Southern California’s industrial real estate market is a mismatch akin to a Wild West standoff. Owners tend to remember the booming demand of early 2022 while tenants are experiencing a downturn. (Getty Images)
In order for a real estate transaction to close — whether it is a lease or a sale — a properly motivated buyer and seller must be present.
By this I mean you need an owner ready to make the next deal and an occupant who’s kicked the tires and is prepared to sign. Ideally, these motivations mesh into a synchronicity that is melodious.
Southern California’s industrial real estate market is a mismatch of expectations. Owners tend to remember how things were in early 2022 when occupant demand was robust, inventory was scarce, and interest rates were affordable.
Folks who lease and buy these buildings perceive the opposite — a downturn in their business (less need for space), more addresses sitting vacant for longer, and borrowing costs that have doubled. A standoff akin to an Old West gunfight has ensued.
Fortunately, no one will be bodily harmed in said showdown. However, owners late to the fight may suffer financial losses.
Today, I’d like to discuss our biggest task as commercial real estate brokers. That is educating owners and occupants to current market conditions.
Understanding market dynamics
To grasp the current state of affairs, we need to delve into the factors shaping the industrial real estate market in Southern California.
In the recent boom, investors favored constructing large warehouses for logistics operators, who primarily lease these spaces. Initially, the demand surged as online shopping soared, prompting distributors to expand their inventory storage.
However, as the frenzy settled, warehouses across all submarkets now sit vacant, competing for tenants.
While reducing rental rates seems a logical solution, constraints like promised returns to investors or fixed cost structures complicate matters.
Challenges faced by owners
Owners are grappling with the challenge of reconciling past experiences with present realities.
Many are holding onto outdated expectations, hoping for a return to the heyday of early 2022. However, failing to acknowledge the shifts in demand, supply, and financing could lead to missed opportunities and financial losses.
Perspective of occupants
Occupants, on the other hand, are feeling the impact of changing market conditions firsthand.
With businesses adapting to new norms and uncertainties, the need for commercial space has shifted. This shift in demand has implications for leasing and purchasing decisions, as occupants navigate a landscape fraught with uncertainties.
The broker’s role in education
As brokers, our role extends beyond facilitating transactions; we are educators and advisors.
Providing owners and occupants with comprehensive market insights, backed by data and analysis, is essential for setting realistic expectations and making informed decisions. By bridging the gap in understanding, we empower our clients to navigate market shifts with confidence.
Synchronicity and moving forward
Ultimately, success in commercial real estate hinges on collaboration and adaptability. By fostering open communication and collaboration between owners and occupants, we can work towards mutually beneficial outcomes.
Embracing flexibility and adaptability allows us to navigate market shifts and seize opportunities as they arise, paving the way for continued success in an ever-changing landscape.
Education of owners and occupants is key to success in commercial real estate. By equipping buyers and sellers with the knowledge and insights needed to weather market shifts, we can bridge the gap in expectations and reach agreement.
I’ve often opined: Allow the market to be the bad guy. If I tell an owner: Here’s how it is, I’m asking that reliance’s be placed on my experience and credibility. I could be wrong. However, if we engage in a process of discovery, the market is sending the feedback.
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. .