Tag Archives: Retail

DIY Office Leasing Seems Cost-Effective But Is It Worth the Risks

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DIY Office Leasing Seems Cost-Effective But Is It Worth the Risks

Savvy business owners are always looking for ways to maximize the strength of their operating expense dollars, especially when it comes to small and midsize enterprises. Though, an unfortunate circumstance (or more) arises when this same sort of confidence is applied to the construct of a new commercial lease. Before we get into the specific aspects of negotiating a commercial lease, let’s address the lofty task of entering into a DIY leasing situation, representing oneself in this real estate transaction and the risks therein.

Do It Yourself Is for Home Renovations, Not Commercial Space

Thanks to the myriad of cable networks shows that illustrate how to break down kitchen walls to open up living space, or the endless Youtube videos that explain how to re-plumb a bathroom sink, the do it yourself population has exploded. And while there are still risks in doing it yourself, the potential mistakes can be readily rectified. Not so for anyone engaging in a do it yourself lease for their business and here’s why.

Commercial Real Estate Contracts Can Be Tricky

Far different from a residential lease agreement, commercial leases have many more variables attached to their contracts because most run from three to five years in length. Even those numbers will vary, depending on the type of market. For example, if the market it hot with minimal vacancy rates, landlords will push tenants for five to ten year terms at high price per square foot. Conversely, in slow markets, shorter lease terms allow landlords to open the door to higher rents, should the markets regain stability. But if you don’t have a leasing broker there to represent you as the tenant, would you know how the market could affect rental rates and your overall negotiating tactics? Probably not, and the devil is most certainly in the details.

Blame It in the Boom Boom

Much like the importance in having forecasts, budgets and a marketing plan for your business, whether it be retail, office, medical or industrial, understanding the components of a commercial real estate agreement is not only crucial to your bottom line, it can enhance or adversely affect your growth.

When planning your next move, literally, into a new commercial space, there are a multitude of points that must be carefully considered before choosing a location and negotiating the terms. In addition, location can be a sticking point, especially in a market that has certainly rebounded and is likely to continue to show well as people and their businesses continue to migrate to Arizona for better property value and overall quality of life.

The good news here is that commercial leases are not a one-size-fits-all. What may be an issue for one business owner may be a treasure for another.

What to Look for in a Commercial Lease before You Start Your Search

Alignment. This might not be the word you’d expect but alignment is tied to every commercial lease success story. In order to facilitate alignment in your lease, the clauses within the contract need to support and enrich the growth of your business. Even if your goal is to remain stagnant (a steady flow of customers, expenses and income) with no real increase or dip to your business, lease terms can be constructed to parallel with your plan.

Honesty. You’ll never see the light of day on alignment if you aren’t honest with yourself about where your business stands and where you want it to go over the course of the next three to five years. Make sure to review what your income and growth projections are (employee head count) and then allot for a space that has the provisions needed to make it happen.

Time. When the economy is bustling, commercial real estate is often just as lucrative. Vacancy rates can be low. Future-casting is important to any business looking to change up their commercial space. To stay ahead and ensure a more seamless relocation, take the time necessary to avoid rush decision making. If your current lease is up in six months, start reviewing your business goals and begin to get a feel for locations of interest.

Options. Even though you think your business is ready to go elsewhere, staying put may prove to be the best choice of all. If you need to downsize, ask your landlord or property manager if the tenant next door is looking to expand. Should your business be the tenant needing more space, ask when the neighboring tenants’ leases expire. If you have a solid track record, the landlord will likely want to work with you and do what is possible to keep you. Reliable tenants are invaluable.

A Professional Commercial Broker. It’s easy to espouse an argument for utilizing the services of a commercial real estate broker in the search and negotiations of a property lease. In addition to including the tenets of the above-mentioned into the initial conversation, an experienced agent will provide just that, experience. Here’s why experience matters and overrides any perceived financial benefit to a DIY lease.

What A Commercial Real Estate Broker Has That You Don’t

There’s a saying amongst people that comes to mind, “I know what I know and I don’t know what I don’t know.” The quicker you can acknowledge this tidbit, the faster you’ll be contacting a commercial real estate agent to help you with your lease. Here’s a hint as to why and how sooner is better.

What a commercial real estate broker has that you don’t:

  • Day-to-day commercial real estate knowledge
  • Ongoing industry relationships
  • Ability to identify opportunities
  • Grasp of triple net leases
  • Licensures and protections

The aforementioned list touches on the basics that a competent, seasoned commercial broker can bring to your next commercial real estate lease transaction. How these features coincide with your best interests is that they help bring alignment, honesty, time and options to the forefront of your lease terms advocating success in your favor.

Only a licensed commercial broker can utilize industry-specific skills to expose potential side effects of a one-sided lease agreement (landlord-centric) and represent you and your business in a manner that’s transparent, progressive and doesn’t cost you anymore than necessary. In fact, commercial property representation will afford you the ability to get the lease terms you want, over the course of the lease term, at a savings that will exceed the commissions paid to the commercial broker.

What else does the commercial brokerage leasing commission bring a tenant?

Peace of mind.
Protection against unscrupulous property owners.
Network of business owners they can refer to your business.

Re-Evaluate Your Current Lease and Plan Your Next Move Now

Why California Transplants Affect Commercial Property Vacancy and Value

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Why California Transplants Affect Commercial Property Vacancy and Value

Some 168 years ago, John Babsone Lane Soule was quoted as saying “Go west young man, go west,” inspiring generations from the East coast to migrate west and test the Pacific waters for a better life. But today, the migration has shifted and California businesses and residents are beginning to pay a heavy price. But for Arizonans, the silver lining keeps shining brighter. We are one of four states who are primary recipients of the Golden State’s loss. To better understand why California transplants affect commercial property vacancy and value within our borders, let’s begin with an overview of what led to today’s real estate circumstances.

The Shrinking Middle Class Can Breathe in Arizona

Between the tax rates and rising costs of housing in California, many people are not only rethinking their quality of life there but realizing that the sought after California lifestyle is long gone. While residents of the state to our west battle whether Northern is better than Southern in terms of overall living, for those of us outside their borders don’t see the benefits in either half of the state.

California has the highest income taxes in the country; yes, they exceed New York and New Jersey. In addition, with the changes in the U.S. tax codes, homeowners in high property tax states are not able to write off their exorbitant taxes, increasing their tax liability. Some would argue that for the people who can afford to live in California and purchase those high-dollar homes, they can certainly pay more of their fair share in taxes. But it isn’t that simple.

Business Can’t Survive Without a Local Workforce

Capitalism is great. Just ask any business owner who’s made it. Chances are, there are middle- and lower-income individuals churning the wheels of progress for them. One of the reasons behind the growing migration of California residents to Arizona, Nevada, Texas and Tennessee is the irrational ratios of income and cost of living. Most people cannot afford to stay there as personal debt rises without any relief in sight.

Finding a case in point isn’t difficult. Go to an income query site and search for a salaried position in California, perhaps San Francisco or Los Angeles. Jot the salary down. Now, do the search again and change the location for any metro Phoenix area city, or check out Las Vegas or Nashville. You’ll notice that the salary rates aren’t that different from what California employers are offering. In addition, California state income taxes are near double of what they are in Arizona, so workers’ take home pay is much less, comparatively speaking.

Add the salary component to the disparaging housing costs and California migration is a no-brainer. In fact, the median price for a home in California compared to Arizona is 60 percent higher. More than the cost to purchase a property, and the associated property taxes, increasing interest rates take a toll on affordability factors.

But if middle-income earners are effectively priced out of the housing market, then how can businesses meet their workforce demand? They can’t.

Cities near Los Angeles Close to Agriculture Hit Hard

The beautiful beaches in Ventura County California easily mask the ugliness of what’s happening to local businesses there. Their financial landscape has grown progressively bleak in recent years. For the reasons noted earlier in this article, the people of this laid-back region are experiencing a loss of vibrancy that was unexpected. The recent wildfires and SOAR haven’t helped either.

Ventura County is one of many areas in California that have adopted commercial and residential development restrictions in an effort to maintain preservation of its natural resources and open land, which some view as scarce.

SOAR, Save Open Space and Agricultural Resources, puts heavy restrictions on agricultural land development, something that Ventura County wants to open up to so that they can keep their residents and businesses from leaving and heading to Arizona. In fact some local experts say that the California housing shortage would require several million units to adequately meet demand.

Until that happens, the land of rugged beaches and environmental protectors may find itself teeming with the wealthy and vying for the attention of mainstream America.

California Might Be for the Few, But Arizona Is Happy Being Mainstream

Massive enterprises are finding refuge in Arizona. Companies such as Caterpillar, Raytheon, Amazon, and IAC Industries are either relocating here or expanding their presence, perhaps as a precautionary method, to the changing tide of California.

Although Arizona doesn’t have the ocean as a border, we do have easy access transportation arteries for manufacturing and industrial businesses. As businesses move more towards enhancing their digital footprint, the need for physical space has changed. What was once essential to retail, brick-and-mortar, a boutique real estate presence or smaller-scale headquarters means that these business owners can be pickier about where they hub their brand and the price they’re willing to pay to do it well.

Phoenix, Scottsdale, Tempe, Gilbert and Mesa also provide California transplants a vision of what once was prevalent in Los Angeles and the Bay Area, now gone: the freedom to grow at a price they can live with.

As Arizona continues to reap the rewards of this massive exodus from California, vacancy rates in commercial property could tighten, and new development will become evident. This will also spur an increased need for multi-family units, already stressed to meet demand. Together, the recent hiccup in property values should be short-lived as the migration will continue throughout 2019.

Lessons Learned from California Should Be Heeded in Phoenix and Surrounding Cities

Residential and commercial property owners who had to succumb to the perils of 2008 and the real estate crash can lay testament to the phrase, “What goes up…” you know the rest. Arizona is not, nor will it ever be, California. However, we can consider this take away: Enjoy what is today and plan for the unexpected tomorrow.

Know a California Transplant Looking to Invest in Commercial Real Estate? We Have Property

Single Biggest Myth about the 2018 Phoenix Commercial Real Estate Market

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Biggest Myth about the 2018 Phoenix Commercial Real Estate Market

If you owned commercial property from 2007 to 2013 in the Phoenix metro area and managed to hang on to it through that ugly rough patch, congratulations! During that time and up to now, you’ve probably asked your agent or broker to provide current market analysis and property value updates, monthly. (smile) We get that. But at the moment, the market is better. While the negative impressions from the past remain dormant in our minds, it wouldn’t take much to embed a resurgence of fear about the future. Not only have we rebounded but 2017 and 2018 were solid years of vacancy absorption, increased rental rates and new construction. Before we can formulate buying and selling strategies for 2019, we thought it would be advantageous to look back on this year and identify the biggest myth about 2018 Phoenix commercial real estate.

Is the Other Shoe Going to Drop?

If there was an investment out there that had a guarantee of equity gain without any period of loss, we’d all buy into it — and good luck getting a piece as commercial brokers would probably take it all for themselves! All joking aside, no risk no reward heavily applies in real estate. It’s the nature of the beast and those who can ride out the down swings will fare better, emotionally and financially. Although there is no crystal ball that can foretell when the right time to buy, sell or hold will be, investors have grown to rely on expert forecasts and predictable shifts in Phoenix real estate cycles.

But the U.S. 2008 economic disaster and subsequent plunge in our local market values went beyond the expected and unexpected. So how do you prepare, much less predict, when the next commercial real estate shoe will drop?

We watch the news feeds on social media. We talk to our industry peers here in Phoenix and in other parts of the country. We attend symposiums, lectures and conventions hosted by economic powerhouses and predictors of what’s to come. Here’s what they’re saying about 2018 and what’s in front of us.

How National Trends Affect the Phoenix Commercial Market

Taking the time to look at human behavior across multiple generations helps property owners weigh in on what to expect in the short-term and make adjustments to their portfolio. The key is to focus on real estate around specific niches, such as baby boomers, Generation X, millennials and the up-and-coming Generation Z. Each has its own set of preferences in how to conduct business, where to live and what quality of life means. Understanding what a positive work/life balance means to each will help identify recommended next steps in real estate acquisitions and missing holes of opportunity yet to be filled.

Much as we’d like to leave politics outside the spectrum of investment decision-making, current municipal, state and national leaders do have a heavy hand in what happens on financial scales. It’s a strange mix of factual data and fear that can set a spin on where we stand today and tomorrow, though another spin and set of circumstances can seemingly change it all overnight.

More details on the status of real estate are found in a study entitled Emerging Trends in Real Estate, published collectively by the Urban Land Institute and PwC each year on where we are, why we’re there and what to expect.

Interestingly enough, from tax and growth perspectives, Phoenix metro and surrounding areas are poised to withstand a temporary hiccup well, more than many other regions in the U.S. These are just some of the reasons why many people are bringing their businesses to our state.

Five Facts that Support Continued Growth

Before we lay out what the biggest myth is for Phoenix commercial real estate over the past year, the following shows what some of our biggest strengths are, heading in to 2019.

5 Leading Indicators of 2019

  • Surge in urban living across multiple generations
  • Desirability in industrial (location and multiple use)
  • National and international interest in Phoenix
  • Tech-savvy design leads office and multi-family space
  • Generation Z brings resurgence to brick-and-mortar retail

As mentioned earlier in this article, planning for real estate ownership, property management and marketability in leasing and sales success will rely on the ability to align with the list of trends noted above.

When Leverage Is High, the Risks Are Higher

One of the best ways to increase the odds in your favor and protect against market fluctuation is to leverage investments within reason. This might sound too conservative but you’ll never be able to capitalize on an opportunity that arises unexpectedly with debt out of reach and cash resources depleted.

Revisit net operating expenses every six months and ask your broker or property manager for creative ways to cut costs without compromising integrity and value. If you use loans to build projects or acquire property, make sure to keep knowledgeable on new programs based on asset allocation perhaps, that could shore up additional resources to tap in to.

Here’s the drum roll…

A Word on Predictable Volatility

What is predictable volatility? Anyone that held their hat on predicting Phoenix real estate cycles probably ate a lot of crow in 2008. Predictable went out the window then and could serve as a lesson for the future in how to prepare for the next market adjustment.

The only constant is change. So how can you stabilize change? Soften the blow. Volatility happens. But it’s made worse by investors who overleverage and look at numbers the way they want to see them instead of what they truly represent. In addition, as if the past hasn’t taught us already, expect the unexpected and sell before it peaks or make adjustments to ride out the cycle so that that your portfolio can take a hit or two.

Buy Local but Think Global

Real estate in Arizona is different than it was just a decade ago. As we need to keep a pulse on what’s going on at the local level, having a broad-based understanding of North America and outside our borders affects commercial real estate attractiveness for small and large scale investors because we truly are a global marketplace.

Soft Landings We Can Live With

This gravy train in real estate won’t last forever. Some experts believe that when the correction comes, it will be palatable. According to Forbes magazine, Phoenix ranks number 5 for top 10 booming real estate markets with more room to grow.

Where will you be in 2019? It depends on whether you accept the myth or learn how to dance with the market.

Secure Your Commercial Real Estate Plan for the New Year