We commercial real estate brokers generally serve three types of clients: investors, tenants and owner-occupants. Unlike our residential colleagues who represent buyers and investors – and the occasional tenant – many in our industry do quite well only servicing folks with leases.
We can be on either the owner’s side or occupant’s side. So our days are filled with one of six pursuits: three types of clients but working on either side. Clear as mud? Allow me to provide details.
Number one and two: Investor hires us to find them something to buy or to fill a vacant building.
Number three and four: Tenant engages us to find them a location to lease or to sublease excess space.
Number five and six: We work to find a parcel for an occupant to buy or they ask us to sell their company’s address.
With that as a backdrop, you can appreciate we have our “ear to the ground” and are a great source for what’s happening. I’ve distilled this down to one thing for each genre – investor, tenant and owner-occupant.
Our industrial market crossed a pivotal point in the middle of 2020. For the first time I can remember, the occupant premium disappeared and investors started paying more for offerings than those who bought them to house businesses.
Deep pools of capital, a rabid appetite for return in a stable asset class, and skimpy supply caused pricing to hit a crescendo in May 2022.
With all the world happenings – inflation, recession, global strife and rising interest rates – investors, especially institutional investors, have hit pause. Private folks are proceeding quite cautiously. Many require debt to acquire income properties.
As rates have now eclipsed 5.5%, the resulting capitalization must be north, lest negative leverage will occur (return on invested dollars less that cap rate). So with fewer buyers and higher rates, prices have started declining.
The period between 2016 and 2019 found record numbers of leases originated or renewed. These are typically three to 10 years in length. Baked into the agreements are annual increases. Up until 2021, these hovered between 2.5% and 3% per year. Around July of 2021, we saw a big push for increases to roughly 4%. We even saw a couple of deals with 5% yearly kickers.
But even with the hefty adjustments, lease coupons didn’t keep pace with inflation. Consequently, come renewal time, many tenants are greeted with rate increases of 50% to 100%.
Folks who lease industrial buildings are concerned with how their bottom lines will be affected and how to counteract a whopping bump in rent.
A distinction is drawn between two commercial real estate owners – occupants or investors. The difference? Occupants also own the operation residing in the facility. Before June of this year, many owner-occupants received unsolicited offers from investors seeking to deploy capital.
In general – these offers were at eye-popping numbers and included a provision to avoid a costly move. Many carpeyed (sorry) the diem and sold. But others got tangled in the two issues that arose: Uncle Sam and sky-high rent.
The balance of 2022 should prove interesting as we navigate this changing market. As an aside, I did see a Santa display in Lowes yesterday. Earliest I can recall. Merry Christmas!
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.
