Article by Eric Smith, Senior Associate, Anaheim Office
Everybody wants to win. Win their co-ed softball game, win in their office, win in life… and win in real estate. So, how do you win in a 2.32% vacant market? Said another way, how do you win in basically the tightest industrial real estate market on record? Not so easy of a win, now is it?
A win may be hard to recognize in this market. As we mentioned in our Voit Q2 market reports, a lot of tenants may be faced with an uncomfortable and almost unfathomable new lease rate. For example, a lease rate signed in the early recovery era of 2012 has probably seen a 30–40% increase. For example, a 20,000 square foot industrial lease at $0.60 NNN per square foot per month most likely has just become a $0.84 NNN per square foot per month lease in the current market. That is a $4,800 monthly difference. On any scale, these numbers can be frustrating for tenants and ecstasy for landlords. Hence, let’s establish what a win actually is.
Winning is prioritizing, strategizing, starting early and using professionals. Winning is calmly leasing the building that is in the right location, with the right power, right clearance, loading and port access. Winning is buying a building to control your own real estate and capitalizing on still low interest rates. Winning is leasing to a credit tenant with a clean use. Winning may be paying the asking rate…
Here are some winning strategies you should consider using:
Accept Sticker Shock – everyone is facing 30–40% rent increases. Before you tell your landlord where to stuff their lease, look around. Making a sound business decision based on growth numbers, ROI and ROE of being in the right building will probably assuage the increased rent.
Buying vs Leasing – buying is always an option. Even with sales prices increasing as much as 26% from the first quarter of 2016, in many circumstances owning the real estate and taking into consideration after-tax benefits is less expensive than leasing.
Consider Moving East – to the Inland Empire. Perhaps Corona, Ontario, Chino or Inland Empire West. There are only 2 buildings (totaling 387,835 square feet) that are under construction in the entire Orange County industrial market.
Consider Renewing Early – blend and extend to get a sense of certainty now. You can always reach out to your landlord early to see about renewing now and securing your rental rate.
Shoot for a Short-Term Lease – if you are a tenant, aim for a short-term lease of 2–4 years so you can catch a potential market correction.
Remember, the pendulum will swing back some day. Be strategic, be informed and learn how to recognize a win.
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