Commercial real estate slows as buyers put down their pencils – Orange County Register
August 2022. Wow! What an incredible 2 and a half years. I have written, in this space until nausea, what we have been through since the ball fell on December 31, 2019.
I won’t bore you with a recap. Instead, today I’d like to offer an opinion on where we are and what potentially lies ahead.
The industrialist has pressed the pause button on its meteoric rise in values, office suites are full of freebies for those wishing to sign a warrant and retail – especially Walmart, Target, Ross, TJMaxx, Tuesday Morning, Bed Bath and Beyond and Burlington Coat Factory – take their pieces. With soaring gas and food prices, few people can afford discretionary spending like before.
As a result, earnings suffered, as evidenced by Walmart’s 14% drop. Foot traffic at the retailer’s stores is also down.
For us, it all comes down to real estate transactions. Are people still making transactions?
I thought about the factors that motivate a transaction. I believe the three factors driving the deal are attitude, stocks and interest rates. Everyone can influence the decision, but in my opinion, only one factor can change the decision: a change in motivation!
I have broadly grouped issues such as uncertainty, lease expiration time, business forecast, market conditions, time of year, age of business, age of business owners, etc., in the attitude category.
As commercial real estate professionals, uncertainty is the attitude that causes the most pain. If a business owner is uncertain about the future, a decision to buy will be postponed or a decision to buy could turn into a decision to rent, or a 10-year lease could become a two-year lease or a new lease could become a renewal at maturity. the current location of the business.
In Southern California, late 2008 and early 2009 were particularly painful. We are now being told that the worst recession since the Great Depression began in December 2007 and ended in June 2009. While we can debate when the recession ended, none of us will dispute when it started.
Many of us in the business sensed that a “change” was coming at the start of 2008. Financing was becoming harder to come by, values were at an all-time high and the market was feeding on an exuberance that many between us believed unsustainable. . Our worst fears came true in the fall of 2008 when the financial sector imploded, stocks plummeted and many real estate deals collapsed.
The resulting uncertainty continued into early 2009 until after Obama’s inauguration. Today, CEOs who decide to bring a workforce back to the office are faced with employees who are comfortable enough to work from their kitchen tables when expensive gasoline doesn’t motivate commuting.
With logistics buildings full of holiday merchandise and tricky retailers, the situation is akin to constipation. It takes something to make things happen!
The market’s supply of suitable alternatives may affect the timing and viability of the transaction.
We’ve all experienced a “seller’s” market since 2019. In these times, the demand for space far exceeds the supply.
As a result, a seller can afford to be optimistic and often is. You need to carefully review inventory every day and put your buyer or tenant in the best position to close a deal.
Today, the market is changing from a seller’s market to an “equal” market. That means the good old days of multiple offers and TBD prices are probably coming to an end.
It was in 2014 when I last saw a “brokerage bonus” offered for a transaction concluded before September 30th. What is this owner seeing and trying to avoid? What is an expensive vacation?
A wide swing up or down can motivate a chord. We had double-digit interest rates in the early 1980s and historically low interest rates over the past decade. Given that interest rates have recently spiked a point or two, many buyers have taken a pencil-and-gun approach to continue shopping.
Any combination of the above can lead to a change in motivation. In my experience, this is the only thing that can cause a real estate transaction to fail. Let’s hope for good attitudes, a balanced inventory and affordable interest rates!!
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.