Hello friends! I’m penning this on the balcony of my stateroom on a ship somewhere in the Caribbean.
With Nassau in our rearview mirror and steaming toward San Juan, the weather is slightly overcast, mid-70s with a mild breeze blowing. Well, not really, but a man can dream.
Today, I go deep on the advice we’re giving to a client of ours who wants to purchase a building. They’re woefully short on space and have placed a Band-Aid on their growth by adding third-party logistics pallet positions.
Where it stands
We’re early. Which is good if we can get seller capitulation. Which we have.
We’ve actually found someone willing to sell to us. The problem is, our idea of value differs.
But, remember 2021? We couldn’t compete with the number of buyers in the market with deep pockets and a rabid desire to own. In my opinion, those times return this year as rents stabilize and interest rates decline.
The real soft spot in the market is the rental market.
I believe a financially qualified tenant could make an unbelievable deal today. Not quite to 2019 pricing but close. Waiting to purchase costs money.
Let’s say today’s value is $358 per square foot and we can strike at $350 per square foot and every month you rent costs $1 per square foot. If you wait 12 months, you must buy the same building at $338 per square foot.
So based on this, here are their alternatives …
Stay put: By striking a short term deal with his current landlord, we can watch the market and react when pricing becomes more favorable.
The positives? They avoid moving twice
Negatives: The space is smaller, it’s already racked and 3PL is costly
Strike a short term sublease
This tactic is similar to staying put but different because the space need is solved.
All of this money is sunk. The client builds no equity and potentially misses out on market opportunity, as the two-year sublease term is a long time.
Positives: It’s the cheapest space alternative and it’s racked
Negatives: There’s no equity; that racking will need to be reconfigured; there’s uncertainty about 22 months from now; and they’re looking at two moves.0
Buy the deal we found
Positives: There’s the certainty of it, plus its size and divisibility. They’ll make just one move.
Negatives: We’re at a price impasse; it’s expensive.
Lease with an option to buy
Positives: Lowers the basis; rent is equity; one (quick) move; time to ramp up operation.
Negatives: absolute non-starter with the ownership and it’s difficult to peg an option price
Strike new lease
Positives: preserves operating capital and it’s cheaper.
Negatives: no generational wealth creation and what’s the expense at the end of the term? Over 120 months, there’s no equity build-up and then there’s the loan pay-down.
What will the client do? You’ll have to stay tuned as this saga is just now unfolding.
Bon Voyage!
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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