Commercial real estate slows as buyers put their pencils down

August 2022. Wow! What an amazing 2 ½ years. I’ve written, in this space ad nauseam, what we’ve experienced since the ball dropped on Dec. 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.

Industrial has hit the pause button from its meteoric rise in values, office suites abound with goodies for those willing to sign a term, and retail — especially Walmart, Target, Ross, TJMaxx, Tuesday Morning, Bed Bath and Beyond and Burlington Coat Factory — are taking their lumps. With gasoline and food prices soaring, few can afford discretionary spending like before.

Consequently, earnings have suffered as evidenced by Walmart’s 14% decline. Foot traffic in the retailer’s stores also is on the wane.

For us, all of this harkens back to real estate deals. Are folks still transacting?

I have thought about factors that motivate a transaction. I believe the three factors that motivate the deal are attitude, inventory and interest rates. All can influence the decision, but in my opinion, only one factor can cause the decision to be changed — a change in motivation!

Attitude

I have broadly lumped issues such as uncertainty, timing of lease expiration, business forecast, market conditions, time of year, age of the business, age of the business owners, etc., into the category of attitude.

As commercial real estate practitioners, uncertainty is the attitude that causes the most pain. If a business owner is uncertain about the future, a buying decision will be postponed or a buying decision could morph into a leasing decision, or a 10-year lease could become a two-year lease or a new lease could become a renewal at the business’s present location.

In Southern California, the end of 2008 and the beginning of 2009 were particularly painful. We now are told that the worst recession since the Great Depression began in December 2007 and ended in June 2009. While we can debate the end of the recession, none of us will argue the beginning.

Many of us in the business sensed a “change” was coming at the beginning of 2008. Financing was becoming more difficult to originate, values were at an all-time high and the market was feeding off an exuberance that many of us believed was unsustainable. Our worst fears became reality in the fall of 2008 as the financial industry imploded, values plummeted and many real estate deals cratered.

The uncertainty that resulted carried into the early part of 2009 until after the Obama inauguration. Today, CEOs deciding to bring back a workforce into the office are faced with employees who are quite comfortable working from their kitchen table while pricey gas doesn’t motivate a commute.

With logistics buildings packed with holiday merchandise and squeamish retailers, the situation is akin to constipation. Something is needed to get things moving!

Inventory

The market’s supply of suitable alternatives can affect the timing and viability of the transaction.

We all have experienced a “seller’s” market since 2019. In these times, the demand for space far outstrips supplies.

As a result, a seller can afford to be bullish and often is. You must carefully review the inventory each day and put your buyer or tenant in the best position to make a deal.

Now the market is changing from a  seller’s market to an “equal” market. Meaning the halcyon days of multiple offers and TBD pricing are likely ending.

It’s was 2014 when I last saw a “broker premium” offered for a deal completed by Sept. 30. What is that owner seeing and trying to avoid? A costly vacancy, that’s what.

Interest rates

A wide swing up or down can motivate a deal. We saw double-digit interest rates in the early 80s and have experienced record low-interest rates for the past decade. Since interest rates have spiked recently by a point or two, many buyers have taken a pencils-down approach to pursuing purchases.

Any combination of the above can cause a change in motivation. In my experience, this is the one thing that can cause a real estate transaction to collapse. Let’s hope for good attitudes, a balanced inventory and affordable interest rates!!

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at [email protected] or 714.564.7104.

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