Reasons to Sell - The Sale Market

Since June of 2020, the industrial real estate market - manufacturing and logistics buildings - has been on turbo-charge! Anything for sale - regardless how ludicrous the asking price might appear - is met with multiple offers, bidding wars, and one group of winners - sellers!?

As buyers go - we’ve witnessed an owner occupant’s ability to compete with investors wane and a flip in the “occupant premium” once experienced. If you don’t recall the meaning of occupant premium - here is a brief refresher. Occupants - companies that own the locations from which they operate - once could pay about 20% more than investors - those reliant upon rental income produced by the location. Utility, financeability, and rent savings were the main three reasons occupants could pay more. The downside of the higher prices paid, however, was the uncertainty of financing contingencies. If the occupant couldn’t get a loan - the deal could crater. But, now that rents have increased exponentially, investor capital is abundant - downright voracious - and most investors buy without needing bank involvement - the tables have turned. Our paradigm has shifted! Now, investors typically pay way more than occupants.?

Rarely, would an investor buy a vacant building and rely upon their ability to rent it in a timely manner. Not that long ago, a steep discount would be negotiated for buying an empty site. After all, such things as downtime, free rent, improvements to the real estate, and brokerage fees had to be estimated and deducted. A long term lease found favor with investors. If this lease had to be originated, an investor would pay less. Now? Shorter termed leases or empty buildings are preferred. Because the market rate can be captured. If an under market agreement is in place - it could take years to ramp up the rate to prevailing levels. In fact, product is in such short supply and capital is searching for a home - we’ve encountered a new deal structure - “the forward”. Simply, investors are lapping up “planned” projects prior to them breaking ground! Amazing.?

With that update as a preamble, let’s discuss some reasons why sale opportunities pop-up these days.?

Business operation is sold which yields the location an excess. One of the most common circumstances today, which creates a need to sell, is the sale of the business occupying the premises. Some owners opt to retain and lease to the new entity but many cash in the chips.

Fund matures. Many instructional investors set up pools of money with sunset clauses. Simply, at the end of x years - the fund is set to liquidate and return the capital investment. You may be wondering what happens if the fund matures in a down market. Is the sale forced? Generally, the administrator has some latitude to move the sale date up or back to account for market fluctuations.?

Merchant builders. Some developers like to acquire land, build, and sell. These function much like new home builders. They like to keep the money turning.?

Liquidity event. Death of a principal, a bankruptcy, imminent domain, or partnership squabbles - all can force the sale of a piece of commercial real estate.?

At these prices - why not? Finally. Much of our sale activity in 2022 is on an unsolicited basis. See a property you like - that’s not for sale - and submit an offer to buy it. Easy. After all, everything is for sale at some price, right? Akin to casting off the Balboa pier in the hopes of a catch - this manner of scarring up deals is terribly time consuming and inefficient. For myriad reasons, these Hail Marys rarely land. But, it only takes one or two.?

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at [email protected] or 714.564.7104. His website is allencbuchanan.blogspot.com.