Much like the severe weather of recent times, much can be said about the headwinds in our commercial real estate market this year.
Shaking off the cobwebs of a post-pandemic hangover, 2022 started off with great momentum to cool off mid-year.
We recently received some good economic news, with the consumer price index not rising as fast and some major retailers posting better than expected profits. But our road ahead is still murky.
So what advice do we give to tenants, investors and owner-occupiers? Let me rank each.
Tenants
Faced with a lease expiring at the end of this year, we recently recommended one of our clients to renew for a short period, just six months, to assess the trajectory of the market.
We have been monitoring available properties for several months. His relocation options were limited and we even created a plan B to stay put if we didn’t see a loosening of the market.
Lo and behold, we noticed a trickle of new buildings hitting the market in October. Now it runs about three times a week. If you’re looking for space, this is a big improvement from six months ago when we were lucky enough to see one every three weeks.
Another interesting metric is that asking rates have gone down. Gone are the days of a newly available property being swept before it was widely marketed. Each new deal was a new high. Not anymore.
Our advice revolves around the belief in future market easing. Tenants become valuable again, especially if they pay on time and don’t spare the building.
What is the cause of the increased supply? Some companies, faced with the new rent structure, left the State or went bankrupt. What remains in their wake are vacancies.
Investors
We see two sets of motivations these days: whether or not to defer taxes. Unless you’re motivated by tax reasons, it might be a good idea to put your money in short-term treasury bills – say, two years – and wait for the right opportunity to arise.
Institutional capital is largely set aside and occupiers are prohibitively expensive. Private investors rule. If rents fall in the face of rising interest rates, values can only fall. Will there be better offers in mid-2023 compared to today? Our opinion is yes.
Certainly, if your investment is dictated by tax-deferred deadlines, you trade or pay capital gains taxes. But remember, the impetus for these purchases was a sale. We believe there will be fewer equity sales as values have fallen or the market has evaporated, resulting in fewer tax-fueled purchases.
Owner occupants
We have seen a voracious appetite for institutional capital targeting properties. Their pitch was an exorbitant purchase price in exchange for a sale-leaseback of two to ten years. This activity peaked in June.
With the uncertainty of recession, inflation and rising rates, these deals weren’t as attractive.
With more and more leases, we anticipate that some of these landlords will have to sell, especially if they face a refinance bullet or a shortage of dollars needed to return the building to rental condition.
Again, patience is key.
Allen C. Buchanan, SIOR, is a principal at Lee & Associates Commercial Real Estate Services in Orange. He can be reached at [email protected] or 714.564.7104.