How to deal with rising commercial rents? – Orange County Register

We commercial real estate brokers typically serve three types of clients: investors, tenants and owners. Unlike our residential peers and occasional tenants who represent buyers and investors, much of our industry only serves people with leases.

We can stand on both the owner’s side and the tenant’s side. Therefore, our days are filled with one of six pursuits. Clear as mud? Please let me provide the details.

Number one and two: Investors hire us to find things to buy or fill empty buildings.

3rd and 4th: Tenants hire us to find a place to lease or sublease their excess space.

5th and 6th: We look for parcels for tenants to buy or ask to sell company addresses.

With that in mind, you can see that we have “earthly ears” and are a good source of information about what is going on. We’ve grouped this into one for each of the investor, tenant, and owner genres.

Investor

Our industrial market crossed a critical point in mid-2020. For the first time I can remember, the occupier premium is gone, and investors are paying more for offerings than those who bought for the residential business.

Ample pools of capital, a ferocious appetite for returns in a stable asset class, and scarce supply pushed prices to a climax in May 2022.

Inflation, recessions, global conflicts, rising interest rates and what’s happening around the world have kept investors, especially institutional investors, at a standstill. Civilians are proceeding rather cautiously. Debt is often required to acquire an income property.

Interest rates are currently above 5.5%, so the resulting market capitalization must be north (return on the dollar invested minus its cap rate) to avoid negative leverage. So prices started to fall as there were fewer buyers and higher rates.

tenant

A record number of leases were initiated or renewed between 2016 and 2019. These are typically 3 to 10 years long. Burned into the contract is an annual increase. Until 2021, these hovered between 2.5% and 3% annually. Around July 2021, there was a big move to raise it to about 4%. I’ve also seen some deals with a 5% annual kicker.

But even with the hefty adjustments, lease coupons weren’t keeping up with inflation. As a result, many tenants are greeted with his 50% to 100% rate increase when it comes time to renew.

Those who lease industrial buildings are concerned about how their earnings will be affected and how they will cope with a significant rise in rents.

Owned house

A distinction is made between two commercial property owners: resident or investor. difference? Residents also own the operations that reside on the premises. By her June of this year, many owners had received unsolicited offers from investors looking to deploy their capital.

In general, these offers were in staggering numbers and included provisions to avoid costly travel. . However, some people got caught up in two problems: Uncle Sam and extremely high rent.

2022 earnings should be interesting as we navigate this changing market. As an aside, I saw the Santa exhibit at Loews yesterday. as early as I can remember. merry christmas!

Allen C. Buchanan (SIOR) is a Principal with Lee & Associates Commercial Real Estate Services in Orange.he can be reached at abuchanan@lee-associates.com or 714.564.7104.