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World events have business owners a bit spooked these days.
China’s economy is imploding, our stock market is crashing, commodity prices (especially oil) are at historic lows, wages have remained flat since 1977, sluggish labor participation for American workers, and the threat of Islamic terrorism – oh, and a new presidential administration is on the horizon.
Curiously, vacancy rates for industrial buildings in Orange County, California have never been lower, sales prices have eclipsed the Mount Everest 2007 levels, lease rates are increasing, and interest rates continue their Eisenhower era bump across the bottom.
Truly, two extremes exist. Advising commercial real estate owners and occupants becomes challenging. So what am I telling my clients?
If you own and occupy your commercial real estate. Take a hard look at your business that occupies the commercial real estate. What is your succession plan? How old are you? Would you benefit from selling the commercial real estate today and leasing the building from the buyer for three to five years? The answers to these questions can illuminate a direction. Said simply, there has never been a better time to sell commercial real estate – if – the need for the building has passed – or will within the next three to five years, you have a place to deploy the sale proceeds, and you can’t fathom yourself as a landlord. If the building meets your needs, you have a deep family membership that will run the business for years to come and you have a loan, now is a great time to refinance.
If you lease your commercial real estate. One of several scenarios may exist. The advice that I give depends on the scenario.
- You have two of more years remaining on your lease – not much to do here, unless, your needs for the building have changed. In that case, there are a number of ways that we can assist in making the building more suitable so that you can live out the term of your lease. I discuss these things in this post.
- Your lease will expire in fewer than two years. Time to get busy! You will make a decision to move and buy, move and lease, or stay. Now is the time to plan for your move if that direction looks appealing. Remember, with 98 of every 100 buildings occupied, your choices are limited and prices are overheated. If you want to stay, try to negotiate a renewal today with a term fewer than two years. I’m concerned with committing to a long term lease today that could find you paying much more than the market in a couple of years.
- Your lease has expired, you are occupying the building on a month-to-month basis. Oh boy! Phone your owner today and get yourself a lease for at least one year with some options to renew. You are vulnerable! Imagine your owner calling you next week to inform you that he has decided to sell your building and you must move out – it happens!
If you rely upon commercial real estate as an investment. Lock your tenant in for as long as possible, today, or consider selling the building today to the occupant, paying the taxes, putting the money in a CD, and waiting patiently. I believe some buying opportunities will present themselves in the next two years.
You will notice I give conflicting advice to investment owners vs occupants. Good get! And, you’re exactly correct. Differing objectives means different advice.