location, size, zoning, budget—and having an AI return a tailored
list of properties in seconds. Virtual tours enhanced by AI can also give
clients a more immersive understanding of spaces without setting foot on-site.
3. Qualifying. AI can automate the process of qualifying leads, saving agents time
and energy. Chatbots and CRM integrations can engage with prospects, ask key
qualifying questions, and prioritize leads based on their likelihood to close.
AI tools also analyze creditworthiness, tenant histories, or business viability
to ensure prospects meet necessary criteria.
4. Controlling. Managing the flow of information and timelines is critical. AI tools
like project management software can keep deals organized, automate follow-ups,
and provide reminders for critical deadlines. Natural language processing can
even analyze communication patterns to detect when a deal might be at risk,
giving agents the chance to course-correct.
5. Execution. During the negotiation and documentation phase, AI can analyze lease
terms, purchase agreements, and market comps to provide insights or identify
red flags. Smart contracts, driven by AI and blockchain, can automate parts of
the execution process, ensuring compliance and accuracy while reducing the time
spent on back-and-forth negotiations.
6. Closing. AI can improve the closing process by streamlining workflows,
automating document generation, and ensuring all compliance requirements are met.
It can also track progress on escrow, title searches, and financing approvals,
reducing the likelihood of delays. Digital signature platforms with AI
integration further simplify the closing process.
7. Compensation. AI can help ensure compensation agreements are tracked accurately
and fairly. Systems integrated with AI can calculate commissions, track
payments, and generate transparent reports for all parties involved.
Additionally, predictive analytics might help agents model future compensation
scenarios based on their deal pipelines.
8. Continuation. The work doesn’t stop after the deal closes, and AI ensures agents
stay top-of-mind with their clients. Automated follow-up systems powered by AI
can check in periodically with past clients, send personalized updates, or even
flag when a client might be ready for another deal based on activity patterns.
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.
