You better get there early in the markdowns to get a deal of selection and price. The longer you wait, the higher the price gets, but the selection wanes until your only choice is an XS purple long-sleeve tee.

But … The price is unbeatable. If you’re like I am, an XS tee only has once use — that of a dish rag. But I digress.

Much has been ballyhooed about the amount of industrial space coming back to the market, so I did a little research. My trusty spreadsheet is not quite as robust as Jonathan Lansner’s, but I made it work.

As a quick review, a sublease is a remnant sale of sorts. When an occupant originates a lease agreement, the contracts vary in length.

Depending on the size of the premises, lease terms range from two to 10 years. Many times, smaller buildings mean shorter leases. If an occupant can’t — or doesn’t choose to — fulfill the term obligation, they’re faced with three choices: A buyout from the owner, a default or a sublease.

A buyout is best for the tenant as they are relieved of the remainder for a fraction of the cost. Since the owner takes the risk and expense of finding a replacement, the situation must be quite compelling.

A default is least palatable for both parties while subleasing is a nice compromise. The tenant markets the excess space in hopes of locating a surrogate to live out its lease term.

So, on to the numbers.

Presently, in all of Orange County, there exist 92 listings in excess of 50,000 square feet. Of these 92, 12 are subleases or 13%.

Los Angeles County came in at 497 listings with 73 subleases or 14.6%. Inland markets, spanning that vast swatch of industrial space to our east, clocked in at 245 listings, of which 34 were subleases or 13.8%.

Most of the givebacks appear in square footage above 100,000 square feet. In the IE that percentage jumps to 16%!

OK, you might be wondering, why does this matter? Allow me to expand on a few reasons.

Market impact

The most valuable subleases in the industrial market closely mimic that of a direct lease.

By that, I mean the term is long enough for an occupant to spread his moving costs over time.

Using our Nordstrom half-yearly sale as an example, a beautiful suit in your exact size at a 30% discount is much more appealing than one two sizes too big, which will then need expensive alterations.

Your savings are eaten up by the expense of making the suit fit. Plus, in some cases, all sales are final, and you can’t take advantage of a generous return policy. Subleases are similar because all sales are final. Your benefit is in the discounted price, not in other concessions such as tenant improvements.

Additionally, subleases have a downward push on market lease rates.

Of the 12 buildings available for sublease in Orange County, all will trade at a rate significantly less than than direct listings. With a few of these, the discounts can be explained as anomalies.

However, if a large percentage of leasing activity is within these remnants, an adjustment of pricing occurs because the pricing is driving demand.

Occupant considerations

In a sublease arrangement, the tenant becomes the sub-landlord, and the surrogate becomes a sub-tenant.

Many occupant/sub-landlords price their sublease at a slight discount vs. a direct lease with an owner. In my opinion, this is a mistake, because a sub-lease needs to pop and provide a shock and awe price to attract demand.

To affect a sublease, you must seek and gain approval from the owner of the property. This approval may not be unreasonably withheld, but it’s a step that must be accomplished. An unauthorized sublease can create a default, which is never advisable.

With your surrogate in place, don’t forget that you, as the tenant, are still ultimately responsible for the lease obligation. Yes, you’ve located someone to pay the rent in your stead. However, if they fail to pay rent or break another lease covenant, the owner may look to you for a remedy.

Owner considerations

If your tenant is financially viable and has simply outgrown your building, thus the need for a sublease and your position is generally pretty solid.

If, however, your occupant is struggling for other reasons, such as a downturn in business or an industry collapse, it’s important to pay close attention to their process of locating a surrogate.

Depending on your tenant’s lease rate compared with current market rents, it might make business sense to allow your tenant to buy out of their obligation.

Under this circumstance, the owner takes the risk of finding a new occupant but avoids a potential bankruptcy by a tenant, which could tie up the real estate for several months.

Ultimately, the owner has the right to approve anyone seeking to sublease his or her building. As mentioned in the paragraph above, this cannot be unreasonably withheld, but it’s well within an owner’s purview to require a use compatible with your building to be sought along with a financially viable group.

Allen Buchanan is a principal and commercial real estate broker at Lee & Associates, Orange. He can be reached at 714.564.7104 or abuchanan@lee-associates.com. 

We’ve not experienced much since the middle of 2022 when the Federal Reserve mounted its stair climber and hiked interest rates several times over the next 18 months.

Most of the selling motivation from the start of 2021 was fueled by crazy high prices investors were willing to pay paired with cheap money. Some who never considered selling their property cashed in during this run-up.

We even saw the occupant premium disappear for a few months. An occupant premium refers to a higher price the user of a building is willing to pay versus that of an investor. You see, occupants consider the utility a piece of real estate has to offer its operation whereas an investor is interested in the income generated.

Generally, that means they’ll pay more. Once the easy money evaporated and investor buyers were relegated to the sidelines – selling motivation ebbed. I believe in 2024, we’ll experience a different kind of selling motivation – more forced selling. Bear with me as I review five situations that could render me prescient.

Transition triggered by the D’s

Transitions can predict a sale and the most common ones that owners face are divorce, death, disposition, distress, disputes and dissolution.

When a marriage ends and the combatants must reconcile the assets, sometimes a sale occurs. Death creates an interesting tax treatment known as a “step-up in basis” which makes selling more attractive. Sometimes business owners decide it’s time to sell their companies.

What follows, occasionally, is the sale of the building the operation once occupied.

A vacant address with a mortgage means someone must foot the bill. Distress happens when no one wants to rent the premises. Arguments can lead to a sale. When partners can’t agree on a direction for the property, selling could be imminent.

Finally, when an ownership entity is dissolved a property is sold. Effectively ending the involvement of the members.

Lender pressure

Here’s my theory. Stress among regional banks has been widely reported, especially if the bank has risky loans on the books or faces upward rate pressure in its bond portfolio.

The demise of Silicon Valley Bank and First Republic are examples.

If a bank-funded construction loan was originated in early 2022 — which financed the construction of a new building — certain assumptions were made including the costs, time to complete the build, lease rate that would be achieved and the amount of carrying time before an occupant moved in.

The expectation was a permanent loan would replace the short-term construction loan. But now the new structure is delivered into a very different world. Lease rates have softened, and vacancy times have expanded.

Plus, interest rates have risen substantially. Lenders fear their construction loans may not be timely repaid and could force a sale.

Owner capitulation

Refinancing into a higher interest rate market could bring some owners to the table with selling motivation. This will especially be true with the owners of office properties.

If the owner of an office building faces substantial vacancy and must resort to lowering its lease rates to attract a tenant, the income generated by the office building is less than anticipated and may not service the debt.

Additionally, if substantial capital expenditures are necessary to attract occupants, the money may not be in the budget. As you can see, a tsunami of issues could cause a seller to hand the keys to their lender. The lender, not wanting to own commercial real estate, then disposes of the property at a discounted amount.

Short term rollover

We currently represent an occupant looking to acquire a building in the Inland Empire.

During 2021, this business owner was effectively blocked from buying because he could not compete with the investor activity. Investors were willing to pay astronomical prices with very few contingencies, and close quickly.

Therefore, we sold and leased back for two years. Our theory was we could re-buy before lease expiration, and we believed the market was headed for a correction.

We are now noticing some building owners, faced with a pending vacancy, looking to sell rather than experience the lengthy and costly process of finding a new tenant.

Investors awakening

Who knows when we’ll see an uptick in investor activity?

My prediction is this genre of buyers — faced with allocation requirements, a declining interest-rate market, and a realization of where lease rates have settled — will cause some buying activity this year.

The interesting part of the equation will be how owners who not faced with any of the pressures will react to unsolicited investor offers. We shall see.

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. 

At the beginning of 2021, as we slowly awakened from the ether of pandemic lockdowns, two trends emerged: rampant online shopping and hybrid workforces.

Both of these phenomena affected commercial real estate and its three asset classes — office, industrial and retail — in different ways.

Owners of industrial spaces — especially those equipped to welcome logistics providers — saw a rapid increase in demand. Fulfilling online orders quickly and efficiently required more on-hand inventory. That translates to a place to receive, stage, store and distribute said goods.

Conversely, as our shopping experiences turned from visiting our local retailer in person to surfing the web, foot traffic to brick-and-mortar stores lessened and spaces became ghost towns.

On the office front, tenants choreographed a thoughtful dance, keeping its workforces safe vs. enforcing in-office work days.

We realized we could ply our trades from just about anywhere, and many did. Therefore, office and retail tilted toward tenants. Industrial spaces were heavily slanted in the owners’ direction.

As we march into 2024, the aggressive pursuit of available inventory by industrial tenants has ebbed, investor activity has been reduced to a trickle and we’re seeing signs of lease rate softening.

In light of changing markets, how should you — as an occupant of industrial space — tender your offers? That, dear readers, is the focus of the balance of this column.

The trends

At the beginning of 2023, we advised our industrial occupants to watch lease rates. Our prediction was significant softening would occur by the end of the year. Therefore, to transact at the beginning of the year might result in a rate higher than anticipated. Our gamble proved prescient, as we experienced a declination of rates, in some cases by 25%.

The metrics

A simple review of how many available properties within a certain size range exist, vs. how many similar properties have leased or sold, is a good way to measure the velocity of a market.

As an example, if during the past year, three buildings between 25,000 and 35,000 square feet have leased or sold, and presently there are 15 available, one could surmise that five years of supply exist.

This, of course, assumes everything stays the same, pricing is not reduced to spur demand, or something outside our economy causes the need for space to increase — such as a pandemic.

The owners

If an owner is carrying a vacant building, it’s important to gauge how willing she will be to accept a deal.

For someone who bought the building at the peak of the market with the usual increase in operating expenses and potential debt service, her willingness to strike at a number less than her carrying costs might be difficult.

By the same token, if ownership has existed for many years with low operating expenses and little to no debt, any deal might look appealing.

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.

Why, you may be wondering? Here are my three reasons.

Number one: Most industrial sites haven’t transacted since the middle of 2022 and must in order to balance allocations.

Number two: We should get clarity this year about one of the metrics that determine commercial real estate value — rental rates.

Number three: A declining interest rate environment  will make Treasury bonds less compelling and real estate more so.

Allow me to add color to these three reflections. But first, a quick review of my definition of an institutional investor.

If you’re a teacher, firefighter, police officer or work at city hall, you can relate to the portion of your paycheck that’s deducted to fund a retirement.

Before the predominance of 401k funds, private employers also provided pensions and took a slice of your salary to do so. If you pay into a whole or universal life insurance policy, those premiums must be invested as well.

All of the above form pools of capital that are used to buy stocks, bonds money market funds and commercial real estate and then produce returns for their investors. Each asset class has its own percentage the fund managers dictate.

Advisors — at the direction of fund managers — use these funds to make purchases. Thus, an institutional investor.

‘Pencils down’

When we began 2022, institutional interest in commercial real estate was rabid, especially if you owned and operated a company from your building. It wasn’t unusual to have buyers knocking on the door.

The play two years ago was to buy the real estate and provide the occupying company a lease-back of around two years.

Demand during this period of time drove values to unseen levels. In some cases, buyers were willing to pay double. The theory was that by 2024, rental rates would far eclipse the lease back amount, providing a greater return on the investment.

However, when the Federal Reserve started to hike interest rates in the middle of 2022 — coupled with global uncertainty —  we saw a shift in investor attitudes. The term, “pencils down” permeated the industry.

For the entirety of 2023, this outlook continued and institutional investor activity was reduced to a trickle.

Where are rents?

One of the fundamental metrics in the world of commercial real estate is rental rates. Think of it as the heartbeat of the industry.

The coming year holds the promise of clarity in this crucial metric. As I’ve written in the space, rents in Class A industrial in north Orange County seem to have found a level that has spurred demand.

So why is this so important? Imagine you’re considering buying a commercial property. You need to know how much rent you can expect to charge tenants. If this number is vague or uncertain, it’s akin to navigating in the dark. But when you have a clear picture of expected rental rates, it’s like having a bright guiding light.

Clear rental rate data allows investors to make informed decisions. They can assess whether a property is undervalued or overpriced, which ultimately impacts the return on investment. It’s the linchpin that can make or break a deal.

Interest rates

Now, let’s talk about something that affects every investor’s decision-making process — interest rates.

In 2024, we’re looking at a landscape of declining interest rates. But why should that matter for real estate?

Picture this: You have some money to invest, and you’re considering your options. On one side, you have Treasury bonds, historically considered a safe bet. On the other side, you have commercial real estate. Traditionally, when interest rates on Treasuries are high, they’re a compelling choice because they offer a relatively safe and stable return.

However, when interest rates start to drop, as they’re doing now, the risk ratio changes. Suddenly, the returns on Treasury bonds become less appealing, while the potential returns from real estate start to become more compelling.

Investors look for opportunities that offer higher returns, and that often leads them to the commercial real estate market. In a world where real estate can provide solid returns in a low-interest environment, the appeal of this asset class becomes evident. It’s a shift that institutional investors can’t afford to ignore.

So, to sum it up. The year holds the promise of an exciting time for commercial real estate.

Institutional investors, with their careful balancing of allocations, eagerly await clarity on rental rates as they navigate the changing interest rate landscape. These factors, when combined, create a compelling case for increased buying activity.

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.

National Football playoff matchups are set, the first professional golf event is in the books. Washington vs. Michigan takes center stage for the NCAA football championship. (Go, Huskies!).

It feels like winter in Southern California as temps dip into the 30s at night. The Iowa presidential primaries are just over a week away, which officially begins an election year.

Yes! A lot is happening. As 2024 ramps into full swing, here’s the advice I’m giving to my owners and occupants of industrial buildings.

Look at total cost

Generally, our annual transaction mix is around 70% leasing and 30% sales. 2023 was no exception.

2022 reversed that ratio as we experienced a buying frenzy in the first half of the year. But as I mentioned in my annual prediction column last week, I expected some rate softening last year and we got it. For context, let’s use a 40,000 square foot building in the Inland Empire.

In January 2023, the prevailing ask was $66,000 per month triple net – rent net of operating expenses. By the end of 2023 it had dropped to $54,000 – an 18% decline. However, ignored in that calculus are the “gross up expenses” of property taxes, insurance and costs associated with mowing the lawn, servicing the air conditioners and keeping the roof water tight. These vary widely.

For an owner who purchased his building recently, expect these extras to be approximately $6,000 per month. The low end — for an owner who’s held title for many years could be half — $3,000 per month.

Added to our triple net rates and a $54,000 per month cost escalates to a range of $57,000-$60,000.

We advise clients these days to consider the “grossed up” rates when comparing alternatives.

Who’s buying what?

More buildings for sale will hit the market this year.

Fueled by vacancies — something we’ve not experienced in years — some owners will cash out instead of originating new leases.

We just completed a deal where the owner spent 36% of the lease’s future income just to attract our client to his building.

Downtime, abated rent, beneficial occupancy, refurbishment, tenant improvements and paying commercial real estate professionals for their representation are among the expenses necessary.

We’ll also see sales of buildings to their tenant occupants. I’ve mentioned many times in this space: Your best buyer is your resident.

What about interest rates, you may be wondering?

Some wise person once opined, “You marry the building, you date the interest rate.” Focus on the price you’re paying. You can always refinance if rates settle lower.

Also, consider owner financing. We struck a sale last year using this structure.

Encumbered by a long term lease that paid them effectively a 3% dividend, the owners were thrilled to sell, carry the paper and get a higher return. Plus, the crush of taxes is protracted.

Expiring lease

If you occupy a building under a lease arrangement, and your lease expires sometime in 2024, we advise proceeding with caution, particularly if your lease started before 2021.

Lease rates have experienced an exponential rise but are now softening.

Depending on the nature of your ownership (private or institutional),- you might be able to strike a renewal at a rate below that of the market.

Pay special attention to the owner’s cost to replace you.

Remember the example above where an owner spent 36% of his future income just to secure a resident? Some owners can’t afford to do this and are willing to reduce the rate in order to keep you.

Look to Class A industrial buildings as well. Our prediction is that these rates will soften, and you might be able to get a better building for the price of one that’s a bit more antiquated.

Election year

Jonathan Lansner did a masterful job reviewing election year trends as they affect our economy. If you didn’t catch his piece, “Are presidential elections good or bad for California’s economy,” I’d highly recommend you find it, cut it out, and pin it to your bulletin board. Enough said.

Cap rates

We pay very close attention to a United States Treasury instrument known as the 10 Year Treasury.

Commercial lending, as well as capitalization rates, closely follow this indicator.

We started to see a fairly astronomical rise in 10-year notes last year. They reached a crescendo in November, topping 5% for the first time in a couple of decades.

They’ve now settled back to a more reasonable 4%.

Simply, you can invest idle cash and receive a risk-free return of 4% on your money. Many opt to do this vs. investing in the uncertainty of real estate ownership.

For context, this same rate at the beginning of 2022 was a paltry 1.76%. As the 10-year note falls into the 3-½ % range, institutional investors shift their focus to investing in commercial real estate, which has the effect of lowering capitalization rates. This could spell a spate of buying activity by the big boys.

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.

Well, at least you’ll be up-to-date on all things commercial real estate.

Last week, I reviewed my prognostications from a year ago. I must admit, getting a perfect score and nailing all my predictions was better than watching Alabama return to Tuscaloosa defeated. But I digress.

Today, I turn toward our newly minted 2024 and what to predict this year.

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 – six to 12 months and continue our search.

His owner would only agree to six months, so we had a new deadline, June 2023. We nearly struck pay dirt in March but jettisoned the opportunity due to its size. It just wasn’t 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. Yes, more were 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, Orange County had 11 such buildings open for business and seeking a resident. Two tenants also left the market last year.

Hmm, someone will get motivated and make a deal, comps will reset to the new level and the frenzy will begin.

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.

Another 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.

Today, you’ve delivered a new building into an entirely different market with 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.

Recession or no?

I say no. Last year, I took a contrarian approach and predicted we would avoid a recession in 2023.

Recall, a 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.

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 4-4.25% percent this year.

OK, so there you have it. My commercial real estate crystal ball. Best wishes, dear readers, for much success in 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.

As you read this on New Year’s Eve 2023, let’s review what I predicted in January 2023, and see how I did getting my Nostradamus on.

Industrial property give-backs

Then: Third party logistics providers will give back space. 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.

December 2023 update: The give-back continues! I recently pulled a list of spaces between 275,000-425,000 square feet in the Inland Empire. Of the 34 available, one-third were subleases, or companies trying to shed space.

Prediction? Nailed it!

Recession? I vote no.

Then: 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 0.75% and one 0.5% 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. I choose to believe in the resiliency in the US economy.

July 2023 update: I nailed this prediction, as our economy has not fallen into recession.

December 2023 update: We will finish 2023 recession-free. This is quite miraculous considering what many were saying last year at this time. No one predicted the Hamas attacks on Israel or 10-year Treasuries topping 5% (briefly in November).

Unrest still rages in the Middle East, but interest rates have settled in the 4% range. Nine of 10 believe we will avoid recession in 2024. I, for one, hope they’re correct.

Prediction? Nailed it!

Return to the office

Then: 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? I predicted workforces would return to the office this year. Sure, a hybrid model will be employed — such as Tuesday-Thursday will be office days and Mondays and Fridays will be optional work from home.

July 2023 update: Orange County Register articles said vacancy throughout office space had doubled since the pandemic in 2020. The new normal is a hybrid workspace except for a few industries.

December 2023 update: Industries such as wealth management are back. Other typically office-bound crafts like attorneys, real estate professionals and CPAs are not.

Prediction? Nailed it!

Retail will survive

Then: A continuation of the experiences that brought us back to brick and mortar stores in 2022 will continue. 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 bought some items online and returned them at the store vs. 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.

December 2023 update: If you visited a mall or retail center during this extended shopping season, you were met with a crush normally reserved for the intersection of the five, 57 and 22. Gridlock indeed. Our economy seems to be settled in to a nice combination of online and in person shopping.

Prediction? Nailed it!

For those keeping score, I got a perfect four out of four. Next week, I’ll proffer my predictions for commercial real estate in 2024. You won’t want to miss that episode. Until then, be safe, my friends.

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.

It’s a fancy way of saying “what’s happening” in our commercial real estate world. We look at things such as comparable lease transactions, comparable sale transactions, number of new availabilities and the number of months needed to complete a lease or sale once the property enters as an availability.

By analyzing these metrics, we’re able to gauge the health of our business. New avails and time on the market are easy enough.

The measures more difficult are the comparable sales and leases as you must factor in some equalizer. By this — and using housing as an example — you wouldn’t compare the price a 10,000-square-foot beachfront property to an inland condo without some means to level the comparison. Price per square foot helps along with age of construction and amenities.

We’re then able to suggest a status of comparable, inferior or superior. If we get quite granular, we can propose a percentage by which a comp is superior or inferior and add or subtract this from the sale price.

Lease comps are trickier. Leases are different from sales comps as they are not a matter of public record. In other words, we can’t go to the county recorder to see where a deal traded. We must rely on relationships with fellow brokers, who will share the points of a lease with us.

Important things to consider:

The starting rate: Defined as the lease amount the tenant pays upon commencement of the lease.

Operating expenses: In certain leases, an amount – in excess of base rent – is billed to the tenant. Operating expenses include costs such as property taxes, building insurance and maintenance.

Annual increases: These are bumps in the lease rate that occur annually, or at some other throughout the term. Most leases these days are written with fixed annual increases versus the change that occurs in the consumer price index which we frequently saw in the 1980s.

Term: Number of months that the tenant commits to pay rent.

And concessions such as:

Refurbishment: Generally referred to as rent, ready items, such as paint, carpet, and general cleanup. Not typically included in refurbishment, would be tenant specific improvements, which are referred to as tenant improvements.

Free rent: This period is and the tenant gets to occupy the building free of base rent.

Beneficial occupancy: Any occupancy granted prior to the commencement of the term is referred to his beneficial occupancy, and sometimes may be called early possession.

Improvements made for the tenant: As mentioned above in the refurbishment section, tenant improvements would be outside the scope of the normal cleanup. This could include things such as adding offices, or upgrading the power panel.

If a fellow broker is willing to share all the points above, we can then do some math and compute what’s known as the effective rate. Simply stated, the effective rate considers rent (including increases) over the term, minus the concessions.

The actual computation is a bit more complex. But you get the idea.

Now, armed with the effective rate of each lease, we can assign the same — inferior, superior, or comparable tag used for sales comps — based on amenities.

As an example, a new Class A offering should be superior to a 30-year-old counterpart.

How superior you may wonder? In certain cases, the 30-year-old address may be functionally obsolete to modern occupants and may need to appeal to a smaller pool of tenants who don’t need Class A amenities.

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. 

Growing up in a family-owned and operated manufacturing business helped provide me with keen insight into the challenges faced by these local employers, who are key components of our local communities. I recall numerous Christmas gatherings with our company’s employees and the special meaning of this time of year.

Also see: Want to sell real estate? Avoid professional time wasters

The holiday season is a time of family, traditions and gathering around a warm and welcoming home. Much like the heart of the holiday season, family-owned manufacturing businesses often have a central hub — their commercial real estate. In this column, we’ll explore the unique challenges and blessings that come with harmonizing real estate and the traditions of family businesses.

Tradition and succession planning

Picture a family-owned manufacturing business as the treasured holiday feast, and the real estate as the time-honored recipes that have been passed down through generations.

More from Allen Buchanan: These are the scary things that happen in real estate

Planning for succession in such an environment can be as intricate as the preparation of a family recipe. It’s about ensuring the family tradition continues to thrive while also preserving the home in which it all began.

Decking the halls with financial considerations

The holiday season is typically marked by financial decisions — gifts to buy, decorations to adorn and feasts to prepare. Similarly, real estate assets within family businesses bring their own financial considerations.

More on commercial real estate: How sky high mortgage rates rates slow commercial real estate

Property values and rental income are like the ornaments and lights that decorate the family tree, enhancing its beauty. However, just as the holiday season comes with its expenses, so do real estate assets with maintenance and operational costs.

Balancing these financial aspects is critical for a harmonious holiday season.

Gifts and legacies and tax obligations

Gift-giving is a central theme of the holidays, but when it comes to real estate within family businesses, it’s essential to navigate the legal and tax implications carefully.

Most read in 2023 by Allen Buchanan: Will Southern California’s empty warehouses find tenants?

Diversifying the feast

During the holidays, it’s common to try new recipes and incorporate diverse flavors into your traditions.

In the world of family-owned manufacturing businesses, real estate can be the secret ingredient to diversification and growth. Ownership of the buildings from which your company operates can be a magical way to increase generational wealth.

These strategies can bring new flavors to your business traditions and ensure a bountiful holiday season.

Family harmony

The holiday season is a time for unity and togetherness, but it can also bring forth differing opinions and tensions within families. Managing real estate assets within a family business can require the skill akin to Santa’s elves.

The family, much like the ornaments on a tree, should work together to create a harmonious atmosphere.

Holiday recipes

As with any holiday feast, it’s often helpful to learn from the masters. Let’s explore a couple of real-life examples.

The Smith family, seasoned in the manufacturing business, wisely chose to own their real estate. As the value of the enterprise grew, so did the worth of the real estate. Additionally, in tough times, rent paid by the operation could be subsidized by the ownership of the building.

It is common these days for the value of the real estate to far eclipse that of the occupying business. Merry Christmas indeed!

On the other hand, the Johnsons decided to lease the facilities from which their enterprise operated. They avoided the heavy down payment needed to own their real estate. However, leases have maturity dates and rents over time have risen.

No additional equity is built, and the operation must constantly face an evolving rental market. This can be great when rents are depressed but troublesome in a time like today, when rents have escalated to a historically high-level.

Blending real estate assets with family-owned manufacturing businesses during the holidays is similar to preparing a cherished family recipe — a delicate balance of tradition, innovation, and unity. You can create a holiday season that’s not only joyful, but also filled with the promise of enduring traditions and lasting legacies.

So, as you gather around the family table during this festive season, remember that your real estate assets can be the foundation of your traditions, and the family business is the holiday feast that brings you all together.

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. 

Time with family and friends during this holiday season is at a premium. Our December calendar is almost full with parties, luncheons and gatherings. But, today, I am writing for three reasons — therapy, education and as a personal reminder.

As commercial real estate practitioners, we only have two things to sell – our information and our time. Levels of our information are available as a commodity, for the world to see, and we only have 168 hours per week — that’s it!

Now, we can layer our expertise on top of the basic data levels – but we cannot create any more time. I realize that is trite but stay with me, here. Avoiding commercial real estate time wasters is tantamount to locking your house at night – if you don’t do it, you might get robbed!

I mentioned in the preamble my three reasons, so here goes!

Therapy

Without a doubt, I have encountered (and unfortunately been engaged by) more time wasters this year than I can remember in my career that spans four decades!

And I pride myself on my qualification skills. Some were requirements unable to be filled, which resulted in lease renewals. Some were loooong drawn out requests for proposal processes or market surveys or tours or owner education or…All had the same result – no revenue!

Time invested with no return — the death knell of any commissioned salesperson! Now before you go all sappy and feel sorry for me, please don’t. I am the most blessed man on earth for myriad reasons that I’ll save for another column – but maybe you can learn from my mistakes this year.

Education

OK, some of this is brokerage 101. But I’m going to spin it for you.

—Work with control I know, basic, right? But how many of you make this mistake? I tell the young guys in here, “Working without control is like drinking and driving” You might get away with it but when you get caught – and you will – the consequences are severe.

—Qualify, Qualify, and keep Qualifying. Qualifying is ongoing. Remember to qualify “throughout the process”, not just at the front end of the transaction.

—Think “anti-move.” Let’s face it, moving sucks! It’s disruptive, time-consuming, counterproductive, inefficient, and expensive. It’s like a knee replacement – painful but necessary sometimes. Be VERY candid with your occupants about the downside of moving locations. When things get tough in the transaction – and they will, you can relay your discussion and remind your clients why moving makes sense.

—Make the client “convince” you. How many of us have fallen for “we want to buy a building”? I always ask my clients “Why would you want to do that?” The answer is illuminating!

—Beware of the corporate “local guy”. OK, these can be your biggest advocate or CHAMPION time wasters. Is the local guy willing to give you complete access to the “real decision maker” or are you trying to fulfill his dream location that has NO CHANCE of materializing or passing corporate scrutiny?

—Beware of lengthy processes. Decisions on who to hire are rarely the result of the fattest proposal binder, the best PowerPoint or the most complete response to an RFP. They generally boil down to a “relationship” – what a concept.

—At some point, they gotta give back. My Mom taught me a relationship must be a 50-50 proposition. Why should this differ in a real estate deal? Examine how much YOU are giving and how much the client is giving in return. This can be as simple as timely returned phone calls, emails, texts, etc. or as complicated as deciding on a strategic direction.

—Out of state, out of mind. Has anyone out there ever dealt with an out-of-state company that is tremendously responsive when you are face-to-face but once the plane leaves the tarmac, so does the responsiveness?  Candidly, I’ve still not figured this one out!

Personal reminder

TRUST YOUR GUT! If it walks like a duck, quacks like a duck, has feathers and flies south for the winter (and you are not in Eugene, Oregon) – chances are they are a commercial real estate time waster!

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