I believe there are three factors that drive commercial real estate deals: attitude, inventory, and interest rates.
All three can influence the decision, and taken together they can create the one factor will cause a decision to be changed: a change in motivation.
• Attitude. I have broadly lumped issues such as uncertainty, timing of a lease expiration, business outlook, market conditions, time of year, age of the business, age of the business owners and more into the category of attitude.
For commercial real estate brokers, uncertainty is the attitude that causes the most pain. If a business owner is uncertain about the future, a buying decision will be postponed or a buying decision could morph into a leasing decision.
In Southern California, the end of 2008 and the beginning of 2009 were particularly painful. We now are told that the worst recession since the great depression began in December 2007 and ended in June of 2009.
While we can debate the end of the recession, none of us will argue the beginning. Many of us in the business sensed a “change” was coming at the beginning of 2008. Financing was becoming more difficult to originate, values were at an all-time high, and the market was feeding off an exuberance that many of us believed was unsustainable.
Our worst fears became reality in the fall of 2008 as the financial industry imploded, values plummeted, and many real estate deals cratered. The uncertainty that resulted carried into the early part of 2009.
• Inventory. The market’s supply of available buildings can affect the timing and viability of the transaction. We are in a seller’s market.
In these times, the demand for space far outstrips supply. As a result, a seller can afford to be bullish and often is.
We in the business must carefully review the inventory each day and put our buyer or tenant in the best position to make a deal. We must employ creative strategies to identify enough suitable properties to give our clients some choice.
Specifically, we must convince the client to expand or modify the geographical search area, building square footage and transaction structure (lease rather than buy or vice versa).
• Interest rates. A wide swing up or down can motivate a deal. We saw double digit interest rates in the early ‘80s and have experienced record low interest rates for the past couple of years.
If our interest rates were to spike by even a point or two, my belief is that you would see a spate of buying activity like no other.
Any combination of the above can cause a change in motivation. In my experience, this is the one thing – the change in motivation – that can cause a real estate transaction to collapse. Let’s hope for good attitudes, a balanced inventory and affordable interest rates!
Allen Buchanan is a principal and commercial real estate broker at Lee & Associates, Orange. He can be reached at 714-564-7104 or abuchanan@lee-associates.com. His website is www.allencbuchanan.com
