Industrial Space Sets the Pace in Commercial Real Estate

The growth of the U.S. industrial real estate market finished strong at the end of 2014. The year posted an astounding “19th consecutive quarter of falling vacancy rates to reach its lowest national level in nearly 14 years, ending 2014 at 7.2%,” as stated by CoStar.  2015 promises to be yet another banner year for the industrial market.

Demand for Industrial and Commercial Space is on the Upswing

The anticipated 3.5% rise of the gross domestic product (GDP) in 2015 –  due to more people landing new jobs and overall wage increases –  will have a direct impact on the industrial real estate market.  Predicted is a fall in vacancy rates and a rise in rents. However, the expectation is that this pace will decrease as the year goes on and construction catches up with demand.

CoStar goes on to say, “GDP is considered a primary driver of demand for industrial space because its components — online and brick-and-mortar consumer spending, businessspending, homebuilding, exports and imports — all generate activity in the warehouse and logistics market.” California industrial real estate markets are among those growing at a fast pace.

Vigorous job growth combined with elevated consumer confidence is ramping up the construction appetite for not just warehouse space in six major California markets, but also multifamily and office space. This trend is expected to last through 2017.

“The forecast is optimistic for commercial real estate once again, and is expected to remain solid for the next few years,” says Jerry Nickelsburg, adjunct professor of economics at UCLA Anderson School of Management and UCLA Anderson Forecast Senior Economist. “Developer sentiment in general is buoyed by a recovering economy, job market growth and increased imports through California ports.”

Preference Shows Build-to-Suit and Warehouse Space

“Industrial demand remains hot for all types of industrial and commercial real estate space – fulfillment/distribution center, warehouse, manufacturing, and flex,” said Thomas J. Bisacquino, President and CEO of NAIOP, the Commercial Real Estate Development Association.

Structures in the industrial sector owned by manufacturers are plants or factories, characteristically using power-driven machines and materials-handling equipment.  Whereas warehouse space often serve as distribution and order picking facilities, which fall into four main categories – private, public, automated, and climate-controlled.

While some commercial industrial buildings are built specifically for a single user, many are built as part of an industrial park on a  build-to-suit basis. These buildings are constructed for a range of reasons, including:

• Companies with aged or outdated facilities want new facilities to allow for updated processes
• Firms are relocating their facilities to more desirable markets
• Companies require more space as their businesses grow
• There are new products to manufacture or process
• Multi-plant companies are expanding
• Multi-plant companies are consolidating several smaller plants into a large, single facility

Right now industrial preference in the U.S. favors smaller warehouses, in both new and existing space.

Employment Heads Demand for Commercial Office and Retail Space

Commercial office space demand is fueled by professional employment trends. Additional factors apart from the number of employees influence space demand. These factors include workspace utilization levels, related rent levels and cycles, tenant type, employee attrition, company growth rates, and general culture.

There is a particularly compelling trend steering the demand for commercial office space. It’s called “live/work/play” and it’s not just real, it is statistically significant. The rebirth in urban living – especially downtown living (downtown where? NY, LA, SF?) – is boosting secondary office markets throughout the country. What’s interesting is that this drive towards downtown office space is coupled with a call for high quality work environments that don’t cramp the millennial generation’s working style. The layout and design of the urban office space is being used more and more as a recruiting tool to get millennials in the door. This group – quickly gaining seniority in the workforce – wants flexibility, open spaces, variety, and access to amenities in their office life. Redevelopment is rampant, but it is not always easy to morph older, existing space into the new trendy look and feel.

There’s no doubt that the influence of Millennials can be felt in all industries, but the impact is enhanced in the commercial real estate industry.  “We get to create and deliver spaces that are not only in demand but innovative, and this not only aids in recruiting new workers but in obtaining and retaining tenants. It’s a win-win,” says Jerry Jacquet, a Principal at Meissner Jacquet Commercial Real Estate Services in San Diego.

The ERA prepared demand forecasts for various land uses in California, including San Jose, Los Angeles and San Diego region, spanning from 2010 to 2030. In the study, the forecast calls for the commercial office space demand low to be 2,369,200 square feet by 2030 and the high to be 3, 625,400 square feet.

In commercial retail space boomers are having a similarly strong influence, especially in the burgeoning need for medical space.  In investment surveys, these spaces have been seen as a “buy” for 2015 by 36.3% of respondents, and a “hold” by 40.6%, with only 23.1% advising “sell.”  That being said, investment and development in the commercial retail sector ranked lower than industrial or office sectors in the same survey.  The ERA survey put the retail space low at 204,500 square feet and the high at 322,400 square feet.

Reshoring and Structural Demands Drive Industrial Growth

“There is still plenty of upside for the commercial industrial market, particularly for rental growth. Both cyclical demand drivers—GDP growth and expanding manufacturing sector—and structural demand drivers—e-commerce and supply chain evolution—will promote strong user demand across geographies and product types,” said Scott Marshall, Executive Managing Director, Industrial Services, The Americas, CBRE.

Take a look at the stats in the graph below from CoStar on industrial real estate inventory, published by NAIOP in the summer of 2014.

The demand for commercial industrial space is evident at the local level in San Diego, where the job hike and the recuperating economy are strengthening market fundamentals. “The industrial market in San Diego saw near pre-recession lows in vacancy with positive indicators across the board in 2014. The recovering economy, the reshoring of many industrial-related manufacturing jobs, the defense sector obtaining both new and renewed contracts, as well as recent big investments in the biotech sector have all fueled confidence in the market,” said John Frager, Executive Managing Director for CBRE San Diego. “In 2015, we expect to see continued big sale price appreciation, significant lease rate appreciation, and more spec development.”

Sources:

UCLA Newsroom

NAIOP

Costar.com

Meissner Jacquet Commercial Real Estate Services

The process of buying or selling commercial real estate can seem overwhelming. However, with the right processes and trusted advisers, these transactions can return positive gains for investors.

Reasons to Acquire a Commercial Property

Commercial real estate is purchased for a variety of reasons, including the ability to:

• Decrease capital costs
• Lower overhead costs
• Institute production improvements
• Accomodate company growth
• Maximize recruitment efforts by relocating to a desirable submarket
• Invest in an upwardly trending property to maximize return

Whatever your reason for acquiring commercial property, it’s a detailed process.  Before any purchase, the buyer must align the purchase with their business initiatives, needs, and operation profile. Many times, commercial property is purchased with tenants – and leases – already in place.

Finding the Right Commercial Real Estate Representation

There are many players involved in the purchase and sale of commercial real estate. That is why it is paramount to secure the right representation. Commercial real estate agents and brokers are knowledgeable and can provide market-specific insight.  In addition, a commercial property management firm can offer unbiased advice and act as the buyer’s or seller’s representation.  In many cases a commercial real estate management firm offers corporate services, including acquisition / disposition due diligence, financial and accounting services, and lease administration.

Document Review

Once you have the right representation, it is time to turn your attention to analysis of the subject property – due diligence should include inspection and document review, among others.

Generally, when performing due diligence, document review should include information about:

• Zoning uses and restrictions
• Property history, including previous sale data
• Special land features including potential erosion, avulsion, falling debris, and possible hazardous substances
• All utility information, including water and sewage
• Any liens or unpaid property-related bills
• Certificates, notices, orders or requisitions that affect the land or buildings

Investor Structures

Purchasing commercial property comes with options in structuring ownership.

A sample list of ownership structures includes:

• Buying as an individual
• Buying through a partnership
• Buying through a company
• Buying through a trust

Before purchasing, every investor should obtain clarity on:

• Available loan amounts
• Loan-to-value percentages
• Terms (eg. 5, 10 and 15 years) and amortization length
• Variable vs. fixed rates
• Payment estimates that include principal and interest

Professional advisers can help you determine which option is best for you, the property and your individual circumstances.

Commercial Property Legal Representation

Of course before you make any offer, consult a legal professional. Your lawyer, along with the commercial real estate adviser managing the sale, will aid in reviewing the sale documents, terms and conditions, along with interpretation of any existing tenant leases, and instruct on any related tax issues.

Before making an offer, it is in your best interest to make it subject to certain conditions (laid out by both buyer and seller), such as favorable finance options, and approval of the terms and conditions of any tenant’s lease. Agree on a date – in writing – when you want  your conditions met. Also, stipulate that no other party can purchase the property unless the conditions are failed to be met by an agreed upon date.

Steps to Sell Commercial Property

The first step in selling property of any type is determining its value. Included in this process is identifying comparables from the property’s submarket to aid in valuation and calculation of actual and potential income. Areas to address include finance options, maintenance records, environmental reports, and detailed data on the surrounding area. This adds up to a substantial amount of paperwork, some of which takes a considerable length of time to compile. Again, bemoaning the reason of why it is beneficial to contract with a professional.

Meissner ​Jacquét Commercial Real Estate Services, a San Diego-based firm, offers Acquisition / Disposition Due Diligence services to its clients.  Jerry ​Jacquét , a Principal at Meissner ​Jacquét , has worked with numerous clients during their due diligence processes and says that, “not performing due diligence before any purchase or sale can wreak legal and financial havoc for an investor.”

Processes Validate Buyer Interest

Performing document review and initiating analytic processes aids in keeping the sale on track, and validates the buyers’ interest in the property.

So how can you get started? First, collect all necessary paperwork that validates ownership, property standing, and fulfills the buyer’s requests. These records will also substantiate your claims regarding the property.

According to Receivership News (a publication of  the California Receivers’ Forum), the following documents should be included in that collection:

• Site plan
• Lot size and zoning information
• Architectural drawings
• Photographs (both aerial and ground level)
• Legal description
• Title commitment
• Narrative portions of an appraisal
• Capital expenditures (details of last 3 years, current and planned)
• Real property tax bills (last 2 years and current)
• Governmental inspection reports (description and status of any violations)
• Utility bills (one year)
• Licenses (description and name of licensed entity)
• Lease(s), sublease(s) and/ or operating agreement(s)
• Service agreement(s) (cancellation rights/penalties)
• Occupancy information (current YTD and last two full years, both detail and summary information)
• Competitive market analysis
• Furniture, Fixtures & Equipment inventory
• Environmental study – Phase 1
• Life and safety information/inspections
• Floodplain information
• Income Statements (current YTD and last two full years, both detail and summary information)
• Balance Sheet (current and last two YE, both detail and summary information)
• Ground Lease

Make it Shine

Putting your property’s best foot forward is an important step towards selling it. Make efforts to institute cost-effective repairs both to the physical structure and surrounding land.  Easy fixes include, fresh paint, minor plumbing repairs, system checks, landscape refresh, pressure wash walkways, window cleaning, and parking lot re-stripe.

The Nuances of the Sell

Find and hire representation that specializes in commercial real estate, then compile a list of the property’s highlights. Catalog all of the aspects that make it unique, appealing and profitable. Be very descriptive. Be sure to investigate the current zoning allowances as these change from time to time. New allowances could make your property even more valuable.  An experienced commercial real estate agent/broker will market your listing in all the usual places, but will also be creative and think outside the box to find all available selling opportunities.

Financing options need to be vetted carefully.  What if you still have a mortgage on your property? Check your loan papers carefully for potential early payoff penalties and parameters around assumability of the loan. Both will impact what you need to ask – and get – for the property.

The Bottom Line

The bottom line is – do not leave any room for error, unanswerable questions, negative financial or legal surprises, or apathetic buyers.

Sources:

• California Receivers’ Forum
• US Bank National Association
• California Business Properties Association
• Meissner ​Jacquét Commercial Real Estate Services

Well-honed procedures determine the difference between mediocre commercial property management and great commercial property management. And the natural outcome of excellent commercial real estate management is a successfully performing asset with solid returns. The right processes can help mitigate unexpected maintenance or budget cuts.

Well-crafted operations go beyond just following a series of steps – they create consistency and a go-to guide in cases of emergencies.  While inferior processes make for extra work hours, additional expense and confusion.

The fundamental responsibilities of a commercial property management firm are to establish innovative, practical, and cost-effective solutions to property issues.  The goal is to increase ownership’s return on investment, which can only be achieved with the best possible results in accordance with an owner’s business plan and goals.  Relevant solutions call for proven procedures.

Tim Meissner, a Principal at Meissner Jacquét Commercial Real Estate Services, a San Diego-based commercial property management company, says that “effective management is a by-product of effective processes.  We have instituted detailed procedures to ensure complete oversight – our management and accounting teams have checks and balances to achieve superior results.”

Commercial property managers have the considerable responsibility of providing, maintaining and developing a wide spectrum of services. These services range from enacting ownership’s business plan and investment objectives, site management and preventative maintenance, client relations, tenant retention and satisfaction,  accounting and reporting, and vendor management.

Comprehensive, successful commercial property management processes should aspire to outperform the client’s expectations.

Unquestionably, effectively combining processes with the appropriate resources is vital to the success of any business’s health. Effects can be felt at the executive level by achieving strategic and operational objectives. On a mid-management level, proven systems can create a safe and effective working environment – a must have for the well-being and performance of any business, no matter what the size or function.

Resource management is key to running the operations of any commercial property. An effective property management team not only identifies what needs to be done to maintain a property at optimal level, but it also performs extensive due diligence to ensure appropriate resources are in place so that the property operates at peak performance.

Designing and implementing a commercial real estate management process that is unique to the property requires a structured framework that will allow the management of the process to become second nature to those responsible for carrying it out.  Vendors including security, HVAC, janitorial, and landscaping, all require a detailed maintenance schedule to ensure that services are performed consistently and correctly.

Professional commercial property management firms institute proven processes, techniques and practices, including the methods, systems and resources to manage:

• Construction projects
• Property operations
• Vendor management
• Maintenance  & technology systems

A crucial component of a successful commercial property manager’s process is to keep the owner informed at every level, including:

• Conducting regular site inspections
• Providing detailed property reports
• Supplying accurate and timely financial accounting & reporting
• Delivering maintenance recommendations
• Providing communication regarding tenant retention and satisfaction

Realization of long-term goals are achieved by staying current in industry best practices and trends, maintaining the proper credentials, attending leading industry conferences, and staying abreast of:

• Regulatory issues
• Current technology & equipment
• Energy management & sustainability issues

The sum and substance of the processes a commercial property management team enacts separates performing properties from non-performers, and can have a direct impact on a property’s bottom line. By adhering to proven procedures, instilling firm checks and balances, and constantly testing and measuring, you can set up your commercial property for success.

Sources:
National Property Management Association
IREM
Meissner Jacquét Commercial Real Estate Services