A Review of My 2024 Predictions

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.

New Construction Abounds. Where Are The Tenants?

The last big - prior to now - industrial building boom in Orange County occurred pre financial meltdown - circa 2003-2006. During that time frame, several sleek new industrial projects dotted the geography of Anaheim south to Irvine Spectrum. Aging manufacturing campuses gave way to class A developments. Noteworthy among these during the period were the Johnson Control Campus in Fullerton, Mission Land acreage in Brea, Fender buildings in Fullerton, and some of the Boeing holdings in northeast Anaheim. Also interesting were the sizes constructed. Typical were boxes between 10,000 and 50,000 square feet. The land pricing, city influence, capital appetites, construction costs, and market demand all coalesced to create some beautiful new inventory. Our local economy was bustling and owner occupied financing was readily available. Many of the project’s buildings were gobbled up pre-completion. Housed were locally owned manufacturers and logistics providers who took advantage of owning the premises from which they operated. Generational wealth was created as these addresses have continued to appreciate while no new similar sized stock has been developed. 
 
Flash forward to the next wave which began in 2014 and continues today. The Beckman cluster of buildings in Fullerton gave way to a group of large logistics hubs totaling almost 1,000,000 square feet. National Oilwell Varco shuttered plants in Brea and Orange. Brea now boasts a 108,000 square foot address while demolition on Orange started this month. Planned are two new addresses - one is 100,000 square feet and the other 189,000 square feet. Excess land owned by Suzuki in Brea formed the basis of three class A structures. The former Kimberly Clark manufacturing location in Fullerton was scraped and replaced by four buildings equaling over 1,600,000 square feet. Tenants such as Bandai, Samsung, and Sprouts now call the addresses home. And there are several more in Anaheim, Fullerton, Brea, Irvine, and Garden Grove. Interestingly, despite the significant investment and construction efforts, there seems to be a glaring absence of tenants ready to occupy these remaining newly built spaces.
 
To understand the conundrum of vacant properties, we must examine the current market dynamics. The economic and market conditions that fueled the previous industrial boom differ from those we encounter today. Fluctuating land pricing, changing city policies, varying capital availability, rising construction costs, and shifting market demands all contribute to the complex equation. During this boom, pronounced was delivery of inventory in excess of 90,000 square feet. Unlike the Inland Empire - where 100,000 square foot buildings are considered small - locally, our sweet spot is well below this mark. One notable shift between the previous and the current wave of construction lies in the ownership models. In the past, owner-occupied financing was readily available, enabling local manufacturers and logistics providers to secure their own spaces. However, this time around, we witness a different landscape with a diverse range of investors and owners driving the construction projects. The motivations and investment strategies of these new players align with the needs of large potential tenants - which are awaiting some certainty before moving - further exacerbating the vacancy issue.
 
There seems to be a glut of available stock between 90,000 and 150,000. Two in Brea, one in Fullerton, one in Garden Grove, two in Anaheim, and four south of the garden grove freeway in Irvine. The sizes above 150,000 and short of 200,000 finds three alternatives in Anaheim and Irvine. Combined there are thirteen units that need occupants five are completed and open for business and the other eight will deliver this year. Generally all are for lease only - which eliminates occupants in this size who want to own. Asking rates exceed $2.00 NNN. Class A buildings leased for less than a buck in the mid 2000’s. 
 
So what does all of this mean? In this author’s opinion we have a demand problem coupled with an inventory surplus. Generally, that imbalance is solved through an increase in demand by price reductions. No one has moved in this direction but someone will soon which resets the market comps to a new level. While the reasons behind the absence of tenants are multifaceted, understanding the current market dynamics, exploring ownership models, and analyzing the evolving demands of businesses are key to unraveling this puzzle. By embracing innovative solutions and long-term thinking, Orange County can unlock the potential of these idle spaces, ensuring a vibrant and prosperous future for the region's industrial landscape.
 
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.
 

Space Requirements

As I’ve written countless times and as recently as last week - commercial real estate practitioners are either the hunter or the hunted. By that I mean the nature of our assignments varies from searching for suitable opportunities for our clients to lease or buy - the hunter. To marketing available buildings - the hunted. You may be wondering - aren’t both tasks in effect hunting? If an owner hires you to locate a tenant or buyer for their vacant location don’t you hunt? Actually, no. Available space is in such short supply than an owner assignment is tantamount to a blue light special. It’s a mad dash to the exits. Managed are myriad tour requests, multiple offers and bidding wars - thus the moniker of hunted.
 
Year to year our percentage of owner to occupant representation varies. Last year, as an example, the majority of our work was representing tenants. The complete opposite has occurred this year. But despite that ratio - we’re busiest fulfilling occupant’s needs.
 
Recently, we were asked to compete for a tenant representation assignment. I believe what we discussed would be informative for my readers - so here goes.
 
Fortunately, our prospect is flexible and has allowed plenty of time to conduct an adequate search. By flexible, I mean they’re able to stay in their existing address, relocate within Orange County, move inland or even move out-of-state, if necessary. Regardless, required is a location in the OC so if alternative one or two don’t happen - we’ll have to source a suite of offices locally in addition to their warehouse. We did a similar deal last year whereby the owner was unwilling to build enough office space within the warehouse to accommodate our head count forcing us to split the operation. The good news? If a separate office configuration is needed - they’re plentiful. Unlike the frenzied pace and low vacancy of manufacturing and logistics buildings - office suites are begging for tenants.
 
So what’s important for the prospective operation? Port access as their products are manufactured overseas and shipped in, modern warehouse amenities which will allow them to rack and stack, a central location to afford access to their distributors, and as mentioned, if their lease isn’t renewed or relocated close by - we’ll need an office suite to house twenty folks.
 
So, what are their options?
 
Certainly, staying put has its benefits. A costly move is avoided which is disruptive and inefficient. Employees, suppliers, truckers, and the like know their location. Generally, a landlord realizes the cost of finding a new occupant, and will be motivated to keep an existing tenant. The downside is their warehouse clearance is skinny - which means more floor space must be leased to store the same amount of goods as a smaller, taller space. Because owners charge by the floor square foot not the cube - a smaller taller space could be cheaper.
 
A relocation within north or south Orange County will be challenged today by the lack of available Class A inventory. But, that landscape is changing. Close to 2,700,000 square feet of newly constructed logistics buildings will dot the basin from Brea to Orange to Fullerton and Anaheim soon.
 
Inland - whether west in Chino, Ontario, Eastvale, and Corona. Or East such as San Bernardino, Perris, Riverside, and Moreno Valley - holds some possibilities. The majority of stock in those areas was built after 2004 with a logistics provider in mind. Plus, a lot of new is being tilted and will be ready for occupancy by early 2023. Port proximity and new regulations against trucking are the storm clouds on the horizon.
 
Finally, a move out-of-state to neighboring Nevada or Arizona appears to be attractive. Both are exceeding California’s pace of new construction and quite inviting of California companies frustrated by local politics and expensive cost of living. But, as I warn anyone considering a move away from California - other places are not simply California with cheaper housing and a lower tax rate. There are real cultural, economic, and political differences to be considered.
 
Options abound and we look forward to providing our advice. The journey should be quite interesting!
 
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.