Monthly Archives: October 2022

Length of Lease: Short Term vs Long Term Leases

length of lease

What is the appropriate length of lease for your business? You may be looking for a long or short-term lease. Factors such as the age and stability of your business, your plans for growth, employee impact study, the nature of your work, and the changes you’ll expect in the neighborhood will all affect your decisions. So what should the length of lease look like and what items can you negotiate based on the length of lease? You and the landlord need to see eye to eye on the following issues before you begin serious negations:

  • Amount of rent (or, if it’s a net lease, a good approximation).
  • Size of the space. The ways landlords measure space BOMA is a great resource to understand how commercial square footage is measured.
  • Length of lease (its term)
  • Options- the landlord’s willingness to let you extend the length of lease or expand into additional space in the future, if that’s important to you.
  • What renovations if any will you need?
  • If there are renovations, you’ll have to negotiate landlord’s tenant improvement contributions.

Some landlords may not be able to give you the length of lease you’d like. The space may be the subject of an option held by another tenant, with plans to take the space sometime in the future. For example, in a multitenant property an existing tenant may have an expansion right into “your” space that may be exercised at a specific date. If so, the space will be available to you only until that time. The landlord can’t’ offer you a lease that extends beyond the exercise date of the option-holding tenant. Even landlords who are not constrained by preexisting options may still be unwilling to meet your needs. This is why it’s important to create a short-list of alternative spaces to consider.

Getting a Short-Term Lease in a Long-Term World

If you’re uncomfortable with a lease longer than a year, but the landlord is looking for a tenant to sign up for five years, the deal may not be workable. Is there a reasonable likelihood that the landlord will agree to a shorter term? The answer will depend on current market conditions. Like many other issues in lease negotiations, the landlord’s willingness to bend a bit may depend on whether it’s a “Tenant” market or “landlord” market. Vacant space is expensive to carry and the landlord may have to make some compromise to get some rent income flowing in. By contrast, if it’s a “landlord’s” market, the landlord is more likely to hold fast, figuring that some other tenant will show up soon who’s willing to sing a longer-term lease and meet the landlord’s other demands as well.

If the landlord insists on a lease term that’s longer than you’d like, all is not necessarily lost. You may decide to agree to a length of lease that’s longer than ideal say three years rather than one as long as this gives you a way to get out earlier (option to terminate). To set up this contingency, you can terminate the lease after a set amount of time as long as you pay a predetermined amount such as a month or two of additional rent. You may be able to get out of a long lease by turning over your rented space to another lease (by subleasing or assigning) most leases allow you to do both, but only with the landlord’s consent If you can find a qualified replacement, this may be your ticket out, since it may state landlords can’t unreasonably turn away an acceptable prospect.

Is the Space Available?

For some businesses, the move-in date is crucial. For example, if you’re already renting space and looking to move, you may need to give yourself enough lead time to transition to a new space. Or the building may be getting sold and you have a hard-stop date that you have to move out. You may urgently need to be installed in your commercial space by a certain date to be ready for seasonal demands such as a tax preparer, or accountant.

Coordinating your needs with those of the landlord can be difficult. Some of it may be in the control of the landlord and depending on your tenant improvements some of it may be outside their control, such is the case with materials and supply chain issues. It’s easiest when the space is vacant and you and the landlord agree on a firm move-in date that’s a month or two away. But if the space needs major work or you’re concerned about whether the current tenant will vacate on time, you may have a problem. It’s always best to start looking for new space 6 to 8 months from when your lease is expiring. If you have a clause in your lease giving you the right to renew it (an option clause), you may want to consider exercising it. But be careful, your option may be longer than you need. If the landlord refuses and you’re obligated for the entire term, you’ll have to try sublet when your new space becomes available. But because subletting usually requires the cooperation of the current landlord, this approach may not work.

Looking to gain some more insight on the Commercial Real Estate market in Phoenix?

There is no denying the influx of demand we’re currently seeing in Phoenix. As a result of a rapidly growing business environment, and the right social info structure to support it, Phoenix is likely to hold high-quality investment opportunities for years to come. ICRE Investment Team has partnered with the most prominent businesses, banks, construction companies, and investors to provide the most up-to-date information on Phoenix’s market condition and opportunities. Feel free to reach out to us for more information at any time.

 

Phoenix Office Space – Market Update & Projections

Phoenix Office Space

What lays ahead for Phoenix office space? As we inch closer to 2023, many investors are wondering if there are still any opportunities to be found in Q4 of 2022. While there is much speculation still circulating around the health of the economy, there are certain sectors within the capital markets that remain strong.

A look back at Q3 of this year may be able to shed some light on which areas of the market show indications of retaining growth well into 2023. As we’ll now dive into, the Phoenix market in particular, has shown noteworthy strength and stability – even in the midst of looming economic turmoil.

Phoenix Office Space Market Overview

Despite questions around the nation’s economic stability, investors are still continuing to pour capital into the Phoenix office space market. Throughout the last five years, Phoenix has held an average of $2.9 billion in office assets traded. In the last 12 months however, the city has seen around $3.6 billion in office assets traded.

Phoenix’s strength and room for investment opportunity can be seen in a few different metrics.

  • Price per SF: Phoenix held steady at $230/SF in Q3 of 2022, while the national average rose above $340/SF.
  • Asking Rents: Phoenix finished Q3 with average asking rents of $29.05 across asset classes, exactly five dollars below the national average of $37.67

Class A properties make up the bulk of office investments being made in phoenix. It’s estimated that just under 70% of leasing volume conducted in the third quarter can be attributed to new leases and class A deals. Not only that, but class A properties in the Valley’s office market also posted a positive net absorption of 317,341 square feet. As we’ll dive into a little later, much of the enthusiasm around class A deals has to do with the quality of the building in concern of employee expectation.

Subleasing Report

Different reports estimate there to be between 6 and 7 million square feet in sublease inventory on the Phoenix market in Q3 – a record mark to date. In the third quarter alone, Phoenix added nearly 1 million square feet in sublease space.

More than likely, the growth in sublease inventory has come as an effect of COVID 19 and the rise in popularity of the in-office hybrid work model. The changes in work standards have pushed underutilized space onto the market.

A New Office Environment

The Phoenix metro area has grown its labor force by nearly 100,000 employees in the last 12 months alone, representing nearly a 5% increase year-over-year. Phoenix has been growing rapidly as a major west-coast contender in the realms of business and tech, but the growth doesn’t come without some major changes. As more and more talent pours into the area, major companies are being forced to improve their offices. This doesn’t just explain the growth in subleasing inventory, but it also explains the impressive numbers in new construction and sales volume in class A properties.

While Phoenix is growing overall as a destination for high-quality talent, like much of the nation, the city still battles bringing workers back from the work-from-home trend. With that being said, the state of the ongoing work-from-home vs back-to-office battle is changing.

Several studies have come to surface in recent weeks highlighting the nation’s improved sentiment to bring professionals back to the office. Initial numbers from the study (which polled 1,267 office space decision-makers and influencers) showed that 86% of respondents agreed that in-person office work is an essential part of a successful business to at least some degree.

Even more interesting, class A office tenants responded to the study with the highest degree of enthusiasm, with 90% agreeing on the importance of in-person work. It’s also worth noting that on a regional basis, the study showed the highest concentration of respondents wanting to see more in-person work to be located on the West Coast. Combined with the impressive number of class A tenants agreeing on the importance of in-person work, this may explain why Phoenix has seen some significant largescale office purchases in recent months.

Office Development in Phoenix

The Grove – Fully Leased New Development

The Grove – a massive, mixed-use campus located in Arcadia – now has the entirety of it’s 180,000 square feet of office space fully leased. The office component makes up the first of many phases of the Grove. There are dozens of multi-million-dollar businesses set to make the Grove their new home. Some of the more notable businesses include JPMorgan Chase and the Phoenix Suns.

RED Development, the firm heading operations at the Grove, reports that it isn’t just the Grove that shows a promising forecast in terms of Phoenix’s office market. They report that 98% of their total office portfolio has been leased.

In total, the Grove’s development will include three class A office buildings, upscale dining, retail space, a boutique hotel, and 58 luxury residences. It’s estimated to be at least a $400 million project upon completion.

More Notable Development in Phoenix

Biltmore Commerce Center: Located at 32nd street and Camelback, the Biltmore Commerce Center has recently been acquired by George Oliver Companies for $61 million. The office space developer plans on transforming the space into a modern and urban workspace with open floor plans and accommodating amenities with a $52 million renovation.

The Esplanade: Only a mile down the road from the Biltmore Commerce Center, Monarch Alternative Capital purchased The Esplanade for $385 million in March of this year.

Final Thoughts on Phoenix’s Office Space Market

There is no denying the recession-based fears surrounding capital markets as we head into 2023. At the same time, certain markets in specific areas of the country continue to thrive. With dozens of class A properties already being sold and developed this year, Phoenix is definitely one of those areas.

At ICRE Investments, we are well-versed in the subtleties of Phoenix office space and have built lasting connections with the area’s more prominent commercial investors, property owners, banks, and commercial lending institutions. If you are looking for some guidance within the rapidly growing office market in Phoenix, we are happy to help. Don’t be afraid to reach out. At ICRE Investment Group, we are especially well versed in the commercial markets surrounding Phoenix, and also have access to a growing list of investment properties around the globe.

2023 Commercial Real Estate Forecast

2023 Commercial Real Estate Forecast

The 2023 Commercial Real Estate Forecast is being shaped by contradicting perspectives. With rising interest rates, inflated markets, and economic uncertainty looming around every corner, there is host of signs showing that commercial real estate will struggle in the years to come. Just the same, there is an equal amount – if not – more data supporting the opposite claim.

In 2021, CRE sectors of multifamily and commercial office experienced growth of 117% and 56% respectively. 2022 has seen similar growth, but can the same be said for 2023?

2023 Commercial Real Estate Forecast Overview

There are a few key numbers that can give investors an idea of what commercial real estate might look like in 2023.

  1. Transaction Volume: While there may be growing concerns around capital markets as a whole, commercial real estate transaction volume is expected to stabilize in the years moving forward, with an estimated $800 billion in 2022, $725 billion in 2023, and $750 billion in 2024.
  2. Price Growth: Throughout 2022, ULI (Urban Land Institute) expects price growth to remain at 10%. While still positive, it’s expected to fall slightly in 2023 to the 6-7% range.
  3. Vacancy Rates: While specific rates can vary city to city, overall, the nation’s vacancy rates are expected to stay the same (around 12.3%) throughout 2022 and 2023.

Sentiment of Recession set to Stifle Growth

While the hard data mentioned above should encourage growth, the ongoing conversation and expectation of an upcoming recession may have the opposite effect. By no means is the looming economic downturn expected to match the 2008 crisis. At the very least, 2023 will still hold modest growth for the commercial real estate industry.

Recently, a panel of economists and global real estate leaders were asked about the expectations for CRE in 2023. 40% of those who were interviewed said that revenues should increase, 48% said revenues should decrease, and 12% expected no change. The survey might not shout prosperity across capital markets, but it’s a far cry from the supposed global recession promoted by others.

Optimism in the Commercial Real Estate Markets

There are two sides to every story. While there is certainly some evidence supporting the claim for a downturn, there is just as much projecting the opposite. The commercial real estate market specifically, has a number of sound fundamentals backing a positive 2023 Commercial Real Estate Forecast.

So far in 2022, we’ve seen stable or improved conditions for cost of capital, capital availability, vacancy levels, leasing activity, transaction activity, property prices, and rental rates.

As we’ll dive into next, certain areas, such as commercial offices, have seen especially promising signs in terms of vacancies, rental growth, leasing activity, and new construction.

Office – The Biggest Commercial Real Estate Trend of 2023?

The growth we’ve seen in 2022 hasn’t been equal across the board. By most statistics, multifamily stood out as the sector with the most growth, and the office sector was right behind it. Moving forward however, there are a few factors that show expedited growth for the office sector across the nation.

  1. “Return to Work”: Investors in commercial real estate are happy to see the downfall of the phrase, “work from home.” Tech and finance were two of the many industries hit hard by the work-from-home movement. However, in hopes of improving productivity and company culture, currently the companies in those sectors are pushing their employees to come back to the office.
  2. New Construction: The employees in industries like tech and finance won’t return to work without the acknowledgement certain caveats. Many are demanding better amenities and an improved work environment. This has forced the hand of many of the biggest tech and finance companies to invest in new office space in select cities. Additionally, commercial real estate sectors such as retail, are expected to grow in the anticipation of office growth.
  3. Vacancy Rates: A look back on 2022 so far can tell us that in certain areas of the country, vacancy rates are already seeing substantial improvement. This growth – or at least stability – can be expected moving forward.

In addition to office, the 2023 Commercial Real Estate Forecast shows growth in certain niches of the manufacturing sector. We all remember the supply chain concerns around semiconductor chips during the COVID-19 pandemic. While those concerns have been partially put to rest, the demand in years to come is still currently underserved.

The semiconductor chip manufacturing niche, alongside electric vehicle manufacturing, has supported legislation soon expected to pass – not to mention billions of dollars in federal grants. There is currently $33 billion in semiconductor chip manufacturing plants in the planning stage, something that presents opportunity for those in construction as well as commercial real estate. Investors are currently focused on the lucrative semiconductor opportunities in states like Arizona and Pennsylvania.

How Interest Rate Hikes Will Impact Commercial Real Estate in 2023

Concerns around interest rates make up much of the conversation around the 2023 Commercial Real Estate Forecast. As of September 2022, the Federal Reserve raised its benchmark interest rate by 0.75 percentage points. Throughout 2022, the Fed has remained consistent on its intention to enact rate hikes until the expected 4.6% benchmark of 2023. With consistent, spaced-out interest rate hikes, the Fed hopes to curb the inflation we are seeing across markets right now.

The rate hikes negatively impact the commercial real estate market in a few main ways: commercial financing, construction costs, and rent prices. While the rate hikes may suggest incoming volatility in 2023, it won’t keep investors away from commercial real estate altogether.

Certain sectors, such as multifamily housing, office, and industrial have seen incredible growth throughout 2022 and are expected to see much of the same in 2023. Turning back the clock on 2022 can help us see which cities in particular, stand out as the best commercial real estate opportunities moving forward.

If you are looking for more information on the current state of the commercial real estate market, don’t be afraid to reach out. At ICRE Investment Group, we are especially well versed in the commercial markets surrounding Phoenix, and also have access to a growing list of investment properties around the globe.

 

 

 

 

National Commercial Office Demand in 2022

National Commercial Office Demand in 2022

Commercial office demand is actually growing nationally. In an article I wrote a couple weeks ago, we compared the Phoenix office market with the markets in Seattle and San Francisco. In this article, we’ll be drawing a comparison at the national level, looking at wider range of statistics to really get an idea of just how good the current commercial office market is. Most metropolitan areas around the U.S. have been posting consistent periods of growth in the commercial office space. Some cities are even posting upwards of two year’s growth.

With the office markets sustaining growth even in the face of economic uncertainty, many people are wondering if there is still opportunity in the commercial office market. In this article, we’ll cover everything you need to know about national commercial office demand in 2022, and go over a few specific cities that are presenting the most lucrative opportunities.

National Commercial Office Occupancy Rates

Before taking a look at the deeper statistics associated with the commercial office markets around the US, it can be beneficial to look at how the market is performing on a surface level. As they were one of the asset classes most effected by the Coronavirus pandemic, it wouldn’t be surprising to find office occupancy rates that suggest a struggling market.

Looking at the numbers, we see that the market is actually thriving. Nationwide, occupancy rates currently sit at just under 70%, trending up from the previous quarter’s posted rate of 66.79%. Overall, the nation’s occupancy rates have been trending up quarter after quarter since the 62.40% posted in Q3 of 2020 during the peak of the pandemic.

Investors wondering if the current market has any room to grow shouldn’t worry, as the nation’s current 70% occupancy rate is a far cry from pre-pandemic levels of 83%. These numbers combined with a heightened sentiment for workers to transition back to the office project a lucrative opportunity in the years ahead.

National Office Vacancy Rates

The flipside of occupancy rates gives us an even better idea of the current state of the nation’s office markets. The average vacancy rate around the country currently sits at just under 18%. While the data varies widely city-by-city, the nation just recorded the first annual decline for office vacancy rates in the last five years, marking a major improvement even amidst the global pandemic.

Total vacancy rates around the country tend to fall in the 12-19% range, with a few outliers above 20% and below 10%. Here are some specifics:

  • Atlanta: 19.4%
  • Denver: 17%
  • Phoenix: 14%
  • Chicago: 18.2%
  • Miami: 8.6%
  • Houston: 24.1%
  • Boston: 8%

National Office Cap Rates

2022’s national data shows that buyers are finding better and better deals, with a cap rate closing at an average of 7% in Q2. By sector, cap rates are highest in the net lease market, with numbers pushing over 7%. Most economists expect rates to continue to climb in the upcoming quarters.

Phoenix’s cap rates keep up with national averages, posting rates of around 7.5% for commercial office spaces in both metro and suburban areas. As interest rates begin to stabilize, the markets in Phoenix and other major cities across the country are also expected to see increased cap rates throughout the rest of 2022 and into 2023.

Office Space Under Construction

Outside of posting healthy numbers in occupancy, vacancy, and cap rates, the nation’s outlook on office space construction also looks promising. Current estimates place around 150 million square feet of office space under construction nationwide. Unsurprisingly, Manhattan stands out as the city with the newest office construction underway at 19 million square feet. Behind them, Dallas, Seattle, Charlotte, Los Angeles, Denver, and Phoenix are each posting numbers between 2 and 7 million square feet of office space under construction.

National Office Price Per Square Foot

The value of asset classes in the A, B, and C categories have all been averaging up throughout 2021 and 2022, with A class assets reaching an average of over $400 per square foot. Nationally, office transactions so far in 2022 have sustained an average of $258 per square foot. Unsurprisingly, Manhattan and San Francisco top the list for highest YTD price per square foot at around $900. Phoenix, Denver, Tampa, Atlanta, and New Jersey all posted numbers in the $250-$350 per square foot range.

In total sales numbers, the $258 per square foot national average translates to over $59.6 billion dollars in office transactions – and that’s only through the end of August. Individual markets look just as strong, with Boston, Dallas, and Manhattan all posting year-to-date sales of over $3 billion dollars. Right behind them, Seattle, Houston, and Phoenix currently have year-to-date commercial office sales of around $2 billion dollars.

The twelve-month trend shows assets in the commercial office space to have quietly trended up throughout the last eight quarters. Despite larger economic concerns, economists expect the growing commercial office demand to continue.

National Commercial Office Demand Broad Outlook

Much speculation still remains on how soon workers will be returning to the office. A study in May of this year was completed across 185 office-using companies in the U.S. that found 36% of employers already had a return-to-office plan underway. Similarly, 25% of the companies planned for a total return-to-office by June, while the rest were still uncertain.

There is also evidence supporting increased amounts of new office construction. This has resulted from the heightened demands from employees, some of which include renovated buildings, advanced air-filtration, cleaner working environments, and in some cases a whole new office altogether. More and more companies are doing away with the classic “assigned office/cubicle” model and beginning anew with an open desk/open floor plan.

Ready to Find Your Next Investment Opportunity?

There are lucrative investment opportunities as commercial office demand continues to grow all around the country, especially in the areas of Phoenix, Scottsdale, and Mesa. While ICRE Investment Group is involved with investment properties around the globe, we are well established in the greater Phoenix area. We’ve built connections with the more prominent commercial investors, property owners, banks, and commercial loan services.

If you’re looking to take advantage of the fast-moving, quickly growing investment opportunities in today’s market, feel free to contact us for more information. We’re happy to help!