by Prince Licaylicay | Sep 10, 2021 | All Articles, Investing
The COVID-19 pandemic will perpetually clout almost all aspects of our lives; this includes the use of commercial real estate. However, from the black plague to the discovery of penicillin, one thing is clear: there is generally an expansion not only in economic terms but also in technology and innovation. Indeed, the post-pandemic recovery has the potential to accelerate and improve with a focus on social justice, health, remote work, households, workers, and companies. And while the pandemic has negatively affected all classes of commercial real estate, it has also brought about innovative possibilities for Commercial Real Estate, such as affordable rental prices, dynamic online communications, and sending in forms and payments through online platforms. Hence, the future is not all gloom for the commercial real estate market, even in light of the COVID-19 pandemic.
Commercial real estate will slowly start to recover from the effects of the pandemic. However, due to the lingering effects of the pandemic, this recovery will most certainly have its challenges and setbacks along the way. That being said, the following are commercial trends that could rebound in 2021 and onwards:
1. Asset Class Winners – While retail, hotel, and office prices continually decline in value ranging between five (5) to ten (10) percent, industrial, data center, life science, and single-family homes will continue to have their value increased. Moreover, the volume of transactions in favorable sectors will most likely remain lower than usual, which will support higher pricing due to increased investor competition.
2. Interest Rates will remain low in 2021 – The Federal Reserve will most likely accommodate a monetary policy, and hence, keep the interest rate low throughout the year. This action will consequentially provide a positive backdrop for commercial real estate borrowers and will inevitably impact the positive recovery of the economy.
3. Major Cities will most likely see population decline – Studies show that New York City, Chicago, San Francisco, Los Angeles, and other cities will continue to lose population. Even before the pandemic hit, people in big cities with rents far exceeding the earning capacity of Americans in the middle class have and will continue to decline. Work-from-home policies and public health shutdowns even further accelerated the decline of the population of these large metros. People are looking for cities that offer a better lifestyle, lower cost of living, and better weather. Some growth cities include Austin, TX, Mount Pleasant, SC, etc.
4. There will be a mainstream rise of alternative assets – Commercial Real Estate exposure will increase among asset allocators, and this is because it offers resilience in an imbalanced recovery. In this case, high equity valuations and negative yields from many government bonds are expected to push more investors toward alternative assets, the commercial real property.
5. Work-from-home offers more opportunities for alternative use of office space – Due to the global pandemic, lockdowns have led more companies to have their employees working from home. At first glance, it may seem like office space would prove useless in 2021, there are several opportunities in the Commercial Real Estate market for commercial offices. Vacancies in high-traffic areas make this the perfect time for commercial owners who are looking to expand.
Therefore, based on the preceding predictions, the pandemic offered a silver lining amidst its adverse effects. It is allowing the slow but dominant increase of commercial real estate in the market. Lawrence Yun of the National Association of REALTORS®’ chief economist said that personal income is up 10.7% year over year, and personal savings is up an astonishing 302% for the same period. As a result, considerable capital will most likely be pumped into the economy, with consumers eager to tap into a year’s worth of savings and what remains of their stimulus funds. According to Yun, “If we look at potential, it’s even greater than we could have expected”. This is, in essence, ‘revenge spending’ wherein people tend to spend what they have saved due to pent-up frustrations due to being stuck at home, saving up money, and now they can go out again. This is, of course, great news for the Commercial Real Estate sector. People will most certainly want to spend their savings on properties whose value has been reduced due to the effects of the pandemic. This is coupled with the interest rate these investors would pay for commercial real estate, which will be relatively lower than previous years. All of these incentives would most certainly be enticing to people who would want to spend their saved-up money – which ultimately would have a remarkable effect on the real estate market.
Another area of potential benefit to commercial real estate is office vacancies. As previously mentioned, offices have been left empty or, in some instances, only a handful of employees are working in offices. In addition, studies show that there has been a decline in the physical office setting or that more commercial offices are engaging in smaller spaces for lease at a much shorter period. Work-from-home will be the single most prominent question for commercial real estate coming out of COVID-19 since this forces companies to re-evaluate their use of office space. Hence, there is a lot of potential in the office, predicting a rebound in the sector after a period of experimentation. Companies will try out different ways to organize office space and employees. However, industrial warehouses and land remain bright spots for commercial real estate investing, increasing 2% and 3% respectively in sales volume year-over-year in the first quarter of 2021. In fact, funds have been invested in the relatively new digital real estate sector, including cell towers, data centers, and logistics facilities, which have performed exceptionally well. These are offshoots and, ultimately, form part of commercial real estate.
To summarize, there is still potential in the office sector; with interest rates near zero, unemployment rates dropping, vaccinations increasing, and the potential for infrastructure investments on the way, the future is still bright for Commercial Real Estate. Although this economic potential is dependent on many factors, virus-related included, there are opportunities ahead for commercial real estate investors along with signs that the Commercial Real Estate market can make a rebound in 2021.
Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
by Phill Tomlinson | Sep 6, 2021 | Blog
Tenant Improvements refer to the customization done to a space to make it meet your needs. A tenant improvement allowance is a sum of money that your landlord makes available to help defray the cost of your build-out. In order to understand tenant improvement allowance, you also need to know the ins and outs about it.nn nnTIs in New SpacennOffice space typically gets delivered in shell condition. This means that while some of the building’s common areas are completed, the interiors of the spaces are frequently bare and unfinished. This makes a great deal of sense from a developer’s perspective. After all, he doesn’t know if a tenant will want an entire floor or a portion of one, and he can’t guess how you will wish to have your space built out.nnLeaving the space unfinished means that the developer doesn’t waste effort creating tenant improvements that won’t work for you. Instead, assuming space is available, you get to carve off your desired portion on the floor and design your space to suit your needs.nnWhen you want your own office designed to match your needs with your authentic materials of choice exactly, it’s almost impossible to beat the flexibility of taking new space. Furthermore, it is frequently a less expensive option.nn nnTIs in Existing SpacennUnless you’re considering leasing office space in a completely new area, most of the space that will be available to you will have already been built out with tenant improvements for the previous occupant. However, if you have some flexibility, this can be an excellent opportunity.nnThe odds are that if you look at a typical pre-built space, it won’t match your needs. Even if the size and location are correct, the TIs probably won’t be. Because of this, landlords know that existing spaces typically need customization. However, if you can look through enough spaces to find one that suits your needs as-is, you could save thousands of dollars in occupancy costs. You won’t have to spend anything (much) to customize it, and the landlord won’t have to pay for demolition or customization.nnOn the other hand, the process could get expensive if you have to take existing space and reconfigure it. In addition to your construction costs, you will also have to figure out demolishing the previous TIs to get the space into buildable condition. As you do this, take a careful look at what you can reuse from the old space. Seemingly minor items like ceiling grids and tiles or doors can add up to multiple dollars per square foot, letting you use your TI budget more wisely.nn nnAllowances for Tenant ImprovementsnnFrequently, you can look to your landlord to help you get your space configured. TI allowances are standard on new space —since they’re an integral part of finishing the building—and are also readily available on already-configured spaces in many markets. The amount of the TI allowance you receive varies based on multiple factors:nnFirst, new spaces typically get more generous subsidies than already-built ones.nnSecond, more landlord-favorable leases usually receive more TI money. These are leases with higher rents or longer terms.nnFinally, TI allowances are usually more generous in markets with higher vacancies and fewer tenants looking.nnIf you can get help with tenant improvements from your landlord, read the fine print so that you understand how the allowance works. Seemingly small requirements—like having to use certain companies or certain materials—could significantly impact the value of the budget you get. As in most parts of commercial real estate, the counsel of an experienced tenant representative can frequently help you get the best deal.nn nnIf you have any questions on this article or need commercial space, contact us anytime, we’re happy to help. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.nnThank you.nn
nnNeed help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!nnn nnPhill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns. nn nnBookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCREnn
by Phill Tomlinson | Sep 6, 2021 | Blog
With rents going up and interest rates continuing to post rates at or near historic lows, the balance might seem to have shifted to the latter option in the lease vs. purchase decision. However, leasing remains a strong option for many companies. Here are a few points you need to know to understand which one is best for you.nn nn nnReasons to PurchasennThe purchase side of the lease vs. purchase equation usually comes into play when your company’s needs are fixed and predictable for the long term. If you know what you need now and won’t change for at least a decade or two, purchasing can be a good option. It gives you total control over your space and a great deal of certainty over what you can do with it since, after all, you own the space.nn nnPurchasing also gives you a chance to participate in the potential appreciation of the property. Unfortunately, for many businesses and most locations, the downsides of purchasing and tying up capital are more than the benefits of the appreciation. However, if your business is one where the appreciated property can form an exit strategy or are in a position to control precious property, purchasing may be a wiser option.nn nnThe Benefits of LeasingnnMany of American’s most successful companies come down on the leasing side of the purchase vs. lease decision for many reasons. First, leasing is typically more flexible, less capital intensive, and offers more options.nn nnThe flexibility benefits of leasing are straightforward. While it’s technically accurate that buildings can be sold on the market, the usual case is that finding a buyer for a vacant building can take months or years, especially at a reasonable price. With a lease, though, you can move out whenever your lease expires. If a building needs work, you can leave that work for the landlord as well. If you have your lease written with extension options, you can choose to renew it, taking flexibility away from your landlord automatically.nn nnIn summary, leasing helps to conserve capital in three ways:nn n
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- Moving into a leased property usually requires a lower initial investment than purchasing a building, simply because rent and security deposits are usually less than loan costs and down payments.
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- Lease payments may be cheaper than mortgage payments.
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- While the accounting of leases is shifting, leases are still treated differently than building purchases when it comes to principles of building your business’s balance sheet.
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n nn nnIf you have any questions on this article or need commercial space, contact us anytime, we’re happy to help. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.nnThank you.nn
nnNeed help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!nnn nnPhill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns. nn nnBookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCREnn
by Phill Tomlinson | Sep 6, 2021 | Blog
Recent developments in the commercial real estate world could make it seem like leasing is becoming a less attractive choice. An ongoing climate of low-interest rates make purchasing less expensive, while skyrocketing property values in some markets could make it seem like if you don’t own, you’re missing out on an opportunity to participate in appreciation. At the same time, changes in lease accounting standards are removing some of the financial benefits of leasing.nn nnWhile these might seem like bad times to be a tenant (or a landlord, for that matter), nothing could be further from the truth. It might be better than usual to own property, but if leasing space is truly the best option for you, none of these factors matter.nn nnWhy You (Should) Lease SpacennThe first reason to occupy space as a tenant is that it is typically less expensive than buying space. While you have some costs for deposits and tenant improvements, those pale next to the price of a down payment and reconfiguring an additional building. Furthermore, finding high-quality small space in a standalone building can be tricky if your company is looking for a relatively small area. This is especially true if you need to be in a Class A high rise or an industrial space with an elevated clear height.nnThe following reason to lease space is that you typically have more options to choose from. In most central business districts, the majority of the office space is located in buildings that are available for lease. While suburban markets may offer more owned space, much of that is in the extremes of large vacant campuses and small neighborhood offices and office condos. Neither are suitable for most tenants.nn nn Advantages to Leasing Your Commercial Real EstatennLeasing space is also much more flexible. With a leased space, you can get in or out of the space whenever your lease rolls over. While barring a non-prepayable and non-assumable mortgage, you can sell a building you own whenever you want, actually disposing of a vacant piece of real estate can be extremely time-consuming, especially if you are not willing to let it go for a very low price. Choosing to lease makes it much easier for your space to change to track your business’s evolution rapidly.nn nnThe ability to leave leased space also means that you can leave expenses behind. For example, if a space needs major tenant improvement work, it could be time to move to a different building and let the new landlord pay for the TIs as a part of the move-in concession package. When a building needs work, the landlord usually has to pay for it and, if he doesn’t, you can move out before those issues become pressing enough to require you to put capital in. Owning the building means that you acknowledge its problems, as well.nn nnFinally, being a tenant in a shared space allows you to be part of a community. You can do business with other vendors in your building. Your employees can run into their employees at lunch counters or happy hours. These interactions can simplify your network of vendor relationships and provide additional glue to reduce worker turnover. Being alone in owned real estate makes it harder to get these locational benefits.nn nnAll of these factors exist regardless of how leases get treated by your accountant and regardless of the greater commercial real estate economy. However, if they match up with your company’s needs, leasing space is probably still your best option.nn nnIf you have any questions on this article or need commercial space, contact us anytime, we’re happy to help. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.nnThank you.nn
nnNeed help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!nnn nnPhill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns. nn nnBookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCREnn
by Phill Tomlinson | Sep 6, 2021 | Blog
Commercial leases are lengthy documents that can be seriously daunting to peruse, but you must take the time to read all of the terms carefully before signing on the dotted line. While every part of the lease document is essential, the following terms of the standard commercial lease contract are areas where you need to pay particularly close attention:nn n
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- Length of the Lease
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nThe length of your lease is significant for your business. A longer lease can often secure a lower monthly rent, as landlords prefer to have tenants locked into place to reduce the need to renegotiate or fill vacant spaces frequently; however, if you anticipate your business needs changing in the near future, a shorter lease may be preferable. You don’t want to end up having unused square footage or having to pay costly fees to break your lease if you need to relocate. Having a sublease term can be beneficial if you opt for a long-term lease because you will have the ability to rent out any unused portion of your space if your business changes before your lease expires.nn n
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- Rent and Security Deposit Terms
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nOf course, the area that discusses how much you’ll be expected to pay is an integral part of your loan. Don’t just look at what the monthly rental rate is. Take the time to find out if and when rent increases and the maximum amount of the increase. You should also look for information about any fees you may be assessed in addition to rent, what portion of operating costs are passed along to you as the tenant, and what allowances are made for improvements to the space.nnPay attention to the security deposit, too. In some cases, you can negotiate your way out of having to put any money down to secure your space if you provide a letter of credit from a financial institution.nn n
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- Premises Terms
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nOne area of a commercial lease that business owners often mistakenly overlook is the terms of the premises. This is the area that clearly outlines what you’re renting. For example, if you’re only renting a portion of the building, make sure that the contract includes parking and use of shared areas like any standard storage rooms, lobbies, waiting rooms, and conference rooms.nn n
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- Use Terms
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nUse terms outline rules that can be deal-breakers for some companies. Check this area to find out if there are any restrictions on what types of business you can conduct. Other tenants in the building may have exclusive clauses in their contract that prevent competitors from being located in the building. These terms could make it impossible for you to expand into other lines of business in the future. In this section of the lease, you’ll also find information about what type of signage and advertising you’re allowed to use on the premises.nnRemember that the first draft of your lease is likely to have the most favorable terms for the landlord, but you do not have to agree. Landlords expect negotiation to occur, so don’t be afraid to make a case for improving the terms to bring the contract into a better balance to benefit both of you.nn nnIf you have any questions on this article or need commercial space, contact us anytime, we’re happy to help. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.nnThank you.nn
nnNeed help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!nnn nnPhill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns. nn nnBookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCREnn
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