Monthly Archives: January 2012

Lessons Learned From Two Recent Deals

 

We sold the Maple Avenue property last month. The owners went to a lot of effort to make the property market-ready. This included painting both the inside and outside of the building. They installed new ceiling foil, repaired the lighting, spray washed the floors, slurry-coated and striped the parking. The single biggest expense was installing a new concrete yard. During the marketing period all the landscaping was maintained and the building was kept clean. The purpose of all this effort was to make the building look attractive and ready for a buyer to occupy. Because the building looked better than others on the market, we were able to obtain a premium. In today's maket, making sure your building looks good and is in "move-in" condition will result in a reduced vacancy, a better tenant, and higher rent. Owners need to spend money on their property if they want to have good results.

 

Earlier this month we leased the final unit at the Avalon Distribution Center. Not sure if it is worth a celebration because the leasing assignment took over two years. When the project was originally conceived, vacancies were at an all time low and the logistics business was on fire. Our typical user was a freight company who handles cargo at LAX and the Ports. We have a central and freeway-close location to serve both areas. During the recession, cargo volumes dropped, vacancies soared, and many of the smaller freight companies went out of business. What saved this project is its superior design. Loading, ceiling height, fire sprinkler, and cubic capacity made the units very funtional and productive for its tenants. Tenacity on the part of the building owner was also important. Now with the worst behind us, the Avalon project will be the success we originally planned.

 

Positive Changes We Are Seeing

 

We are seeing changes beginning to happen in the thinking and strategies of our clients:

 

Landlords are less willing to drop their rents and to retain poor paying tenants. In the darkest part of the market, since was no leasing activity, a poor tenant was considered better than no tenant. This is no longer true and landlords are taking more chances. Leasing activity was strong at end of 2011 and most brokers are busy. It is a slightly better market and that is enough margin to take a risk. Rents are still low but more tenants are looking for space.

 

 

Many manufacturing companies are completing a fundamental reorganization of their production and storage needs. Those with the resources have replaced manpower with automation and robots. They have also shifted warehousing needs to their suppliers. For instance corrugated packaging and raw materials are delivered when needed. Counter-intuitively, these growing companies actually need less, but better functional space. After several years of trying, these companies have gotten things right.

 

 

With the greatest fears behind us, at least here in the U.S., I am seeing a return to deals that blew up over the past few years. One Buyer with a new equity partner is trying to resurrect a deal that collapsed in 2009. A Seller sees the investment market starting to improve for “B” product and is back looking for Buyers. In a third case, management has finally agreed to take some risk and is looking for land to purchase. I’m not sure any of these deals will come to fruition but in all these cases, we are back in the market (to some degree).

 

 

Property is selling. Not always quickly. And still not at peak prices. But sale prices have come back much better than lease rates. Still, owners need to do the hard work and be proactive. They need to spend money on refurbishment. Solve all the environmental problems. Tear down improvements that need removal. Get entitlements to occupy the property. But if the property is market-ready, it will sell at a relatively generous price.

 

 

I’m also seeing more permanent moves as in a major relocation or a fundamental shift of real estate goals. While short term decisions still persist, more businesses are willing to consider long term commitments. This is reflective of more confidence. And why not? Low interest rates and low prices coupled with improving business conditions is an ideal time to lock up space. It’s hard to make a mistake about paying too much when inflation adjusted rents are half what they were twenty years ago.

 

 

There is plenty of worry and many things can go wrong. Over the past few years many companies have shed debt, reorganized their production, and returned to lean. They are now willing to take a chance at growing. Slightly better financing and a bottom in real estate values are making their decisions easier.

Macro View 2012 and Our Solutions

 

The Macro View

Similar to 2011, this year starts with a favorable outlook. GDP is up, unemployment rates are down and the last quarter of 2011 saw improvement in leasing activity. Development has also returned in some selected areas under a new guise. Industrial developers are preparing sites and building pads with the goal of constructing the building once they secure a tenant. This modified build-to-suit will shave a year off the normal development cycle.

However the downsides of California real estate are still numerous. Not even accounting for the Euro crisis, California has many unique problems that need to be corrected. Unemployment rates are among the highest in the Country. Budget woes have a particular negative effect on the state’s education system. The housing crisis is acute. Local politicians are mostly ineffective and in several of the smaller cities, corrupt. Widening the Panama Canal will drain a significant share of our logistics/warehouse business. Meanwhile many states are aggressively enticing California’s remaining companies with substantially better business conditions. Regulation and entitlement frustrations continue to dissuade businesses from expanding. Finally, Redevelopment Agencies are set to shut down and remove a major prop to local developers. Unfortunately, it is a bleak picture that will not help my brokerage business.

Within the confines of disillusionment, there are pockets and industries that will fuel limited growth. The belief that California will eventually bounce back has many buyers scouring the landscape for deals. We are at a time when mortgage payments are so low that it is cheaper to purchase than rent. This is a positive development for a steady, cash-flowing business. From a brokerage standpoint it is substantially easier to sell a building than to lease one.

On the investment side, fully rented properties especially those with good credit and stable tenants are selling at high prices. Even at low cap rates these properties provide stability compared to other investment alternatives. Likewise, new buildings with good industrial design are benefiting from the fear factor. These class A buildings will be the first to lease. Conversely, anything with risk, vacancy, or poor attributes are very difficult to finance in light of a faltering California economy.

Looking forward to 2012, it will be a challenging but not impossible year to strive. By using 2009 and 2009 as a benchmark, this will be the the third decent year in a row.

Solutions for 2012

Our focus is industrial buildings and infill land. Historically, our region has been in the South Bay area that includes the Ports and Airport. During the boom period before the financial crisis, we spread our land efforts throughout the greater Los Angeles area. In that period any vacant property or underutilized building had a buyer for industrial repositioning, housing, retail, education, religious, retail, self storage, and many other myriad uses. In order to deal in a much wider area, we developed a GIS program to search for property. We called the program MAPP and more details can be found at https://kleincom.com/?page_id=9. Over the past year we expanded the program to include all boroughs of New York City and soon we should have close-in New Jersey. The purpose is to selectively pick off deals in these areas, and other parts of the country, much like we have throughout greater Los Angeles. Currently we are moving the MAPP program to an on-line version to better collaborate with our customers. By the end of the year, we should have the entire MAPP program on-line with a version available on mobile devices that will be GPS enabled.

As the bottom fell out of the Los Angeles market, we saw the demise of many promising developers. Once the credit squeeze started, many of these builder clients shut their doors. Searching for business, we made the decision to return to our roots while at the same time looking for other opportunities. Opening the office on Gardena Boulevard has given us the ability to be with many of our longstanding clients in the South Bay. Being located in the new office has made it easier for us to meet customers and help clients with their immediate real estate goals. Gratefully, we attribute a substantial part of earnings this past year to drop-in customers.

Technology has greatly changed the brokerage business. Information about available property is widely available on many Internet sites. At a certain level ubiquitous information has made brokers irrelevant. However, with fluctuating business conditions, there is even a greater need for brokers who can be trusted to get the deal done. By combining our local ability in Los Angeles with a tool and relationships to understand markets outside of the region, it explains how we are able to sell buildings and land here in Los Angeles, but also dispose of sites in North Carolina and in New York.

Please visit us in the new year to discuss your real estate plans.