SD sees high demand for owner-occupied buildings

By: THOR KAMBAN BIBERMAN, The San Diego Daily Transcript

Friday, April 10, 2015

The demand for owner-occupied buildings is high, but deciding whether to buy or lease may not be easy. 

This was the topic of discussion at a recent roundtable discussion sponsored by Wells Fargo Bank at The Daily Transcript.

 

While overall commercial loan volumes are down compared with the peak before the Great Recession, Phil Linton, a CBRE senior vice president, said demand and prices for what becomes owner-occupied office and industrial properties are both up 30 percent year over year — the strongest since the mid-1980s. 

"And there's 90 percent financing again at historically low rates," Linton said. "Every single market factor is positive for growth." 

Linton said about half of commercial/industrial sales are either office or industrial condominiums. Linton estimated that there are about 300 owner-occupied sales in the county each year. 

"What are the occupancy costs looking into future years?" Linton asked, adding that much could depend on whether the tenant is the sole occupier of a property. 

Linton said another factor is the nature of the business. For instance, medical workers have to spend a huge amount of money on their offices, he said. Medical and dental professionals who own their buildings generally hold them for the long term. 

"They don't flip and sell after three years," Linton said. 

Gary London, London Group Realty Advisors president, said whether to rent or buy is generally triggered when a company has expansion plans. 

Jim Hatch, a CBRE Capital Markets vice president, said that businesses generally don't plan to move until they are "bursting at the seams." 

Despite what may be a scramble, Hatch said, he can't remember any complaints about buildings that were purchased for the long term.

Glenn Arnold, a DTZ senior vice president, countered that purchases can go awry. 

"Some buildings are so horrible they are a bad buy,” Arnold said, adding that he was faced with marketing a building in Kearny Mesa with a zero lot line and only one entrance. 

And, “it was against the hillside," he said. 

Linton said that while there are isolated problems, existing buildings are almost universally selling below replacement cost.

"That's why you see almost no speculative construction," Linton said. 

Linton, Arnold and Merri Adams, a CDC Small Business Finance loan officer, each noted how a long-term Small Business Administration loan can help make a building purchase possible. 

Such a loan may have other benefits, as well. 

"If you can lock in a loan for 20 to 25 years, that's a competitive advantage," Arnold said. 

Buying a building this way adds certainty over the long term, Adams agreed. 

"If you have $400,000 worth of improvements, those can be applied to your down payment," Adams said. 

Being a willing buyer isn't enough; the acquisition must also make sense for the current owner. 

"The biggest concern there is the quality of the tenant," said Dan Adams (no relation to Merri), a Wells Fargo Bank (NYSE: WFC) vice president. 

Linton said the good news for the seller and the lender is if the buyer of the building is also the user of the property, there tends to be a very low failure rate. 

Arnold said other factors need to be considered. 

"Do you have seven to 10 years left in the business or is it less?" Arnold asked. "Businesses change their strategies for a hundred different reasons." 

Merri Adams said companies don't need to just look at their business. 

"They need to look at how much they are setting aside for retirement," Merri Adams said. "A lot of business owners can't set anything aside for retirement because they have everything tied up in the business." 

Arnold also warned that companies may be too dependent on one person. 

"Sometimes, even after 25 years, as soon as the owner retires -- or gets hit by a bus -- the value of their business disappears," Arnold added. 

Merri Adams said failures may be low, but Small Business Administration lending volumes are still considerably behind where they were before the recession. 

"It took a little while for businesses to get where they were bankable again," she said. "I think banks are all in now."

"Businesses are feeling much more stable," Linton agreed. 

"I'm actually seeing a lot of expansions," Merri Adams said. "This wasn't happening at all before." 

Both Dan Adams and Merri Adams said commercial real estate didn't decline as expected, the way residential real estate plummeted during the recession. 

"The next big drop was going to be commercial and it never happened," Dan Adams said, adding San Diego fared better than most areas. 

Commercial real estate is a cyclical business and each participant had an opinion of where things stand in the cycle and the availability of capital. 

"Changes have taken a long time. … It has been a long, slow slog, but this upturn may have legs," London said.

London added that buildings still have to be the right type to be financed. 

"The market is very strong in Class A buildings, but very weak in B and C buildings," London said. "In industrial, tenants may need to be in Class A buildings or warehouses." 

London said apartments still top the list in occupancies; some parts of the county may be over-retailed with neighborhood centers; and the strength in the hotel market may wane sooner than expected. 

"The hotel market scares me," London said. "I fear that people are paying way too much for these properties."

 

DISCLAIMER: This blog/article has been curated from an alternate source and is designed for informational purposes to highlight the commercial real estate market. It solely represents the opinion of the specific blogger/author and does not necessarily represent the opinion of Pacific Coast Commercial. www.PacificCoastCommercial.com

 

 

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