It’s a common question I frequently hear from friends and acquaintances: What’s moving in the real estate business?
After explaining I don’t sell houses, I usually say the last quarter saw a big increase in industrial leases — or retail leases, investor purchases or whatever the trends were for the last several months.
That’s the way it goes in commercial real estate. The market moves, trending this way or that in search of the path of least resistance. Transactions occur when the property type, size, improvements and cost all line up between buyers and sellers and landlords and tenants.
Commercial real estate brokerage, then, is a constantly changing business that requires a knowledge of available inventory for purchase or lease, the effective price points and a sense of buyer or tenant demand that influences those prices.
When demand is small and inventory is large — as is the case with large vacant commercial land parcels today — prices might fall to a range that attracts investors who know prices have hit bottom and will only get better. Real estate that has had little demand and offers low prices as a result of that lack of demand will start moving when buyers see an opportunity and sellers decide it’s just not worth holding any longer. Sales occur when perceived benefits to the buyer and seller are equal.
In 2012, Mesa County experienced an increase in investor purchases, many of which resulted because the negotiated prices equaled the benefits sought by the investors.
An example of this would be a residential four-plex a bank sold to an investor who demanded an 8 percent return on rental income less expenses. The transaction occurred because the price met the investor’s expectations.
The same happened when a 2,500 square foot commercial office and warehouse that was vacant for over a year was leased. The landlord and tenant agree on a lease price that, while 70 percent of the previous rent, met the needs of both parties. The market moves when landlord and tenant benefits are equal.
Let’s say you’re sitting on a $1 million property that’s draws little interest from buyers or tenants. What’s needed to prompt a relatively quick sale or lease transaction for the owner?
That could depend on the age of the structure, its location, the lack of a needed fenced yard by some users, the asking price or lack of relative demand in the overall market because of industry changes. Energy exploration and production has slowed in the region because of jobs moving to other areas developing oil rather than natural gas.
Depending on the answers to those questions, it could be best for the owner to lease the property for a relatively short term of three years or less to maintain the property and cover holding expenses while waiting for the market to improve. The market for that property will move when the landlord and tenant realize benefits that are more or less equal.
Real estate sales and leases occur every day. When owners consider the net benefits needed by buyers or tenants, it’s far more likely a transaction will occur and their real estate will move.