Since June 2020, the industrial real estate market for manufacturing and logistics buildings has been boosted! Anything for sale – no matter how ridiculous the asking price may seem – is met with multiple bids, bidding wars and a group of winners – the sellers!
As buyers leave, we have seen a diminishing ability for an owner occupier to compete with investors and a reversal of the “occupier premium” once experienced.
If you don’t remember what occupier’s premium means, here’s a quick reminder: occupiers, or the companies that own the locations from which they operate, could once pay around 20% more than investors – those which depend on the rental income generated by the location. .
Utility, affordability and rent savings were the top three reasons occupants would pay more. The downside of the higher prices paid, however, was the uncertainty of funding contingencies. If the occupier could not obtain a loan, the business could collapse.
But, now that rents have risen exponentially, investor capital is plentiful if not downright voracious and most investors are buying without the need for bank intervention. So the tables have turned. Our paradigm has changed. These days, investors usually pay a lot more than occupiers.
Rarely does an investor buy a vacant building and rely on their ability to rent it out in a timely manner. Not so long ago, a large discount was negotiated for the purchase of an empty site. After all, things like downtime, free rent, home improvements, and brokerage fees had to be estimated and deducted.
A long-term lease is generally favored by investors. If this lease were to be created, an investor would pay less. Today? Shorter term leases or empty buildings are preferred. Because the market rate can be captured.
If a submarket deal is in place, it could take years to raise the rate to current levels. In fact, the product is so scarce and the capital is looking for a home that we have encountered a new transaction structure called “the front”. Simply, investors swallow “planned” projects even before they are launched! It’s incredible.
With this update as a preamble, let’s discuss a few reasons why selling opportunities are popping up these days.
A commercial activity is sold. One of the most common circumstances today that creates a need to sell is the sale of the business occupying the premises. Some owners choose to retain and lease to the new entity, but many cash in the tokens.
The fund is maturing. Many investors have set up money pools with sunset clauses. Simply, at the end of X number of years, the fund is settled to liquidate and return the capital investment. You might be wondering what happens if the fund matures in a bear market. Is the sale forced? Typically, the administrator has some leeway to move the sale date forward or back to accommodate market fluctuations.
The builders. Some developers like to acquire land, build and resell. These work much like new home builders. They like to spin the money.
Liquidity event. The death of a principal, bankruptcy, eminent domain or partnership disputes can force the sale of commercial real estate.
At these prices, why not? Much of our sales activity in 2022 is on an unsolicited basis. See a property you like that’s not for sale and submit an offer to buy it. Easy. After all, everything is for sale at a certain price, right?
Similar to jettisoning Balboa’s pier in hopes of a catch, this manner of scaring away business is extremely time consuming and ineffective. For a myriad of reasons, these Ave Marias rarely land. But, it only takes one or two.
Allen C. Buchanan, SIOR, is a director with Lee &; Associés Business Real Estate Services at Orange. He can becontacted at [email protected] or 714.564.7104.