Data Driven Leasing 201
This weekend I was reviewing an article from the Corporate Real Estate Journal's recent publication . The authors, one of which is Alison Baumann of CompStak whom I co-hosted a fireside chat with last year and is brilliant, put together an exhaustive set of ways to utilize market data to ensure you make the best informed decision you can when putting together an industrial lease deal. It was so good I had to share it with you all. Much of this I covered in my first book Industrial Intelligence , although I think they did an amazing job here and you would benefit by seeing the methods broken down one by one below. Enjoy!
Method 1: Analyzing Vacancy by Building Size
* Purpose: Reveal hidden market conditions beyond general vacancy statistics. * Why It Matters: Overall vacancy figures can mask significant variations based on building size, type, or submarket. * Example (Inland Empire): + Market vacancy: 8.5% + Buildings >1 million ft²: Extremely low vacancy + Mid-size buildings (200k-500k ft²): ~12% vacancy, significantly softer market * Action: Always segment vacancy data by building size to assess your true negotiating position accurately.
Method 2: Estimating Mark-to-Market Using Asking Rent Data
* Purpose: Quickly determine if your current lease rent is below the market. * How to Implement: + Compare your lease rent (with built-in escalations) to current asking rents in the market. + Estimate percentage below current market value. * Practical Example (Atlanta): A 60,000 ft² lease signed in 2019 with standard 3% annual escalations could be 40% below the current market rent. * Insight: This quick analysis helps in renewal negotiations, lease terminations, or relocation decisions.
Method 3: Evaluating Future Supply Conditions
* Purpose: Understand short-term market supply risks by analyzing new construction. * Key Metrics: + Construction pipeline as a % of existing inventory + Speculative vs. build-to-suit construction ratio + Pre-leasing rate of speculative space * Case Study (Phoenix): + Speculative construction could push vacancy to 17.7%. + Indicates significant near-term tenant leverage. * Action: Use this data to time lease negotiations strategically or renegotiate current leases.
Method 4: Forecasting Absorption with Economic Indicators
* Purpose: Predict market absorption using macroeconomic data (e.g., GDP, consumer spending, employment). * Methodology: + Identify regional economic growth projections. + Estimate future net absorption rates. + Cross-check these estimates with construction pipeline data. * Example (Charlotte): + Historically, employment growth and net absorption correlated (2.0-2.5% annually). + Provides strong basis for predicting future market conditions. * Benefit: Enables proactive leasing strategies aligned with projected market demand.
Method 5: Calculating Effective Rents for Accurate Lease Costing
* Purpose: Identify the true occupancy cost of leases beyond starting rents. * Critical Components: + Starting rent and annual escalations + Free rent periods + Tenant improvement allowances (TIs) * Example Scenario: + Landlord-favorable terms (higher escalations, fewer concessions) versus tenant-favorable terms (more concessions, lower escalations). + Effective rent calculation highlights true lease affordability. * Insight: Effective rent clarifies negotiations, allowing tenants to compare leases on an "apples-to-apples" basis.
Method 6: Utilizing Lease Comps to Identify Market Trends and Opportunities
* Purpose: Use actual lease transaction data to understand market shifts ahead of broader statistics. * Key Indicators from Lease Comps: + Changes in effective rents + Length of rent-free periods + Average lease terms * Real-World Examples: + Philadelphia market: Rising concessions despite stable headline rents indicate softer conditions. + Los Angeles-Inland Empire: Shorter lease terms suggest tenant desire for flexibility in uncertain times. * Action: Analyze recent comps frequently to recognize shifting market dynamics early, empowering better negotiation leverage.
Method 7: Assessing Property Tax Reassessment Risk
* Purpose: Manage risk in pass-through expenses under triple-net (NNN) leases. * How to Evaluate: + Review property tax assessments over recent years. + Compare assessment increases with market-value trends. * Example (Atlanta): + Property assessed value increased 79% in five years, closely tracking market values. + Indicates lower future reassessment risk. * Benefit: Reduces risk of unexpected increases in occupancy costs due to sudden tax reassessments.
Conclusion: Using These Methods for Strategic Advantage
* Overall Insight: Understanding and applying these methods empowers tenants to navigate volatility strategically, rather than reactively. * Actionable Advice: Regularly integrate vacancy segmentation, effective rents, lease comps analysis, and reassessment risk evaluations into your real estate strategy. * Long-term Benefit: This approach ensures better-aligned real estate decisions, cost control, and resilience in fluctuating markets.
What does this mean for you and your property? That's where the fun begins. If you have a specific location that you need to analyze, shoot me an email, call or text and me and my team will get right on it and get you what you need. Talk soon.
Best Regards,
Justin Smith, SIOR MBA, MRED, MCR, MSCM Candidate Senior Vice President | Principal Lee & Associates | Irvine
D 949.790.3151 C 949.400.4786 O 949.727.1200 jbsmith@lee-associates.com (mailto:jbsmith@lee-associates.com) ____________________________________
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