Time to Lock In

Executive Summary

We are in that window between the end of summer and the start of the holidays. This is prime deal-making time. If you have been waiting for pricing to soften, this is your moment as a tenant, as free rent is rising, subleases are plentiful, and we may be near the start of lower lease rates. We’re seeing a lot of tenants and business owners in transition between upsizing, downsizing, terminating leases, threatening bankruptcy, consolidating, moving out of state, and moving out of the country. It is in these times of transition when it pays to do your homework.

Tenants – Time of Transition, Hard Decisions

• Downsizing vs. Subleasing vs. Termination
  • You are likely facing this challenge if you are in a renewal situation and business is slow. Is it better to have your rate go up 50% in order to stay in a larger building, or have your rent go up 25% and move into a smaller building but incur the cost of moving?
    • If you stay in your larger building, you may have room for growth when this market turns around, and we can help you sublease excess space, which is possible but not without its risks.
    • If you move to a new, smaller building, you will get more concessions from your new landlord trying to attract you to their property, but you will have to move your employees, disrupt your operation, and likely make new capital investments within the new property, and incur the cost of moving.
    • Here, we help you create realistic options and weigh the decision through analysis of timelines, reoccurring and one-time expenses, and then help you negotiate the most favorable lease deal that aligns with your vision, goals, and objectives.
    • Lastly, many companies in transition are doing so at the end of their lease and in the middle of their lease. This takes a delicate hand. Here, you have to factor in our ability to sublease your current space or negotiate a termination with your landlord. Terminating your lease isn’t as simple as having your attorney call theirs. It usually requires that we work to sublease your space and, in the course of doing so, attract a new 5-10-year tenant interested in doing a direct deal. Then, we negotiate with your landlord a termination of your lease in exchange for signing a new lease with the new tenant. While this requires more work on both parts, it results in the ideal outcome of being let out of your current lease free to grow.
• Moving Out of State
  • We work on 5-10 assignments a year across the country for corporate accounts. Moving out of state is viable for a lot of businesses. This takes the normal real estate leasing and acquisition work we do for clients and elevates it based on having to evaluate different operating environments in each state and metropolitan area to make an informed decision. Moving to Las Vegas and Phoenix are common alternatives for Southern California companies. Increasingly, companies are also looking to the Central Valley. For national companies, we help with the regular decisions to enter and exit different markets with their regional implications.
    • Network Optimization Studies
      • One of the first steps for clients to reorganize your supply chain and distribution network is to work through a network optimization study. Here, we help you negotiate an RFP with multiple independent consultants, who, once selected, will go through your inbound and outbound freight, look at all the parcel carriers, and look for opportunities to minimize time in transit and largely to reach their customers quicker. Freight expenses used to make up 3X the cost of overhead; however, with the increase in labor and real estate expenses, all three have a very real impact on your company’s success.
    • Labor Analysis
      • Labor analysis helps us identify which markets have the right labor for your operation. Technical, skilled, engineering, and unskilled labor, union vs non-union implications, educational attainment levels, affordable workforce housing, commuting times, wage rates based on skill level, highing environment, and more. Being able to compare labor markets along with network optimization and real estate will give you the confidence you need to press ahead.
    • Economic Incentives
      • Once we have widdled down the market that is favorable for us to serve our customers and land our distribution center or manufacturing plant, it’s time to secure property and secure economic incentives. The economic incentives dance requires knowledge players to reach the right state, county, and city economic developers at the right time and with the right package of information focused on how your company is going to create jobs, invest capital, and build infrastructure. Here, it pays to know which move to make and when and how to follow through, as many incentives require ongoing monitoring and auditing to reach performance thresholds for additional funding.
• Nearshoring
  • Lastly, we have companies looking to move their supply chain down to Mexico. This might be as an alternative to California, an alternative to China, or an alternative to Arizona, Texas, Alabama or another manufacturing hub. Here, we help you get smart on what it takes to locate in Mexico, as different laws, customs, and sensitivities are needed to succeed. Here, we work with you and one of the top 20 SIORs who service different regions within Mexico and connect with economic development consultants to flesh out how feasible the move is and what the realities are of operating there.

Landlords – Class A Cools, Flight to Class B

• Class A absorption is down in Los Angeles, Orange County, and the Inland Empire.
  • Los Angeles – Net absorption was negative for the fourth consecutive quarter.
  • Orange County – Net absorption is negative YTD
  • Inland Empire – Net absorption was negative this quarter for the first time in 14 years, although still positive YTD.
• Rent Growth
  • Los Angeles – 16.2% increase YTD – Rents have peaked and are expected to decline now that new construction inventory delivery is at peak levels and not yet being absorbed.
  • Orange County – 9.9% – Rents are only projected to soften slightly based on a lack of new construction pipeline that is already decreasing.
  • Inland Empire – 7.9% increase YTD. Rents are projected to decrease as the construction pipeline is at an all-time high, with deliveries still at peak levels.
• Sublease Inventory – IE > LA & OC Combined
  • Los Angeles – Although sublease space grew 21.2% from Q1 2023 to reach 6.3 million, it pales in comparison to the 12.5 million SF peak of the last cycle.
  • Orange County – Although sublease space is up to 2.8 million, it is not too far from the historical trend line of 1.8 million. And this is roughly 60% of the 2009-2011 sublease peak in the last cycle.
  • Inland Empire – 13-year high with 6.7 million SF available for sublease. This includes about 1.1 million of preleased space. Interestingly, this is still below 2009-2011 levels. Considering the inventory has grown substantially, this should keep increasing slightly.

Sale Comps

Sales are still happening despite the bid-ask spread. Most investment buyers perceive that the industrial markets have not adjusted and that there is room for price decreases, but with the leasing market growth rates still posting positive numbers, price adjustment has been modest. That said owner/user purchases and SBA loans are continuing to trickle. Here are the latest owner/user, sale-leaseback, and investor sales comps. 

Media

• Book #1
  • Industrial Intelligence, The Executive’s Guide for Making Informed Commercial Real Estate Decisions
    • Audible / Audiobook Now Available!
    • Buy Paperback & Kindle
• Book #2
  • Industrial Income, The Investors’ Guide to Maximize the Value in Commercial Real Estate Leases
    • I’m currently targeting a publishing date of January 1, 2024, after my prior publisher went through a change of ownership and imploded. Thankfully, the editor-in-chief from my old publisher went out on his own and took me under his wing. I’m going through the last round of editing and approvals this month, and then it’s fit for print. We’ll have a marketing campaign this next quarter, so I’m sure you’ll see more news of its launch.
• Podcast
  • Subscribe to the show or listen to individual episodes here.

We’d love to catch up with you and brainstorm how we can make your goals come to life.


Best Regards,

Justin Smith, SIOR              Grant LaBounty                     
jbsmith@leeirvine.com         glabounty@leeirvine.com        

Chris Vassilian                     Jeannette Cano
cvassilian@leeirvine.com     jcano@leeirvine.com

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