Like the strong weather patterns of late, much can be said for the headwinds in our commercial real estate market this year.
Shaking off the cobwebs of a post-pandemic hangover, 2022 started with great momentum only to be cooled mid-year.
We received some decent economic news of late with the consumer price index not increasing as fast and some major retailers posting better earnings than expected. But our path forward still remains murky.
So what advice are we giving to tenants, investors and occupants who own? Allow me to categorize each.
Tenants
Faced with a lease expiration at the end of this year, we recently recommended a client of ours renew for a short period of time, just six months, to gauge the market trajectory.
We’ve been watching what property has become available for several months. His options to relocate were limited and we’d even created a Plan B to stay put if we didn’t see some loosening in the market.
Lo and behold, we noticed a trickle of new buildings hitting the market in October. Now it’s running about three per week. If you’re looking for space, this is a vast improvement vs. six months ago when we were lucky to see one every three weeks.
Another interesting metric is the asking rates have declined. Gone are the days when a newly available property was swept up before it was widely marketed. Every new deal was a new high. Not anymore.
Our advice centers around the belief in a future market softening. Tenants are becoming valuable again, especially if they pay on time and are easy on the building.
What’s causing the increase in supply? Some businesses, faced with the new rent structure are headed out of state or out of business. What’s left in their wake are vacancies.
Investors
We see two sets of motivations these days: to defer taxes or not. Unless motivated by tax reasons, it might be wise to put your money in short-term treasuries – say, two years – and wait for the right opportunity to come along.
Institutional capital is largely sidelined and occupants are priced out. Private investors rule. If rents are softening in the face of rising interest rates, values can only decline. Will there be better deals in mid-2023 vs. today? Our opinion is yes.
Certainly, if your investment is dictated by tax-deferred timeframes, you either transact or pay the capital gains taxes. But remember, the impetus of those buys was a sale. Our sense is they’ll be fewer equity sales as values have declined or the market’s evaporated, leading to fewer tax-fueled purchases.
Occupants who own
We saw a voracious appetite from institutional capital targeting properties. Their pitch was a sky-high purchase price in return for a leaseback of two-10 years. This activity peaked in June.
With the uncertainty of recession, inflation and rising rates, these deals weren’t as attractive.
With more lease deals hitting, our prediction is some of these owners will need to sell, especially if faced with a refinance bullet or a shortage of dollars necessary to refurbish the building into rent-ready condition.
Once again, patience is key.
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.
Source: Orange County Register
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