Has the gap between investors and owner-user’s widened?

​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.

​For example, if investors are paying equal to or more than what an owner-user would pay, it is going to drive up the acquisition cost for owner-user buyers who need a facility, and that owner-user will need to account for that added cost in their operational budgets and bottom line.  This accounting typically causes an increase in sale prices for their goods or services, increasing inflationary pressures on the macro-economic environment.  This is exactly the environment we have been operating under in Southern California Industrial property for the past several years. It really began to materialize as we came out of the Covid lockdown.  The main driver for this was the amount of capital chasing industrial property.  After Covid, many of the investment funds around the US that targeted other real estate asset classes (Office, Retail, Multi-Family, etc.)  pivoted and started chasing industrial property deals, dramatically increasing competition for the few deals that were out there.  There were only a few deals here and there to buy because most owners of property in California get crushed by taxes (in the 40% range of gains, as well as other transfer taxes) when they sell, so they would rather hold on to the property than give that money to our government.
 
Therefore, when a property was available, it made it hard for owner-user buyers to compete, because the investor buyer could move more quickly, being a cash buyer. The investor had different return-on-investment objectives than the owner-user, and therefore could pay more money because rapidly increasing rents would justify their return-on-investment objectives. 
 
In 2022 things changed as the Federal Reserve began to quickly increase interest rates, which translated to commercial loans being quoted in the 6%+ range.  This nearly stopped investment buyers in their tracks as they had to put pencils down and recalibrate in a rapidly changing environment.
 
As a result, what we are now beginning to see is a more normalized gap between what an owner-user would pay and what an investor would pay.   For a quick snapshot on how values have moved, please refer to last month’s article (insert link).   This has created some opportunity for owner-user investor/buyers, and we are already seeing them come out in the early part of 2023 to see what these opportunities really mean.  Please call us to discuss what this means in more detail.  We expect this to be a strong year for owner-user-sales as long as sellers can figure out how to minimize the tax implications of the sales they consider.  Please note that we can introduce you to several CPA’s and Wealth Advisors who can assist with tax management and minimization strategies; call us to discuss your situation and objectives.