Key Things To Do In 2023

Last week I shared my forecast for the balance of 2023. Discussed were my view on where interest rates might be headed and their impact upon our industrial market, class A industrial absorption, the possibility of a recession, and finally politics. My mom always suggested I not discuss politics or religion in an open forum - but alas, politics touches so many areas of our profession - sometimes venturing in is necessary. Today, however, no politics, but a review of a few things you - as an owner or an occupant of commercial real estate - should consider as the days shorten and the “ber” months unfold. 

Property taxes. One of the first lessons I learned when I became a real estate practitioner is how property taxes work in California. By the way, each state is different. Proposition 13 in 1978 set the course for how California currently handles levies on real property. Simply, 1% of the assessed value is computed to form the amount each parcel owner will pay in the fiscal year. Fiscal years run from July 1 to June 30 - therefore stemming parts of two calendar annuals. Assessments generally arrive to parcel holders in mid summer. Unless the parcel traded hands or improvements - requiring building permits - were made, the math is simple. Law requires a 2% increase. A sale will reset the assessment to the amount of the transaction and improvements increase the assessed amount dollar for dollar. Then. The first half taxes July 1-December 31 - are due November 1 and are late December 10. Second half - January 1-June 30 - are due February 1 and are late April 10. The nemonic device No Darn Fooling Around has been employed by real estate professionals for decades as a date reminder. 

Your landlord - if you lease - will do one of several things with the tax bill on your rented premises. If you operate under a triple net lease arrangement - she’ll send you the bill when it’s received and expect you to pay it. Or, she’ll pay it and expect reimbursement. Or, she’ll collect an estimate of the annual amount on a monthly basis and pay when received. Under a gross lease, she’ll pay the bill and expect reimbursement for the increased amount over the first year of your lease. Don’t know the base amount? Simply visit the Orange County tax assessors web site. You can easily research past years. 

Understanding the mechanism of property tax computation can potentially save you dollars. So keep this column as a guide. By the way, you should be able to question - and require proof - of any property tax increase. 

The fall is a great time to check on insurance coverages, building system repairs, and upcoming key dates. As you’ve read, insurance carriers are bolting our state. Those that remain behind - with a lack of competition - are jacking up rates. This can affect coverage on your premises as well as your operation’s liability. Do yourself a solid and schedule a visit with your insurance provider. You’ll be happy you did. With the dog days of summer behind us and shorter, wetter days ahead, now’s a good time to have your roof inspected and any repairs performed. Also, if your location is equipped with a well for truck high loading - check the sump pump lest you have a water feature after the first major rainfall. Finally, take a look at the key dates of your lease - expiration, options, rights to terminate or refusal to purchase, or any upcoming rent increases. 

You’re now equipped to complete the year and head into 2024!

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 Four Months of 2023

Happy Labor Day! It’s now September. That time in SoCal when Christmas decorations take the place of lawn furniture in Home Depot. College football has just begun yet we’re expecting St. Nick to return the next kick off. Fall is my favorite time of year, however - cooler temps, changing leaves, shorter days, and all of the holidays that follow - Labor Day, Halloween, Thanksgiving, Christmas and News Year’s Eve. Travels for the summer are over, kids are back in school, and hopefully no more hurricanes will mass in the Pacific. Now to the balance of the year. What the next four months have in store for commercial real estate owners and occupants is the subject of this column. 
 
Watch interest rates. Borrowing for houses just eclipsed 7%. Historically average but so much higher than the sub 3% rates we witnessed in 2021. What’s followed is a lack of available houses for sale as folks with cheap loans don’t want to sell and new buyers can’t afford today’s prices financed at the higher rates. Sure. Commercial real estate borrowing is also impacted but another element evolves from high rates - small businesses ability to finance growth through acquiring competitors, buying equipment and leasing larger quarters. Our Federal Reserve seems bent upon taming inflation and causing unemployment to rise in the process. Higher interest rates - when business expansion is quelled - can create uncertainty among business owners. 
 
Class A Industrial absorption. Amid the resounding echoes of new construction, there's a curious absence - a noticeable lack of tenants ready to move in and occupy these freshly minted spaces. The question looms, why? Conditions that once fueled the previous industrial boom have evolved into a new breed of challenges. Gone are the days of localized manufacturers and logistics providers securing their own spaces with owner-occupied financing. Instead, our market has produced spaces that align with the needs of large-scale tenants. And therein lies a conundrum - the needs of these tenants hinge on a degree of certainty, a stable backdrop before they commit, amplifying the vacancy issue. We’ve overbuilt the high end of the market. Someone will have to concede to lower lease rates in order to attract a tenant. Once this happens, others will follow as a new paradigm will emerge. 
 
Recession. I predicted in January we’d avoid a recession as the resilience of the consumer would steer us past a downturn. So far, I’m correct. What lies ahead in the next four months of 2023 will be interesting to watch. So far unemployment is low, wages are higher, and folks are spending money on services such as travel. Most would agree the consumer racking up too much credit card debt in the process. As this debt is recalibrated into higher monthly payments because of higher rates - fewer dollars are available to throttle consumption. 
 
Politics. We have a long list of Republican hopefuls, an indicted frontrunner and months before the primaries. On a global level, war still rages in Ukraine, China stealthily observes, and record heat, rain, and storms rage like no other time Incan remember. The list of contenders will thin and we’ll be safely past storm season. 2024 will bring the promise of an election year. 
 
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.
 

Hilary and CRE

On Wednesday of last week, the first reports of a tropical storm brewing off the coast of Baja were filed. Over the next few days, the storm gained intensity and at its peak had winds allowing it to claim Category 4 status - one below the largest breed, a Cat 5. Catastrophic flooding, crippling winds and record rainfall were predicted to hit SoCal as the first storm of its kind to make landfall in 84 years barreled toward our coast. As I write this column, Hurricane Hilary is headed up through Northern California, Oregon and Idaho and fortunately not leaving much destruction in its wake. Sure we had some flooding in the Inland mountains and valleys but for the most part very little wind or rain in Orange County. I’ve definitely witnessed more torrential downpours during El Niño storms. 
 
You may be wondering what a freak hurricane has to do with commercial real estate? Indulge me as I draw a few parallels. 
 
Resilience and Preparedness. Just as communities and individuals need to prepare for hurricanes and other natural disasters, businesses also need to have contingency plans and strategies in place to withstand unexpected challenges. Is your manufacturing business able to sustain a power outage? Do you have an alternate shipping provider if UPS or FedEx were to strike? 
 
Location Matters. The path of a hurricane is critical in determining its impact, and similarly, the location of a commercial property can greatly influence its success. Proximity to employees, suppliers, and customers are critical. Businesses must carefully choose their real estate locations to ensure accessibility, exposure, and the ability to weather economic storms.
 
Risk Assessment and Mitigation. Analyzing the potential risks of a hurricane, such as flooding and wind damage track along with the need for businesses to assess risks associated with their real estate. Are you covered in the event of a cyber attack? With so many carriers leaving California, have you had a recent chat with yours to insure your coverage is secure?
 
Adaptation and Recovery. After a hurricane, communities and businesses must adapt to new conditions and work towards recovery. Similarly, commercial real estate ventures might need to adapt to changing market dynamics, technology trends, or shifts in tenant needs.
 
Infrastructure and Facilities Management. Hurricanes can damage infrastructure, and businesses must invest in repairs and maintenance to keep their operations running. I received a call last month from a client seeking referral to a roofer. Mind you, he had no idea we’d have rain in August. He just realized the best time to prepare for roof leaks is before you have one. 
 
Community Impact. Hurricanes impact not only individual properties but also the broader community. Similarly, the state of commercial real estate in a region can affect the local economy and vice versa. Vacancy in a regional mall or a dark big box retailer - such as the one near our house - cause tenants to seek other addresses. 
 
Economic Resurgence. After a hurricane, communities often work together to rebuild and revitalize. This mirrors the collaborative efforts that can occur in the aftermath of economic downturns or changes in the commercial real estate market. I recall an investor telling me in 2010 that we were entering the best buying cycle of a lifetime - and he was correct!
 
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.
 

Evidence the Industrial Market Is Changing

I’d like to flash back for a moment to three years ago. Recall, we were past the darkest days of the pandemic - at least we believed - and headed for freedom. Freedom from our keyboards and the stifling confines of our converted home offices. Commutes to our brick and mortar locations awaited us. Whether we plied our trades in a concrete tilt up manufacturing building, a suite of offices in a high rise or a retail store front - homes away from homes were returning. At least we believe so. Nature had another variant in mind and although Delta was less virulent it was much more contagious. Our staycations continued until the virus found fewer hosts. 
 
During this hiatus, industrial manufacturing and logistics thrived, office floundered and retail shifted to blue vans delivering to our residences. 
 
Now. Three years hence, the class of commercial real estate - buildings used for manufacturing and shipping - is showing signs of a slowdown. So what pray tell are the warning flags that signal said pause? Indulge me as I review a few of them. 
 
More Sublease Space. Three years ago, excess industrial space was non-existent. Fast forward to today, and it's become a common buzzword in the industrial market. It's like finding uncharted territory on a map that was once thought to be fully explored. The increase in sublease space is more than just square footage; it's a sign that the landscape of demand is shifting. Companies that once occupied these spaces are now reevaluating their real estate needs. The surplus of sublease options indicates a change in how businesses perceive their workspace requirements. It's like a reverse game of musical chairs. 
 
Longer Time on Market. Remember the days when a property would hit the market, and within the blink of an eye, it was off again? Or, it never officially hit? Well, those days seem to be fading. Properties are lingering, waiting for someone to come knocking. The extended time on the market isn't just a numerical value; it's a reflection of uncertainty. It's as if potential occupants are standing at a crossroads, evaluating their next move cautiously.
 
Increased Broker Incentives. Brokers used to be like matchmakers, introducing tenants to their perfect property. Now, it's almost as if they've donned a new hat – that of a negotiator. Broker incentives have become a sign of the times. Trips, bonus fees, touring currency are making their way back. They're the conversation starter, the bargaining chip that landlords put on the table to sweeten the deal. It's not just about securing a tenant; it's about convincing them that this space is worth their commitment. The increase in broker incentives is like a neon sign flashing, "Flexibility is the new black." It's an acknowledgment that the market has changed, and everyone needs to adapt to keep the dance floor crowded.
 
More Tenant Concessions. Concessions, such as free rent, moving allowances, special purpose tenant improvements, et al, used to be rare, reserved for special occasions. Now, they're being offered like party favors at the end of a celebration. It's not just about the property itself anymore; it's about what comes with it. Companies aren't just looking for four walls and a roof; they're looking for a partnership. Tenant concessions are a handshake that says, "We're in this together." Landlords are bending, flexing, and shaping their offerings to accommodate the evolving needs of their tenants. It's like watching a jigsaw puzzle being put together, piece by piece, until a harmonious picture emerges.
 
Softening in Asking Rates. The asking rate used to be a non-negotiable declaration, a line in the sand that set the tone for negotiations. Today, it's more like a starting point, a foundation that can be molded and shaped. The softening in asking rates isn't a sign of weakness; it's a sign of realism. Landlords are acknowledging that the script has changed. It's not just about what they think their property is worth; it's about what tenants are willing to pay. The softening in asking rates is like a bridge connecting two sides, a compromise that ensures both parties can find common ground.
 
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.
 

Alaska Journey

Another state got notched into our travel belt this week as we concluded a cruise to Alaska. In a word - amazing! Ketchikan, Sitka, and Juneau were on our agenda. Photos do not do justice to the rugged wilderness of the 49th addition to our union. Hopefully, my words can. 
 
As we traversed the Endicott Arm and threaded through the Tracey Arms-Fjord, several chunks of blue ice were encountered. Akin to a punch bowl at the end of a party, these bobbing blue behemoths bathe in the icy waters - having parted from the mothership Dawes glacier and now headed for the freedom of open waters. I couldn’t help recall a comparison I once made to an iceberg and its similarity to a commercial real estate transaction. 
 
As occupants of commercial real estate, you focus upon a couple of things – the space and possibly the lease payment or monthly debt service. The space: Does it lay out well for your operation? Are there enough private offices for a collaborative work environment? Does the power into the building adequately support all machinery and equipment? Can you afford the monthly payments? If these boxes are checked, boom! You’re golden, right? Maybe not so rapido, my friends. If you focus on the space and the payments, you’re only seeing the tip of the iceberg. Similar to Dawes glacier, more than 80 percent of the transaction’s issues are lurking beneath the surface and can destroy your occupancy if not properly anticipated.
 
As the commercial real estate comparisons continued, I learned on this trip is the undeniable significance of location. In Alaska, remote and inaccessible areas are abundant, offering breathtaking beauty but also posing challenges for development. Similarly, in commercial real estate, the value of a property is often tied to its location, accessibility, and proximity to key amenities and transportation hubs. Just as Alaska's hidden gems require strategic planning to unlock their potential, commercial properties in prime locations can hold the key to successful investments.
 
The rugged terrain of Alaska prompted me to contemplate the importance of due diligence in commercial real estate transactions. Just as I carefully planned my hiking routes to ensure safety and efficiency, investors must thoroughly research properties, assess risks, and conduct comprehensive financial analyses before making decisions. Understanding the lay of the land, figuratively and literally, is crucial to avoid pitfalls and maximize returns.
 
Finally, the sense of adventure and discovery that accompanied me throughout my Alaskan expedition mirrors the excitement and reward in the world of commercial real estate. Exploring new markets, uncovering hidden potential in properties, and forging successful deals can be as thrilling as discovering an uncharted trail or an untouched wilderness.
 
My journey through Southeast Alaska left an indelible impression on my soul, and it also opened my eyes to the valuable lessons that can be applied to the dynamic world of commercial real estate. Whether it's embracing the significance of location, conducting thorough due diligence, or simply enjoying the thrill of exploration, this trip has enriched my understanding of both Alaska's wonders and the intricacies of commercial real estate.
 
So, fellow adventurers, as you set out on your own ventures in the realm of commercial real estate, remember to embrace the spirit of Alaska - wild, resilient, and full of untapped potential. 
 
Happy exploring and investing!
 
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.
 

Journey Along the Strait. Where History Meets Real Estate

Greetings from the Strait of Juan de Fuca! As I traverse the picturesque towns bordering this historically significant waterway, I can't help but marvel at the unique blend of past and present that shapes the landscapes around me. From Sequim's lavender fields to the quaint charm of Whidbey Island, and from the rugged beauty of Port Angeles to the Victorian allure of Port Townsend, each place has its story to tell.
 
As I stand on the shores of the strait, it strikes me that this is not just any body of water. Unlike the Bering Strait or the Strait of Gibraltar, the Strait of Juan de Fuca holds a distinct peculiarity - it serves as the international boundary between Canada and the United States. In 1787, the maritime fur trader Charles William Barkley named it after Juan de Fuca, the Greek navigator who embarked on a Spanish expedition in 1592 to seek the legendary Strait of Anián.
 
But you may be wondering, what on earth does all of this have to do with commercial real estate? Bear with me as I weave the threads of history, geography, and property together.
 
The towns that line the Strait of Juan de Fuca have witnessed a rich tapestry of events, with maritime trade being a common theme in their stories. The influx of traders and settlers in the past laid the groundwork for the thriving communities we see today. Sequim, known for its lavender farms and breathtaking landscapes, has seen a surge in tourism, leading to growing demand for commercial properties like boutique hotels, quaint cafes, and craft shops that cater to visitors seeking a slice of tranquility. That’s what lured us here as my wife visited Sequim a few years ago to dye cloth. 
 
Whidbey Island, with its idyllic surroundings and artistic vibe, has also become a magnet for tourists and creative minds alike. The real estate market here has adapted to the influx of artists, writers, and nature enthusiasts, with charming studios, workshops, and eco-friendly accommodations becoming the new norm.
 
In Port Angeles, where the Olympic Mountains meet the sea, the maritime history is still palpable. While the shipping industry has evolved, the waterfront properties have retained their allure. With breathtaking views of the strait and the nearby islands, developers are keen on creating modern commercial spaces that respect the town's history and unique setting.
 
Port Townsend's well-preserved Victorian architecture takes us back in time, but the real estate market here is far from stagnant. The town's heritage buildings have found new life as boutique shops, galleries, and restaurants, each property contributing to the vibrant local economy.
 
Seattle, the urban heartbeat of the region, showcases a different facet of commercial real estate. As a bustling metropolis, the city boasts an array of high-rise office buildings, tech hubs, and commercial centers. I’ve not seen the number of cranes rising from down below in any major city recently. The economic ties between Seattle and neighboring Canadian cities have further fueled cross-border investments, making the region a melting pot of cultures and business ventures.
 
Next week, as we sail towards Alaska on the Quantum of the Seas, the significance of the Strait of Juan de Fuca becomes clearer. Its history has shaped the present, and that includes the world of commercial real estate. From quaint towns preserving their past while embracing the future, to vibrant cities that thrive on innovation and international connections, the strait's influence reverberates through the properties that shape these communities.
 
So, the next time you set foot in a historic building turned modern commercial space or enjoy a relaxing retreat by the water, take a moment to appreciate the hidden stories woven into the fabric of the place. History may be in the past, but its echoes are forever present in the towns and properties along the Strait of Juan de Fuca.
 
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.
 

Status of 2023 Predictions

We’ve now eclipsed six and one half months of 2023. Wow! That was speedy. As our temperatures in SoCal have heated, so has our national economy. At the same time and similar to this spring’s weather, inflation has cooled as the federal reserve’s tightening policies seem to be working. We’re still above the 2% target as sought but core inflation is now running around 3% on an annualized basis. Meanwhile, interest rates as pegged by a spread over the 10 year duration treasuries are still historically low but significantly higher than the pandemically plagued years of 2020-2022. I generally wait until a full year passes before I dissect the previous years predictions. But last year and this, things have moved so quickly - I felt it was worthy to do a mid year recap. After all, we are in earnings season as our big employers report progress. So I’ll pretend to be a big employer and report mine. 
 
In January of this year, I wrote:
 
Industrial real estate. Third party logistics providers will give back space. If you’re unfamiliar with the term - 3PL or third party logistics provider - allow me to explain. Simply, a 3PL is an outsourced warehousing service. Say you’re a company that needs to get your product distributed to Walmart but don’t have the space or inclination to do so yourself. Enter the 3PL who will charge you - by the pallet - to receive, store, re-package, and ship your goods for you. For the past three years - to keep up with the demand of online shopping - 3PLs thrived and leased hundreds of thousands of square feet of logistics boxes. With the “de-inventorying” currently occurring, these providers need fewer square feet. But there’s an issue as many signed term leases which still have time to go. Therefore look for much of this excess to enter the market as sublease space. July 2023 update. We’ve seen a fair amount of give back as Amazon started the whittling process in late 2022. The push for space seems to be a lot less rabid than it was in 2021 and 2022. I frankly thought we would see more space returning to the market from third-party logistics providers. Although we’ve seen a bit of this it’s not happened on a wholesale basis the way I anticipated. So this one falls into the category of let’s wait and see what happens for the balance of the year.
 
Recession? I vote no. How’s that for contrarian thinking! Here’s how I read the tea leaves. The Fed came out with guns blazing last year with three .75% and one .5% rate bumps. As we’ve discussed, this increase affects the rate in which banks borrow. The theory is more expensive money will cool a white hot economy as businesses will re-think borrowing for expansion. If you look at Gross Domestic Product or GDP for the third quarter of 2022 - it actually increased over Q2. By the time you read this, we’ll have a glimpse as to how the fourth quarter fared. Now couple that with core inflation which has declined for several months. Finally, retailers are shedding inventory as mentioned above. In fact this is deflationary as things are on sale. Now some might counter by opining - we’ve not felt the full impact of the Fed rate increases, folks are spending that idle cash left over from the pandemic, and massive layoffs await. We’ll see. I choose to believe in the resiliency in the US economy. Plus. Did you visit a mall, restaurant, or attempt to book a flight during the holidays? Bedlam! July 2023 update. I nailed this prediction as our economy has not fallen into recession. Some would say the full impact of the federal reserve’s rate increases have not been felt throughout. I still believe in the resiliency of the United States economy, our ability to innovate, and the seemingly unstoppable consumer. We will see what the next six months holds, but I for one believe that we have “stuck the landing” and will avoid a recession.
 
 Return to the office. Much has been written on this subject. We’re starting the third year since all of us were forced to return to our spare bedrooms. Remember that fateful day in March of 2020? Like yesterday! Fortunately, our team had spent the previous few months figuring out how to duplicate our desktop mobily. Did we have insider scoop? No. We just wanted the flexibility to do stuff in a client’s lobby, our dining room, or the front seat of our car without losing productivity. We were lucky. When the order came - we simply unplugged, drove twenty minutes home and plugged back in. Many were not so lucky and found themselves grappling with how to remain viable. Others simply ordered a bunch online and ate alot. I heard this from a friend. 😎I predict workforces will return to the office this year. Sure, a hybrid model will be employed where - as an example - Tuesday-Thursday will be office days and Mondays and Fridays will be optional work from home. July 2023 update. I read with great interest Jeff Collins and Jonathan Lansner‘s columns that appeared in the Orange County Register yesterday. Vacancy throughout office space has doubled since the pandemic in 2020. The new normal is a hybrid workspace with the exception of a few industries. As an example the wealth advisory businesses are back to the office full-time whereas flexible industries such as real estate, healthcare, insurance, are still working remotely. I would count this prediction as a miss thus far but we’ll see what the next six months bring.
 
Retail. A continuation of the experiences that brought us back to brick and mortar stores in 2022 will continue. As examples. On a recent visit to Main Place, we were serenaded by era dressed carolers, and our grandsons thrust into a cube of stuffed animals as human claw machines. I’ve never seen the place so packed! My wife and I commented - what recession? Sans these experiences, however, I’m afraid the on-line shopping is easier. What’s avoided are out-of-stocks, surly clerks, crowds, and no parking. Speaking of Main Place. Our favorite parking spaces are now consumed with a multi family building which is under construction. Providing your own customer base and foot traffic - once the units are fully occupied - is always a great idea. But how cities choose to eliminate tax basis while at the same time increasing police and fire service remains the tug-of-war. July 2023 update. Brick and mortar retail continues to it astonish me. I recently purchased some items online and chose to return them at the store versus dealing with reboxing and shipping them through UPS. I was greeted with lines in the return lanes that would rival 405 traffic on a busy weekend. One of these was a lower end big box retailer and the other was a higher end specialty seller. Expected would be the lower end store to be busy but I was surprised to see the higher end specialty retailer just as busy. People are traveling! I recently heard a report that the July 4 weekend was the busiest in Los Angeles international airport’s history. It appears the pent-up demand for wander lusters is quickly unfolding. 
 
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.