Never have we seen such staggering prices being paid these days. And, never is a long time!
So, when will prices return to normal? And what is normal? Bear with me as we dissect the topic.
Think of prices as a conveyor belt or a motorized sidewalk, like the ones at giant airports. You hop on at a point and continue to ride. But, it’s a continuous loop. Those who entered early, say in 2010, have seen massive appreciation in the value of their purchase. If you jumped into the fray last year, we shall see. But it all starts with pricing — the basis or starting point of your buy.
Commercial real estate, whether it’s retail, office or industrial, carries with it a number. As brokers, we typically talk in terms of prices per square foot. Sure, owners and occupants also might consider these figures, but they are most frequently concerned with the total.
As an aside, early in my career, I prepared for a tour of leasing alternatives. I carefully memorized all of the lease rates. When the client asked what amount was to be paid monthly, I sheepishly deferred to my HP 12-C calculator for the answer.
To add some context, 50,000 square foot industrial buildings were plentiful in 2010 for well under $5 million (or $100 per square foot for you brokers out there). Sure, in the bowels of SoCal, you might be thinking. Nope, I’m talking Anaheim. A decade ago, just along the stretch of East La Palma between Kraemer and Imperial there were 12 such properties. Now? You’d be lucky to find one for under $15 million!
You might be wondering. What’s causing the astronomical rise?
Certainly, cheap money is a culprit. You see, when an occupant can borrow 90% of the purchase price from the Small Business Administration and have the first six months of payments forgiven, tremendous buying power is unleashed. Couple that with an obscenely low supply of buildings to buy and voila — the perfect storm of appreciation.
Next, returns on capital are puny. Even though we’ve seen an uptick of 10-year Treasury yields this week, 1.6% is still anemic. Wild stock market gyrations spook investors, too. Commercial real estate becomes a safe haven. As these well-heeled groups compete – once again – for skimpy availabilities, the upward march continues.
Companies who can’t or choose not to buy are forced to rent. A similar competition ensues for vacant lease alternatives, which are rare. As an example, if your goal is to lease a new, 100,000-square-foot spot in north Orange County, you have ONE choice and construction is not complete.
In the past, when pricing got crazy, you could head east to the Inland Empire. Now, even the IE is no bargain. We represent a well-qualified -commerce outfit looking to buy 200,000 square feet. Recently, we pursued a site under construction. Our full-price offer was countered with a higher number, an unwillingness to allow a financing contingency and an enormous non-refundable deposit request. Next!
So, to the question. When will this insanity end? The answer is: when one or all of the aforementioned scenarios shift. We’d need something cataclysmic to occur to return to a normal 5%-6% vacancy – such as a pandemic. Wait, we already had one. Hmmmm …
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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