Balance in a market — or lack thereof — can dictate how offers are made or received.
Think about it this way. If you’re an occupant in a buyer’s market, you have myriad choices. Conversely, try to transact in an environment weighted toward owners, and you’ll be lucky to have any choices.
In the industrial real estate arena, this balance has tipped in favor of occupants. Not terribly long ago, this wasn’t the case. But the spate of new development coupled with a softening in demand has created a glut of available properties.
In a balanced environment — where supply and demand are at parity — a negotiation would unfold like this. A need emerges. The alternatives are considered: three to five of them. The best is selected for function and value. An offer is made. A back and forth dreams. Agreements are made and reduced to a contract. The deal is completed.
Now, tip the scales in favor of the occupant or the owner, and a very different approach must be employed. We start with the need. But in an occupant-hedged domain, rather than three to five alternatives, there are 20! There are a number of these available buildings that are functional and can be leased or purchased at a great value. So how do you make sense of this clutter and refine it to the best option?
What follows is a strategy I employ.
Clarify the need
Start by defining the fundamentals of what you seek:
Are you leasing, purchasing, or considering a hybrid option? What incentives (eg, free rent, tenant improvements) are critical? What is your budget? Consider base rent, escalations, and other costs like common area maintenance (CAM) fees. Do you need special features like upgraded office space, employee parking, or nearby dining and retail? Is the property move-in ready, or will it require modifications? Is ownership an option, and how does it align with your long-term operational goals?
Establish a shortlist
In a market flooded with options, narrowing the field is essential. Use the SPACE framework to assess each property’s strengths and weaknesses:
1. Structure of the Deal:
—Are the lease or purchase terms favorable and flexible?
—What incentives are offered, such as tenant improvements or free rent?
2. Price:
—Is the rent or purchase price competitive within the market?
—What additional costs, like property taxes or operating expenses, impact the total cost?
3. Amenities:
—Are there value-added features like upgraded office areas, energy-efficient systems, or nearby retail and dining options for employees?
—Does the property provide unique advantages, such as expanded parking, fitness centers, or collaborative spaces?
4. Location:
—Is the location approximate to Mears, key, employees, and customers.
—Are the streets surrounding the building conductive to truck traffic?
5. Equity of ownership:
—If ownership is an option, what are the financing terms?
—How does owning versus leasing align with your operational and financial goals?
—If you are leasing, what is the financial position of the ownership. Will they be able to fulfill the terms of the transaction?
Request proposals
Once you’ve identified your top candidates, request detailed proposals. These should include:
—Pricing (base rent, escalations, CAM fees, purchase price)
—Terms (lease length, purchase options, tenant improvements)
—Key features (amenities, condition, and ownership opportunities)
Rank the alternatives
—Property A scores highest for deal structure and price but lacks sufficient amenities.
—Property B scores well across all categories, offering both favorable terms and modern amenities.
—Property C offers ownership potential but requires significant upfront investment in renovations.
This process provides a clear, objective way to prioritize options.
Negotiate
With your top-ranked property identified, enter negotiations. Use your position in an occupant-favored market to secure the most favorable terms:
—Extended free rent or higher tenant improvement allowances
—Flexible lease terms or ownership incentives
—Concessions like lower operating costs or early occupancy
If negotiations stall or due diligence reveals concerns, pivot confidently to your next choice.
Trust but verify
Even with a top-ranked option, thorough due diligence is critical. Conduct property inspections, financial reviews, and legal checks to ensure the property meets all expectations.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at [email protected] or 714.564.7104.
