Since June of 2020, the industrial real estate market of manufacturing and logistics buildings has been on turbo-charge! Anything for sale – regardless of how ludicrous the asking price might appear – is met with multiple offers, bidding wars and one group of winners – sellers!
As buyers go, we’ve witnessed an owner occupant’s ability to compete with investors wane and a flip in the “occupant premium” once experienced.
If you don’t recall the meaning of occupant premium, here is a brief refresher: Occupants, or companies that own the locations from which they operate, once could pay about 20% more than investors — those reliant on rental income produced by the location.
Utility, finance-ability and rent savings were the main three reasons occupants would pay more. The downside of the higher prices paid, however, was the uncertainty of financing contingencies. If the occupant couldn’t get a loan, the deal could crater.
But, now that rents have increased exponentially, investor capital is abundant if not downright voracious and most investors buy without needing bank involvement. So, the tables have turned. Our paradigm has shifted. Nowadays, investors typically pay a lot more than occupants.
Rarely, would an investor buy a vacant building and rely on their ability to rent it in a timely manner. Not that long ago, a steep discount would be negotiated for buying an empty site. After all, such things as downtime, free rent, improvements to the real estate and brokerage fees had to be estimated and deducted.
A long-term lease generally found favor with investors. If this lease had to be originated, an investor would pay less. Today? Shorter termed leases or empty buildings are preferred. Because the market rate can be captured.
If an under-market agreement is in place, it could take years to ramp up the rate to prevailing levels. In fact, the product is in such short supply and capital is searching for a home, we’ve encountered a new deal structure called “the forward.” Simply, investors are lapping up “planned” projects before they even break ground! It’s amazing.
With that update as a preamble, let’s discuss some reasons why sale opportunities are popping up these days.
A business operation is sold. One of the most common circumstances today that creates a need to sell is the sale of the business occupying the premises. Some owners opt to retain and lease to the new entity, but many cash in the chips.
The fund matures. Many investors set up pools of money with sunset clauses. Simply, at the end of X-number of years, the fund is set to liquidate and return the capital investment. You may be wondering what happens if the fund matures in a down market. Is the sale forced? Generally, the administrator has some latitude to move the sale date up or back to account for market fluctuations.
The builders. Some developers like to acquire land, build and sell. These function much like new home builders. They like to keep the money turning.
Liquidity event. Death of a principal, a bankruptcy, eminent domain or partnership squabbles all can force the sale of a piece of commercial real estate.
At these prices, why not? Much of our sale activity in 2022 is happening on an unsolicited basis. See a property you like that’s not for sale and submit an offer to buy it. Easy. After all, everything is for sale at some price, right?
Akin to casting off the Balboa Pier in the hopes of a catch, this manner of scaring up deals is terribly time-consuming and inefficient. For myriad reasons, these Hail Marys rarely land. But, it only takes one or two.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can bereached at abuchanan@lee-associates.com or 714.564.7104.
