Will stability or a black swan event settle on real estate? – Daily News

on Jan8
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Happy new year! If you’re reading this, most likely you’ve already blown two or three resolutions. That’s OK. Just resolve to read this column each week and you’ll be fine.

Well, at least you’ll be up-to-date on all things commercial real estate.

Last week, I reviewed my prognostications from a year ago. I must admit, getting a perfect score and nailing all my predictions was better than watching Alabama return to Tuscaloosa defeated. But I digress.

Today, I turn toward our newly minted 2024 and what to predict this year.

Industrial lease rates will soften

This time last year, a client of ours was facing an expiring lease. We tried to find a suitable alternative to move his operation. Nothing was ideal. We advised him to stay put, negotiate a short term fix – six to 12 months and continue our search.

His owner would only agree to six months, so we had a new deadline, June 2023. We nearly struck pay dirt in March but jettisoned the opportunity due to its size. It just wasn’t big enough.

Once again, we approached his owner, asking for some more time. He agreed to extend through December. Our gamble paid off as we secured a suitable building at a 15% discount!

Why, you may wonder? Simple economics.

We tracked new avails and ones leaving the market and noticed an imbalance. Yes, more were coming than going. We knew someone would drop their rate to secure a great tenant.

Expect more of the same this year, especially with Class A buildings above 100,000 square feet. At last count, Orange County had 11 such buildings open for business and seeking a resident. Two tenants also left the market last year.

Hmm, someone will get motivated and make a deal, comps will reset to the new level and the frenzy will begin.

Expect sales volume to increase

The forces outlined in the paragraph above will trickle into the sales world. By that, I mean an owner awaiting a tenant may choose to sell.

Another catalyst could be the underlying debt on the asset.

Imagine you’ve originated a short-term construction loan to build a Class A structure. You considered construction costs, time to build and lease. Your calculus was based upon conditions in early 2022.

Today, you’ve delivered a new building into an entirely different market with longer vacancy and lower rates. Your lender might be getting a bit nervous. When will the maturing debt be repaid? Thus, pressure to dispose of the new build.

Recession or no?

I say no. Last year, I took a contrarian approach and predicted we would avoid a recession in 2023.

Recall, a recession is a decline in gross national product for at least two quarters. I believed in the resiliency of the United States economy, especially the consumer, and we skated by a recession in 2023.

As I write these predictions today, the only storm clouds I see on our horizon are global uncertainty in the Middle East. Specifically, will the Red Sea shipping lane disruption cause inflationary pressures on goods delivered?

If this proves to be the case, the Federal Reserve may be persuaded to delay cuts in interest rates, which are predicted for this year. However, I’m reminded of our status in January 2020. We were rocking along when a microscopic foe sent us to our spare bedrooms. Therefore, beware of the Black Swan event.

Interest rates

Last year, for the first time in a couple of decades, you could actually make money on idle cash. We saw a peak in Treasuries occur last year when the 10 year T-note eclipsed 5%. The rate this morning is slightly above 3.8%.

This is good news for borrowers, bad news for savers and could cause an uptick in institutional buying activity. These behemoth money managers are constantly seeking return and might view commercial real estate as a safe haven to earn some additional juice.

I believe the 10-year notes will level at around 4-4.25% percent this year.

OK, so there you have it. My commercial real estate crystal ball. Best wishes, dear readers, for much success in 2024.

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.

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