As I have written in this space many times, uncertainty kills markets.
When investors or business owners have a cloudy view of the future, reluctance to make commitments abounds. Conversely, an optimistic view of what is to come leads to hiring, equipment purchases and operational expansion. Therefore, we see long-term leases and negotiated commercial real estate purchases.
Uncertainty reigns in the offices. The Covid lockdowns, which forced many of us to work from home, were followed by lukewarm reopenings, high petrol prices and a reluctance to move, leading to a labor hybrid work.
When will all of this stabilize? Guess what.
Bargains abound for office occupiers looking to sign a five-year or longer lease. In my view, office landlords are resigned to responding to tenant demands by offering free rent, bountiful tenant improvements, moving allowances and agent bonuses.
We see a different dynamic unfolding in the industrial sector. When interest rates soared in mid-June, we saw a sea change in the attitude of buyers, especially institutional investors.
Many investors are on the bench awaiting any indication of the direction the economy is taking.
We saw a similar break in March 2020. But, six weeks later, a boom of epic proportions occurred. This rabid appetite continued throughout the first half of this year. Record rental and sale prices have resulted. But now we are seeing retrades – a fancy way to describe requests for price reductions and even cancellations. Even acquisitions that seem accretive to investors’ portfolios are cratering.
However, on the other hand, industrial real estate occupiers are booming.
One of our aerospace customers has a nine-figure backlog. Another, which sticks stickers on duct tape, will record its best year yet. A moving and storage operation we advise has seen consecutive revenue spikes. Three rounds indeed!
Finally, a group we advise that provides engineering for large commercial air conditioning projects cannot keep pace with demand.
When these business benefits require additional space, occupants end up with one out of 100 available buildings. Yes that is correct. Just 1% vacancy rate!
Because there is nowhere to move, renewal rates have increased. Businesses are forced to get creative to solve their need for space. Some have narrowed their stacking aisles and become vertical. Oh, but wait. This reach truck that allows you to take very high orders cannot be delivered for 26 months. It’s true! Over two years from now. How to plan a business?
So what’s up? Why the massive disconnection between investors and occupants? Here is what I believe is happening.
Commercial real estate prices have soared with expectations of rising rents and a lack of supply. Then we felt some global pressure with Russia’s invasion of Ukraine, followed by high inflation for four decades that caused rates to rise to dampen price increases and two quarters of falling GDP .
Institutional investors, en masse, chose to be bearish for fear of being chairless when the music stopped. Meanwhile, business is good. People are working, wages have risen, demand remains strong, and the stock market is appreciating.
It’s as if the companies didn’t get the memo. Aren’t we in a recession? Isn’t the cost of borrowing higher? Yes and yes.
But somehow this recession is different from the ones I’ve survived. Generally, we work our way out of slowdowns. But this time, the lower echelon of wage earners are crushed by higher prices at the pump and at the grocery store. There is no disposable income left. It is therefore a consumer recession in relation to a structural problem of our economy.
Only time will tell if I’m right.
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.
