​We are now past the fervency felt during the dramatic increases in sale prices, lease rates, and overall demand for industrial space that we experienced from mid-2020 to Q4 2022. However, not everyone in the market has adjusted to the ‘new normal’ as quickly as others. More importantly, the approach to securing transactions, especially leases, must change quickly as well.  One area where we have seen some landlords quick to pivot and others more reluctant to embrace the change is in the commission rates landlords are willing to offer to source and secure new tenants or maintain existing tenants.  While this may appear to be self-serving since I am one who receives commissions from leasing space, there are clear reasons why offering more leasing commissions benefits landlords more than brokers in both the near and long term. There are two reasons in particular that we want to focus on here.

As the landscape of the commercial industrial real estate market has clearly changed over the past 24-months, from the almost ravenous times of mid-2020-to-mid-2022 to now where we are experiencing a more normalized balanced environment, we are starting to see fewer ‘off market’ opportunities.  Although, it is good to remind ourselves that a normalized Southern California industrial real estate market is still very robust with strong buyer/tenant demand and scarcity of land or buildings, which helps to maintain low vacancy rates and resilient prices.  Overall, scarcity and demand vary from one local market to the next, but demand in the core Mid Counties (LA/OC border) infill market has pivoted more from investors to owner-user occupants.  Demand from the investor base persists, although their underwriting and return requirement have changed as a result of interest rate pressure; therefore, the prices PSF these investors can pay for an asset has generally decreased below what an owner user can pay for the same property if vacant and ready for occupancy.  As a result, owner-user buyers step in to fill the void left by investor buyers on many local so-cal industrial property sales (non-portfolio sales).  Therefore, overall demand for property has remained strong, it is just the motivations and objectives of the buyers that has changed.  

​The year continues to race along, and election headlines can hurry us to the next significant milestone event in the process.  On top of that, turmoil persists with international border discussions abounding and escalating.  Many Americans and small business face monetary hardships as inflationary effects are felt.  At the same time, the ‘corporate financial world’ seems to be adjusting well to the higher interest rate environment, for now, although the once aggressively bullish pursuit of industrial commercial property by various investment groups has now become a more targeted approach with less capital focused on more opportunistic acquisitions. Furthermore, on a local level in the Southern California market, the owner user buyer pool continues to strengthen and fill the void left by these investment groups.  As last month’s article focused generally on some of the drivers for industrial commercial real estate decisions in an election year (hyperlink to article), this month we can focus on some of the considerations those making decisions this elections cycle must face. 

We often see businesses, large and small, reluctant to make major decisions regarding real estate during an election year. And while this is the case for some, we also see many others who, by way of necessity or opportunity, are compelled to decide a course of action regarding their real estate. While businesses must consider the outcomes and impacts of pending elections, short-term and long-term risk-reward calculations are made when evaluating whether a company or individual should proceed with a certain real estate transaction, or not, in an ‘election year.’ These decisions should be made with careful consideration and interpretation of available research and market data, coupled with a clear outlook of strategy implementation. Here are a few examples of compelling reasons to make a deal in an election year. ​

Working within the industrial property landscape in the Socal commercial real estate world, we find that many of our clients both own the real estate that they presently occupy and run their existing business operations within that property.  Using the operating business to acquire real estate is one of the surest ways we have seem people build wealth, and we have helped many toward that end.  In our time we have found that the structure of the operating lease to the property owner entity has significant impact on the performance, cash flow, and value of both the real estate itself and the operating business.  Furthermore, structuring this lease in an optimal way is critical for positioning your business and/or your real estate in the most attractive way to create maximum value and gains in any potential sale or financing situation. 
 

​Introduction
For Landlords of Industrial Real Estate, who are often faced with important decisions that affect their property's short term and long term value, considering whether to invest in tenant improvements, also known as TIs, can have a significant impact on the property’s marketability.  Tenant improvements generally refer to the specific modifications made to a commercial office or warehouse. While landlords often hesitate completing these improvements due to the upfront costs associated with TIs, there are compelling reasons to consider this investment. Let’s now look briefly at some of those reasons.

​In the 4th quarter of 2022 we wrote the first half of our Subleasing article, where we covered the overall strategy of subleasing, Master Landlord approval, and the price you should charge.  Now, nearly halfway into 2023 we want to pick up that topic as we continue to see Sublease space on the market increase,   while getting absorbed relatively quickly.  In today’s article we aim to cover what it would look like, in the subleasing scenario, to (i) terminate the existing lease, (ii) what are appropriate commission amounts, (iii) how do we handle rental profit, and (iv) how to address the condition of the Premises.  While we will not cover every aspect of each of these topics, this will give you a good launch point for further discussion as it relates to your unique situation.

​Over the past six to nine months there has been much news related to interest rates, supply chain challenges, geopolitical conflict in many forms, food production issues, disease and hazardous material spills, to name a few things.  As a result, the question of industrial commercial property value is considered, especially after the historic run up in values over the past 10 years. People are asking, “what is the value of my property now, and what should I do with my building to generate the most revenue or wealth for me and my family?”  

​As we continue to keep you informed on the ever-changing landscape of commercial industrial real estate values and activity in the Southern California marketplace, we want to highlight one aspect that has caused some confusion and challenges over the past several years.  This aspect is the delta between what an investor would pay for an industrial warehouse property compared to what an owner-user would pay for the same property.   While this is somewhat nuanced, it is an important consideration because it will be a good indication of the health of a particular market.

​Opportunities are always present, if you know where to look and how to evaluate them.  As we embark upon 2023 we are certain there will be more exciting surprises in the world and our individual lives. But one area where we aim to minimizes surprises for you is in how the industrial real estate market is evolving. We are tracking activity in real time so that we can keep you informed on velocity and values, trends and opportunities.