Commercial Real Estate Considerations for Emerging from the Coronavirus Pandemic

The ongoing fatigue of the coronavirus pandemic is real for everyone and has now impacted virtually every aspect of our lives.  Business owners and those in the workforce have no doubt felt the business effects as well with new policies and protocols to ensure safety and health. While we are all ready for this to end, the experts tell us it is not likely to end soon and we will have to adjust to it.

Many organizations are allowing their employees and staff to work from home or virtually mobile on a longer term or permanent basis. While work from home and Zoom meetings may be appealing and most appropriate in these difficult and uncertain times, it does not provide the same social and collaborative work experience that people enjoy about their work. That element has been missing for many during this pandemic. Additionally, certain roles may not be as productive in a work from home and virtual environment.  These factors and others will be among the drivers for people to get back into their offices and businesses and they will also affect commercial real estate absorption levels and property usage moving forward.

The ‘new normal’ for work will likely include combinations of virtual work, possible ‘hoteling’ or co-working and traditional places of employment work with new safety guidelines and procedures.  Business owners, managers and employees will be looking at new planning, protocols and metrics such as the following:

  • Return to work plans based on phasing and percentages of increasing employee density on a gradual basis as is safe or permitted in the local municipality
  • Longer term policy for work locations of each role
  • Re-designs of office floorplans (workstations, private offices and shared spaces) for social distancing and new safety policies
  • Signage, sanitizer locations, mask wearing policies and other health and safety precaution measures
  • Re-calculations of square footage needed for office operations moving forward based on new ‘de-densification’ policy and usage metrics

For business owners and managers, working through these and other business-specific policies and factors as the economy regenerates itself will be essential to regaining market traction and sales.  There is no question that the outcomes of these new measures and the new associated work trends will have significant effects on the local commercial real estate market.  Navigating these dynamics effectively will have a major impact on the longevity and future success of our local economy.  Business owners and managers, be proactive and seek the guidance of the right professionals that can guide you to good decision making for employee health safety and commercial real estate during this next short term and critical business period.

 

Just Sold! 1025 1st Ave N, St Petersburg, FL 33705

I am happy to announce the sale of my commercial office/flex building listing at 1025 1st Ave N / 1030 Arlington Ave N which just closed last Friday.  Congratulations to the Seller and Buyer.  It was also a pleasure assisting the Seller in the transaction. Premier Sothebys Intl Realty of St Petersburg represented the Buyer. It is a great building in an excellent location in the EDGE District of Downtown St Petersburg.

Recession Recommendations for Tenants, Buyers, Landlords and Sellers

In last month’s edition, I discussed some possible impacts of a recession on our local commercial real estate market.  It now seems all but certain that we will face a recession of some length due to the economic impacts of the COVID-19 pandemic.  Here are some recommendations for you to consider if you have some kind of involvement in the commercial real estate market during a recession:

Tenants: If your business has been severely impacted by the recession and paying rent is not possible, contact your Landlord (if you have not already) and discuss rent reduction, relief or temporary abatement options if needed.  Keep the line of communication open with your Landlord so they can work with you through the difficult times.  You may also need to consider down-sizing or right-sizing based on new virtual working policies and opportunities that may have emerged for your company during and after the pandemic.

Buyers: If you are in the market to acquire a property, especially if you are a cash buyer, look for opportunities with Sellers that are highly motivated to dispose of a property.  Deals are out there in difficult times and this creates buying opportunities.

Landlords: Be open to working with your tenants, especially if they were in good standing with you up to the COVID-19 pandemic.  Structure short term alternative or reduction/abatement arrangements that are appropriate to the situation.  Tenants appreciate Landlords who show empathy during difficult economic times.

Sellers:  Real estate goes through up-cycles and down-cycles. Recessions often create down-cycles for certain sectors of real estate.  Evaluate where your property is in its cycle and decide if now is a good time to sell. If you decide to keep the property, you may need to ride out the current economic cycle for a while before values return to price ranges that are acceptable to you.

Should you find yourself in a position of needing to down-size, right-size, acquire, lease or sell a commercial property or if you are planning to enter the commercial real estate market after conditions improve, I would welcome the opportunity to assist you. I can help guide you and navigate you toward a successful outcome based on your specific situation and objectives.

Have a commercial real estate question?  Let me know.  Email me at: chris@cprteam.com

The Possible Impacts of a Recession on our local Commercial Real Estate Market

What are the possible impacts of a recession on the local commercial real estate market?  Frankly, it is hard to say exactly what the impacts may be on our local commercial real estate market. In a best case scenario there will likely be minimal impacts (if any) on a longer term basis to our local commercial real estate market.  In the short term there may be some vacated commercial spaces resulting in new available commercial inventory.  A worst-case scenario however may result in a more substantial amount of businesses impacted to the point where locally many may fold or downsize.  This would likely result in a decreased need for leased space in certain sectors and possibly buildings being vacated on a more substantial scale.  A resulting increase of new space and building availability both to lease and purchase may come back into the market and this increased supply may also have a short term impact on rents and purchase values.  Increased inventory coupled with a possible decrease in demand due to possible recession conditions, may also result in a possible cool-off for a while, possibly on a longer term basis for certain commercial real estate sectors, in what has a been a thriving local commercial real estate market in recent years.

The reality of what occurs however may be something in the middle of the two case scenarios and depends on the severity and length of a recession and the impact on the global and U.S. economy as well as that of the local Tampa Bay area.  The commercial inventory market in the Tampa Bay area is not overbuilt like other markets in the U.S. and as the economy pulls out of a possible recession, any short term surplus of inventory in the market should be re-absorbed and eventually return to a stronger market in alignment with local economic recovery and growth.

Should you find yourself in a position of needing to downsize or exit from a commercial property or if you are planning to enter the commercial real estate market after conditions improve, I would welcome the opportunity to assist you. I can help guide you and navigate you toward a successful outcome based on your specific situation and objectives.

Have a commercial real estate question?  Let me know.  Email me at: chris@cprteam.com

 

Just Leased! 15,000 SF flex building for high-tech client. Tenant representation assignment. 11400 47th St N, Pinellas Park, FL

I am happy to announce that I just assisted one of my high-tech clients in leasing this 15,000 SF, 100% A/C’d flex building (5,800 SF office space / 9,200 SF warehouse) in Pinellas Park.  This was a Tenant representation assignment for me.  Cushman & Wakefield represented the Landlord.

This building will be their new corporate HQ for manufacturing their electronics products.  The term was 5-years and the rate started at $7.50/SF NNN. Lease commencement was March 1, 2020.

 

Are the commercial real estate needs of high-tech companies different than others? I can speak from direct experience; yes, absolutely.

Having spent eight (8) years in the Silicon Valley in tech and software earlier in my career, I held management positions and I leased various spaces for our teams at that time in different locations at times of economic and tech expansion.  I also closed offices when needed during times of company re-organization or when leases were up or when offices were under-performing.  Our criteria were varied and suited to the demands of tech productivity, sales and growth. We needed proximity to our target customers in the region, high speed bandwidth, a working environment geared for our culture and productivity needs, suitable parking and the lease flexibility to accommodate rapid expansion or the possibility to downsize or close the office after a merger, acquisition or economic downturn substantially affecting business.  I saw all stages of the commercial real estate cycle in those years and how our business demands and changes in direction affected our commercial real estate obligations and decisions.

Generally, what I found then and that still holds true today is that high-tech companies, especially earlier stage organizations and start-ups, have difficulty predicting degree of future growth since so many factors are in play the in the high-tech sectors. Tech sectors that look promising today can be filled with intense competition or better alternatives in as little as 6-12 months.  Positive cash flow and excessive burn rates are also major factors for start-ups and early stage companies. More established tech companies may have more predictable sales, profits and growth however they also have to make commercial real estate decisions to help them maintain a leadership position with customers, profits and foster longer-term growth.

Regardless of the degree of company maturity or years in business, today’s high-tech leaders must factor their specific short term and longer-term strategic business considerations into their commercial real estate planning, objectives and decision making.  Having a commercial real estate broker in their corner who has been in the trenches of high-tech and commercial real estate and understands their challenges can go a long way toward helping them navigate the market, find the right spaces for expansion, negotiate good deals and make good commercial real estate decisions.  I specialize in this area of commercial real estate.  Let me know if you would like to speak further about your high-tech commercial real estate objectives!

Planning to buy a commercial property this year for your business or as an investment? Consider these tips for actions to take during your Due Diligence / Inspection Period:

  1. Have the building professionally inspected by a commercial inspector.  Understand its overall condition including the roof, HVAC system, electrical wiring and plumbing. Gain an understanding of any key areas of the building that will need to be updated after closing.
  2. Have a licensed contractor go through the building and estimate costs for any improvements and updates you may need to make in order to open your doors for business or to make it ready for a new tenant(s).
  3. Look at the current zoning for the property and ensure that your intended use for the building or property is a permitted use for that zoning.  If your intended use is not a permitted use of that zoning, it may not be possible or substantially difficult for you to gain the City/County approvals necessary to operate your business in that location.
  4. In some cases and for certain kinds of properties, special sub-surface assessments such as Environmental Site Assessments  (Phase 1-2, etc.) may also be necessary.  These can take longer to schedule, perform and compile so make sure to have enough time in your Due Diligence / Inspection period for these kinds of specialized studies.
  5. Obtain and review all available documents on the property from the Seller including any surveys, property studies or other important documents.
  6. Obtain and review all financial data on the property including income (if tenant occupied) and operating expenses (insurance, taxes, utilities, etc.).  Understand the financial picture of the property in detail.
  7. If there are tenant(s) in the property, obtain and review copies of their leases.  Understand the lease obligations and rights you may be taking over as a new owner.
  8. For any required financing elements, consult with different commercial banking/lending institutions for the best financial products that may be available to you (conventional, SBA 504, etc.).
  9. Consult a commercial real estate attorney for legal contract review, lease review (if there are tenants) and overall legal guidance relative to the purchase.One additional tip, when starting your search, consider using a qualified commercial real estate agent as your ‘exclusive buyer’s agent’ operating in a ‘single agent’ relationship for you to help you find the property, help you negotiate best possible price and terms and successfully guide you through the acquisition process. Such a commercial agent can help you avoid potential issues and make sound decisions.

Commercial Real Estate Investment Analysis Methods

Q: I’m thinking of investing in income producing real estate in 2020. What are some of the common methods for analyzing and evaluating return on investment (ROI) performance for an income property?

A: When you buy an investment property, you are effectively buying an income stream. Therefore, it is important to be able to measure the performance of that income stream relative to other investment options you may be considering.

Many investors will look at ‘Capitalization Rate’, commonly referred to as ‘cap rate’ which is derived from dividing a property’s annual net operating income ‘NOI’ (gross income – operating expenses) into an asking price, as follows: NOI ÷ Price = Cap Rate.  The higher the cap rate, the better the return. Since there is a direct relationship between price and cap rate, as the price of the property goes down, the cap rate goes up and vice versa. For example, an investment property costing $1,000,000 with a NOI of $60,000 has a cap rate of 6%. If that same investment property were to sell for $900,000, the cap rate on the same NOI ($60,000) increases to 6.7%. Cap rate analysis is a quick measure of a property’s first year return, but it only looks at a first-year pre-tax return (before any debt service) and not a full projected return over the holding period of the investment property.

Investors also look at ‘Cash on Cash’ as a measure of an investment’s potential.  Cash on cash is derived as ‘cash flow before tax’ (net operating income – annual debt service) divided by initial investment = before-tax cash on cash.  Cash on cash is an effective additional way to look at the performance of an investment property on a before-tax basis after annual debt service.

There are other more advanced methods to evaluate a property’s investment yield potential over a longer term or the projected holding period using tools such as Internal Rate of Return (IRR) and a Discounted Cash Flow (DCF) analysis.  The bottom line is that when evaluating an income property investment, it is essential to analyze the ‘actual’ financials of the investment property during your due diligence period whenever possible to ensure you understand its performance and can compare the performance against other investment options and then make an informed investment decision.  Also, use caution when evaluating only pro-forma (not actual) income and adjust your investment risk threshold and decision making accordingly if actual financials are not available.

Planning to lease commercial space in 2020? 3 Key Tips to Consider for Best Results:

1.            Give yourself plenty of time to find a suitable property and execute a lease. Commercial inventory available in the local areas is low and you will have competition for spaces. 3-6 months from the time you start to the time you want to be in the new space is strongly recommended. A space requiring a buildout will likely require even more time for architecture, engineering, permitting and construction. So start your search process early!

 2.            Interview and select a commercial agent to assist you with tenant representation and help you with your search.  A good tenant rep can help you with the leg work of searching, possibly find off market opportunities for you, promote your needs with other agents and help you avoid potential pitfalls or mistakes in the lease negotiation process. In most cases, you will not have to pay the tenant rep, the landlord or landlord’s broker typically pays the tenant rep’s commission at lease execution.  So why not have an expert resource in your corner? Engage the services of a commercial tenant representation agent! 

3.            Make sure to look at a broad range of locations to identify the best rent value opportunity for your business objectives. For example, properties in the downtown St Pete market areas are commanding top rents due to the high demand and low inventory. Conversely, there are typically more spaces available in mid-Pinellas County and those prices per square foot may be more attractive to you. Do your homework on rents in the various sub-markets around Pinellas County and the greater Tampa Bay area and make an informed leasing decision!

Have a commercial real estate question?  Let me know!  Email me at: chris@cprteam.com