Tag Archives: Brokerage



Over the summer we created a commercial real estate mapping application that combines the important commercial real estate information  for Los Angeles County in one place. It is designed to help buyers, tenants, developers, and investors get a spatial view of the real estate commitment they are about to make. We call this map application MAPP 1.0.

MAPP 1.0 combines source data from the following areas:

  • Parcel Data including all relevant Assesor information and shape files.
  • Aerial Photography superimposed over the parcel data.
  • A proprietary database containing all Tenant, Owner, and Available Property information.
  • Zoning from the largest municipalities in the County (more is being added weekly).
  • Special  districtsthat allow for high density development.
  • Custom fields describing the investment quality of the buildings, the potential for infill development, and field notes.

While additional source data is being added for more functionality, MAPP 1.0 can quickly identify the primary attributes of every property in Los Angeles County. The initial focus is being placed in our specialty areas of larger industrial buildings and infill development. Our 30 years of brokerage experience has demonstrated that sometimes the perfect property is listed on the open market, however more times than not, it takes searching the off-market to locate the more perfect opportunities. For instance, MAPP 1.0 can locate all development sites within 500’ of a Metro Rail stop and determine the likelihood of a purchase. We can identify every rail-served parcel in the County for those businesses that require rail service. MAPP 1.0 can find older teardown properties that are ready for redevelopment.  For marketing property, if you have a 100,000 square foot building, we can locate every tenant in a smaller building and quickly generate a list of prospective tenants.

While we are immediately working on upgrading MAPP 1.0, we have developed a unique and powerful real estate app. We would like to demonstrate MAPP 1.0 and put it, and us, to work for your next commercial real estate decision.


Tenants Are the New Opportunity Buyers

Tenant decision making has radically changed since the Great Recession. The combination of low interest rates and falling prices mean that mortgage payments are the same as or less than rent.  This has been a fairly rare occurrence over my 30-year career. Tenants with established histories are finding some great bargains. Even companies that may have difficulty obtaining loans and lack large down payments can team with sophisticated investors to solve many financing hurdles.
Searching for deals was once the domain of shrewd real estate operators, but uncertainty, credit and legacy problems have sidelined many of the aggressive buyers. Because of vacancy risk, the value of a tenant is the critical difference in closing deals. With the threat of slowing growth, a year vacancy can destroy a proforma. In other words tenants have become the only viable buyer for many properties.
Before the recession, industrial real estate was marketed on an efficiency ranking.  Physical attributes such as maximizing throughput with loading doors, yard depths, ceiling heights, and access was the primary criteria for many tenants.  Many developers and users strove to create the the best designed warehouses for maximum velocity. The supreme example is a cross-dock building with large side yards for container storage. Metrics included number of loading doors per square foot and cubic storage capacity. While tenants will always want functional properties, many will sacrifice the most efficient features for more affordable occupancy costs. This is a significant change wrought by the Great Recession. A lower rent for a less efficient building is an outspoken preference.

The desire to reduce costs coupled with an eye on profiting from property has changed the dialogue with tenants. Not only is there a wide selection of choices, but many tenants are starting to probe more deeply. They want to know when the property was acquired and what are the characteristics of the property owner. If the building was purchased in the boom, then price flexibility will be limited until the bank takes over. Moms and Pops tend to be better Sellers than institutions, although not necessarily true in every instance. Certain areas also tend to be better long term investments. Cities with a history of good governance and pockets of institutional ownership are a couple examples of preference.

Over the years, some very smart buyers have followed a different acquisition strategy that bears some reflection. By luck or by skill they have located their businesses in locations that receive preferential zoning entitlements. These properties could be in high density commercial corridors, near transit hubs, or for other reason are more valuable than the existing improvements merit. In a growing city like Los Angeles well located properties go through periods of excessive valuations. While we may be some time from development activity, if a user can satisfactorily occupy an older, well-located property, upside will drop in his lap.

In the first part of this year, there have been some very good purchases.  I have seen prices as low as $45.00 for older properties that need work, but mid $50’s to mid $60’s for rather decent buildings. One of the largest, but older industrial buildings in the County sold quietly this year in the mid-$40’s. This is not to say deals are easy to find, but with declining economic news, we are closer to the beginning than the end of the deal wave.

SIOR Spring Conference Brings More Optimism


We finished our semi-annual meeting in Orlando, Florida. The general sentiment is we have reached the bottom of the cycle. Although by what measurement?  Recent sales and leases have indicated a low point. However, when other leases expire, those buildings will still need to discover their own downward level. Visually, think of dominoes falling down over a lengthy period of time. The current signals are more a psychological target rather than one of momentum. Monitoring rent tends will validate when we are at the beginning of a new upward trajectory. 

As industrial developers begin to make plans, many still have an outspoken preference for the Los Angeles port complex. If any developers decide to buy land it will because of increased shipping volume. Many will be examining the recently improving trade figures to see if they are of lasting improvement or a result of temporary stimulus and inventory restocking. This difference alone is the most important part of an improving warehouse picture. Land values will need to reflect market rents and this means we are at 50% of the peak – mid to low teens in per foot prices.

One very negative part of the conference is the number of EDC people who have been targeting California companies to move to their state or region. While California has always been a large target for relocations, the current problems of California finance, high costs, and poor services have "Right to Work" states absolutely gloating. California business will not wait while the state searches for a solution. Replacing good manufacturing jobs with logistic companies may be good for real estate companies, but it's not the road to rebuilding a damaged California economy and improving the lives of its citizens.

The investment experts emphasized that Lenders will only loan on existing cash flow. In a building that is only partially leased, the vacant space will be underwritten at zero. This leads to a hard ceiling for prices. In contrast, during good markets, lenders anticipate that appreciation will hide any mistakes. In bad times, it's strictly cash flow, credit, and market rates. For many Sellers, this will be a hard pill to swallow.
There was also confirmation that "A" product with good leases are finding many competitive institutional buyers in the 8 cap range. It's not really an acknowledgement that the market is improving but more a case of portfolio allocation. Nevertheless, it's a source of transactions and gives owners who own quality property a path to real estate sales. The caution is that the vast majority of industrial property is non-institutional and these properties will continue to be the fodder for opportunistic buyers.

The biggest surprise is that distressed assets have not made a bigger debut. Many buyers and brokers had hoped to see a flood of problem properties. And many are wondering why there are not more foreclosed properties on the market. Some answers include government stimulus money, low interest rates, pretend and extend, regulatory forbearance, and the lack of a RTC Clearinghouse. Others also stated that the great hope of purchasing discounted notes have only amounted to a trickle because gaining fee ownership has not been as easy as expected.

Overall, we are in much better shape than last Spring. Clients are beginning to articulate strategies to move forward. Activity levels are up. Cautious optimism has replaced the doom scenarios. However, profit spreads will need to be large enough to insure against any further possible declines. The conference again proved why SIOR is my most important resource for industrial and office real estate. It's the only place I know where I can find honest, personal and intelligent industry guidance on a useful, deal-making level.

The Year Ahead – 2010


General Sentiment

To judge the health of the industrial market, I rely on activity reports from fellow brokers. Across the board, its been obviously weak. Most of my peers are squeaking out a living from short term leases and renewals. Sales and investments are moribund. There's a bit of government support and stimulus work for those in the pipeline, but not enough to have a broad impact. Many agents have left the business. Most of my broker friends anticipate the same for 2010. We may be nearing the bottom of the cycle, but most sellers and banks are not willing to accept the greatly reduced prices. 


Statistically, keep your eyes on container imports, unemployment numbers, and lending reports. Improvements in these categories should translate directly to greater Los Angeles industrial.  Those investors who bet heavily on a "port strategy" have seen the value of their investments erode. Logistics was, and still is, the primary factor for industrial real estate investing. The same failures apply to many owner users who financed purchases with the China Trade in mind. They have received a double whammy with falling building prices and lower trade income. While expectations are weak, survivors are changing the way transactions occur. Tenants are taking an incremental approach in making decisions until they get a better picture of the future. Once business conditions shift to more certainty, companies will focus on permanent and sustainable decisions.



Characterization Advantages Disadvantages
Take space when needed; piecemeal Short forecasting horizon Hodgepodge of facilities; lacks overall plane
Short term decision making No need for long term decisions Conflicting and confusing
Functional space, no amenities Opportunistic in real estate market No consistent image
Uncertain or fast changing business conditions Short and relatively riskfree commitments No macro saving or operational effectiveness




Characterization Advantages Disadvantages
Standard policy and specs Reinforces identity and stability Difficult to modify when needed
Measured and efficient More economy to scale Reinforces existing structures
Certainty in business Reduced confusion Stifles creativity and change



One industry fallacy is the marketing ploy of offering short term teaser rates.  As these discounts are often negotiated, rents increase on an arbitrary date which the tenant may or may not be able to afford. Sometimes landlords are forced to extend the low rate or lose the tenant all together. Plus reasonably intelligent tenants will calculate the inducement in a present value calculation and not fall subject to an unaffordable rent increase. To truly be effective, these "discounted" rents should mirror the tenant's operations with metrics based on gross sales, employment, or pallet positions. Maybe a return to percentage rent is warranted in certain circumstances. If the loan can be serviced under this variation, fixing the rent to the tenant's business would lease buildings faster than having a teaser promotion.   



Short Term Leasing Triage



As owners find current rents or their business model will no longer support their mortgage, they begin to seek unusual solutions.  I've seen import companies use their existing operational infrastructure to branch into public warehousing. Others will simply offer warehouse space and offices with no more security than a handshake. Video cameras and security guards offer enough protection that an expensive demising wall is foregone. Some businesses who are familiar with Container Freight Stations find this a normal solution. Meanwhile many tenants are adaptable. Communication and data is portable and goods can be transferred easily. Some of these operations have learned from military logisticians who supply goods on the fly. Portability can be a competitive advantage because legacy competitors are often stuck with costly capital investments in real estate, employee costs and infrastructure.  

In a soft and agile market, flexibility is particularly advantageous with product launches and uncertain sales forecasting. The corollary in the retail world are pop up shops that feature a designer branded product for a few months and then moves to a new location with another product. The new fad of Twitter food trucks that navigate the city and message their fans are another example of a flexible business model. Needless to say restaurants with fixed overhead costs are not as enamoured with this new dining experience. As economic challenges bring fresh ideas, expect to see more short term occupancies supported by new technology.



 Pension Plans



Pension funds are major investors in the real estate world. Because of their size, pension funds can dominate a market. Along with REITS, their influence is felt throughout Los Angeles industrial and commercial property. Unfortunately, group-think has caused a collective failure with overpriced property and non-performing land. For Pension Advisors and their related investment vehicles, it is not enough of an excuse that they made the same mistakes as everyone else. The advisors are well rewarded to avoid such bad decisions. The largest pension fund of all has fallen the hardest and many signs are pointing to incompetence, poor ethics, and corruption. The result of poor pension investing is destabilizing municipal finance. Government services will  be cut to pay for faltering pension obligations. Of course, a large part of the blame goes to the pension industry itself. There are too many financial obligations negotiated through labor agreements that will not be satisfied by either prudent or risky investing. Some cities will need to go bankrupt to shed their costly pension plans. The next wave of investing is just starting as funds look to purchase distressed assets. The expectation is large returns over a short holding period. Hopefully, pensions will also look long-term at some of the individual problem assets in the market. A turn around strategy with a longer holding period will reduce volatility and maintain steady gains in excess of actuarial payouts.

The other irony in the pension mess is that many pension funds are considering the finance of municipal infrastructure. In exchange for a toll or bankable cash stream, the investor will finance the capital improvement like a bridge, road, port, or water system. In the past, municipalities would be able to finance this improvement through a bond issue or other financing vehicle. But partly because of high pension obligations, governments can no longer afford to finance important municipal improvements and are turning to funds supported by pension monies. Not only will municipalities need to increase contributions, but they will also be paying fees to these same pension companies. More importantly, California needs vital improvements to attract new business whether it's publicaly or privately financed.




Banks have moved to center stage in many negotiations. Properties being sold today are often underwater. Personal guarantees, blanket encumbrances, and cross-collateralization are complicating closings. Before a Buyer gets too far into a deal they need to look at the indebtedness before spending a lot of time on other issues.   In one deal, the seller agreed to bring additional funds to close the sale. In another, the deficiency was shifted on to other properties, including the Seller's home. Luckily, those were the easy solutions. The painful and common situations, like bankruptcies and foreclosures, are not as easily solved.


The other interesting part of the financial crisis is each bank will solve things differently. Some won't cooperate at all because of their own individual problems. Others will discount the note, but will not accept a cram-down. Some banks will temporarily reduce mortgage payments as long as their interest is covered. Many banks favor big borrowers over Mom and Pops. SBA borrowers are in the most difficult circumstances because many have pledged their homes and have mortgage leverage that vastly exceeds market rents.


Over all, industrial foreclosures have been limited in comparison to multi and single family residential   But year end defaults of industrial have increased. There should be enough problem industrial next year that the buyers will examine workouts instead of shopping traditional brokerage offerings. When interest rates increase, some of the favorable short term loans that have been extended to landlords should also increase defaults. If you are looking for industrial and not scouring for defaults, you will be missing some of the best opportunities.




Companies are awaiting new legislation that affect their business. Health Care reform for small business will affect most of my clients and may damper rehiring. New banking rules that set increased capital requirements will translate directly to real estate investing. Finally the California Air Resources Board will soon establish rules to reduce greenhouse gasses. With a cap and trade mechanism forecast it will create winners and losers among industrial companies and dramatically change the value of some industrial properties.



Fundamentally, the brokerage business remains the same. It's about representation, finding deals, and negotiating. Companies will look for lower real estate costs and better locations. But 2010 will also be influenced by many new factors and alert participants will find some real gems because of the market disintermediation. More importantly, as we climb out of recession there will be many new and different rules to conduct business.