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Is a new kind of “crash” on the horizon for real estate?

Posted on August 30, 2021 by Mike Kushner in Blog, Commercial Real Estate, Local Market, Trends No Comments

It doesn’t take more than a quick glance through the news to read something about the fast and wild real estate market that has risen from the chaos of a global pandemic. Listings are selling within days of hitting the market, well above asking price, and construction can hardly keep up with the demand for new residential and commercial properties. There are many factors impacting the temperature of the market which make it quite different than the real estate “boom” we know all too well from 2008 – as well as the crash that followed.

Should real estate professionals as well as buyers, sellers, and builders be wary of a similar crash on the horizon? Without a doubt, the market cannot sustain this pace indefinitely, but it also doesn’t mean it will end in a crash-and-burn (or rather explosive) style that it did in 2008. Keep reading for a high-level overview of why the 2021 real estate boom is unique, and what we can expect as the tides inevitably turn.

Noteworthy Differences Between 2021 and 2008

Lower leverage and higher down payments – When the market corrected itself in 2008, overleveraged home buyers brought down the housing market, and some of that contagion spread throughout the rest of the property markets quickly causing a “wildfire” of sorts. As we now approach Q4 of 2021, the housing market is robust with buyers coming in with lower leverage than ever. Despite record-high housing prices, we’re also seeing a record-high percentage of house buyers bringing in 20% down payment or better. Meanwhile, 26% of all houses are sold to cash buyers. With so much money being printed by the Federal Reserve and still tight underwriting standards, only the most well-qualified house buyers are getting a chance to buy and even they are swamping the available inventory.

Slow and low construction – Housing construction levels remain well below that of the 2005–2007 period, which preceded the 2008–2010 correction. Part of that is due to wary housing builders who lived through the chaos of 2008. Another consideration is the disrupted supply chains due to COVID-19 deaths, illnesses, and lockdowns. Until we can fully resolve the prolonged impact of COVID-19 on a global basis, we can expect to deal with supply chain issues and higher prices from inadequate supply. And unfortunately, with the way that variants are arising from all the global hot spots, combined with anti-vaxxers, it’s going to be a long haul out of this storm.

Falling interest rates – Right now interest rates remain at record lows and falling. Interest rates will continue to fall during the current inflation spike and after; that’s how the mechanism of Federal Reserve money printing works. But it’s not advised to expect interest rates to climb just because rates are low today. Until the Federal Reserve changes its policy direction, there is no catalyst for higher interest rates, at least not yet.

Preparing for Impact: What kind of crash to expect?

Collectively, real estate professionals agree that a crash is on the horizon for office and retail real estate. Although “crash” may be too strong of a word – rather we should view it as a natural flow to the ebb we’ve experienced, and a course correction like what must occur after any major market shift.

Here are some important things that are boiling under the surface that will have an impact on the market sooner than later. Even with the general reopening of the U.S. economy, nationally office space demand is nowhere near what the still high asking prices for office buildings would imply. Furthermore, retail is getting crushed by online shopping, which reached escape velocity during the COVID-19 lockdowns. So, those two property segments have a lot of room to fall until property owners figure out how to adapt. The hard reality is that many commercial property owners may simply run out of cash before they can adapt and some of that price drop may spread to neighboring housing in 2022–2023.

Our current market is driven by supply and demand. While no one can predict the future with 100% accuracy, I don’t think we are heading for a catastrophic “crash” per se. Rather, I see the housing market continuing strong for at least eight to ten months before we see a significant slowdown and evening out.

Key Takeaways

The bottom line is that there is a property market readjustment coming, but it’ll be quite different from what the United States experienced in 2008. Those circumstances were uniquely reckless and volatile. Though real estate will always be (not crazy about this wording), often at a rapid pace, the market right now is not a castle built on quicksand as it was 13 years ago. As a whole, the nation has learned from these mistakes and is not endorsing overleveraging of buyers. Additionally, construction has slowed for various reasons, most beyond our control, which has naturally put some “brakes” on the market.

The most important takeaway is for potential real estate buyers. As it stands, there is no general advantage to wait. As interest rates fall, housing becomes more affordable at ever-higher prices. If you are in the market for property right now, then buy right now. Simply put, the market will continue to shift and where some pros lessen, others will emerge in your favor. The best move is to hunt for opportunities overlooked by others, so you don’t end up in an impossible bidding war or jump into a property that really isn’t the right fit for you. Don’t get caught up in the manufactured chaos but remain steady in your thinking and purchasing. Most importantly, link arms with a trusted real estate professional who can help you navigate the choppy waters of the market – now and into the future.

What is your take on the current real estate market and the potential for a crash in the future? Do you agree with this prediction or have one of your own to share? Join the conversation by leaving a comment!

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Economic Impact of Rising Commercial Construction Costs

Posted on July 14, 2021 by Mike Kushner in Blog, Commercial Real Estate, Local Market, Trends No Comments

When a global pandemic first hit, the main concern was rightfully on the health and wellbeing of our population. As we slowly gained knowledge and tools to bring the spread of this virus under control, something equally as powerful and disruptive was already burning through the economy like wildfire.

Ongoing pandemic-related disruptions in the supply chain of a range of construction materials are undermining project demand and this has trickled down to impact just about every industry imaginable. Most directly, the delays and cost increases fall on construction businesses, their workers, and their clients who are waiting on them to complete projects varying from a single-family home to mega complexes that have been in the works for years.

These mass shortages caused by the inability to ship or receive some of our economy’s most essential materials, such as lumber and steel, have the construction industry in between a rock and a hard place. And we can be sure that they will not be the only sector to feel the blow of delayed project timelines and skyrocketing costs. How does all of this stand to impact the progress and financial health of our economy? Keep reading for key insights.

Understanding the Impact

According to construction project estimators, one of the biggest reasons for material shortages is the inability to ship available materials by rail or truck. Due to container and trucking shortages being felt across the country, anything with significant shipping and logistics components is highly likely to cause lead time issues. If the easing of tariffs is put into place, pricing and availability should begin to return to normal levels, which would have a positive impact on current projects and the market as a whole. However, with the shipping container and freight backlog that currently exists, bringing in significant quantities of overseas material only adds to the current challenge.

GRAPH COURTESY OF AGC OF AMERICA

Shortages Drive Cost

While general contractors can usually protect against the expectation that costs will increase, the construction industry has not experienced such dramatic material cost increases in recent history. Material cost increases, coupled with the already existing labor and housing shortages, will continue to impact the industry, domestically and globally, for the foreseeable future. Such shortages could delay the start of new projects around the country and may trigger additional claims on projects that are currently underway.

These increases and challenges are cause for concern; it’s important for business owners to consider the types of materials that their project will require. While commercial construction material costs have risen as well, it is not to the extent that residential construction costs rose due to its heavy reliance on softwood lumber. For commercial construction, steel prices generally have a greater impact.

Delays Across the Board

Some material suppliers have completely canceled their bids or contracts due to the lack of materials. While others have indicated delays of six months or more and are currently quoting prices for materials (like engineered wood products) that will not ship until early 2022! Because of these setbacks, the industry can expect an increase in claims and disputes over material prices and associated delays.

Getting Creative with Contracts

Project participants might consider amending their contracts, incorporating new or modified cost-escalation provisions, or adding riders for adjustments to contract terms based on certain material cost increases, such as based on express percentage increases. Parties might also negotiate contract allowances for certain materials or incorporate cost-sharing for material price increases that exceed certain thresholds.

Push On or Wait?

Borrowing is very inexpensive right now, and even a slight increase in lending rates down the road could add hundreds of thousands of dollars in overall costs, depending on the length of the loan agreement. Project owners need to weigh the risks of waiting for material prices to come down against the probability of rising inflation and interest rates. Likewise, if waiting means you can’t expand your production capacity, grow your business, or address the needs of those you serve because of your facility’s limitations, the long-term implications could negate and even overshadow any potential savings.

What’s most important to keep in mind is that the market has demonstrated again and again that everything flows. Trends (and troubles) will come and go, and when the market experiences a negative impact caused by something else, it will look to correct itself almost immediately. To address the delay of construction materials and labor, and the rise in construction costs, as a result, we can see solutions already emerging. These range from using alternate materials, negotiating more flexible terms within a contract, phasing out projects, and getting creative with how and when to borrow money to take advantage of low-interest rates.

The commercial construction industry will rebound, if not even stronger than it was before the pandemic hit. The lesson here is to remain patient, seek innovative and collaborative solutions, and keep your eyes set on the long-term evening-out of any negative impact you may be experiencing today.

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The Pandemic’s Uneven Effect on Consumer Spending

Posted on December 30, 2020 by Mike Kushner in Blog, Retail No Comments

When COVID-19 hit and the U.S. went into full lockdown, consumer spending took a sharp turn. Heading out to restaurants, bars, concerts, or the movies was no longer an option. Even now, nine months later, we are far from returning to how things were. The general public is wary or deterred by new policies like limited capacity, wearing face masks, and social distancing. This has all had a profound impact on how we’re spending our money, particularly on services or experiences. Instead, we’ve shifted our spending to physical goods to find other means of entertainment and enjoyment, and to make our homes more comfortable, because we’re spending considerably more time at home.

Considering all of this, plus the fact that 10+ million Americans are still jobless, the sluggish recovery of consumer spending on services is cause for concern. At the same time, retailers selling goods, especially online and through contact-free delivery, are in a position to grow their market share. Keep reading to learn how COVID-19 has had an uneven impact on spending, and what this might mean for our economy and commercial real estate long-term.

Spending Shifts from Services to Goods

Based on data from U.S. Bureau of Economic Analysis, spending on goods quickly recovered from the initial shock of the pandemic, returning to growth as early as June. But consumer spending on services is still more than 6 percent off pre-pandemic levels.

The reasoning behind these numbers is straightforward. As the pandemic severely limited people’s option to spend money on services such as dining out, traveling, and other leisurely activities, their spending shifted to physical goods because this was both more accessible and deemed the safer option for enjoyment and entertainment. People weren’t visiting public pools or taking vacations, so spending on items like swimming pools, bicycles, kayaks, etc. skyrocketed. For many retailers, these items were out of stock nearly all summer.

Furthermore, people began reallocating discretionary income formerly used for travel and entertainment to home improvements and renovations. We saw things like new appliances, cabinetry, and mattresses run out of stock while hotels, restaurants, casinos, and event venues sit vacant.

A Double-Edged Sword for Economic Recovery

While it’s certainly positive to see overall spending levels recover relatively quickly, the slow recovery of consumer spending on services is concerning for several reasons. First, the United States is a service economy, as the U.S. GDP reveals. In 2019, personal consumption expenditure on services accounted for 47 percent of the gross domestic product, making it by far the biggest contributor to the country’s economic output.

As the following chart shows, clothing and accessories stores experienced a 30 percent decline in sales compared to the same period of 2019. Similarly, food services and drinking places were hit with a 20 percent spending decline compared to last year’s total. Department stores and electronics experienced a 15 percent decline through three quarters of 2020.

At the other end of the spectrum, non-store retailers, building material and garden dealers, as well as grocery stores, have seen double-digit growth rates in the first nine months of 2020, as consumers shifted much of their spending online and outdoor activities boomed in face of the COVID-19 threat.

What This Means for Retail Locations

Some industries have found ways to safely reopen with limited capacity and new policies in place such as social distancing and mandating facemasks be worn. But even nine months after the start of the pandemic, things are far from “normal” and this includes bottom-line sales. Restaurants, bars, and hotels can only operate at 50% capacity or less which is a huge blow to the amount of business they can do in any given week or month. And shopping at retail locations is quickly being replaced by online shopping.

While some retailers have been able to accommodate customers online, many others, particularly small businesses and boutiques, were not equipped to make this shift. For businesses already on the brink of making ends meet, the pandemic was the straw, rather the wrecking ball, that broke the camel’s back. We see shopping centers with major vacancies and entire chains of corporate stores and restaurants bow out of business.

For commercial real estate, especially shopping centers and malls, the future is bleak. In contrast industrial real estate is rising in demand because of big online retailers needing to increase their storage and rapid distribution. People want their essentials (and even non-essentials) delivered quickly to their door-step. With businesses like Amazon offering free 2-day delivery for most items, ample and accessible storage facilities have never been more important.

And for consumers, the biggest takeaway from this major shift in spending is to be mindful and intentional about how and where you invest your resources. How we spend impacts the economy. Though you may hear phrases like “shop local” and think your individual spending is just a drop in the bucket, when all those drops are put together, it has a large impact. For those that don’t feel comfortable dining out, you can still support your local restaurants through takeout or delivery. And if you don’t desire shopping in-store, consider supporting small businesses through curbside pick-up or having items shipped to your home. Our collective spending habits today, even amidst a pandemic, are painting the picture of our economy well into the future.

Even after the impact of COVID-19 on the economy begins to correct itself, what do you think the impact on consumer spending will be long-term? Comments are welcome below!

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COVID-19 and Commercial Real Estate: Why Tenant Reps Are More Valuable than Ever

Posted on October 1, 2020 by Mike Kushner in Blog, Office Leasing, Tenant Representative/Buyer Agent No Comments

Now more than ever, if you are looking to lease commercial real estate, you need a tenant rep on your side. All of the services they provide, which include negotiations, market expertise, coordination, and strategic advice, have not changed. However, given the complexity of the during- and post-COVID economy and all of the changes that keep coming, such services have become more valuable than ever. Here are six reasons why working with a commercial real estate professional who exclusively represents is more important now than ever before.

Your use of space has changed.

This spring, when basically all non-essentially businesses were forced to temporarily close or work remotely, how people used commercial spaces changed drastically. Even after people were able to slowly get back to business and reopen, there was a drastic shift in how much space was needed to accommodate needs. Some businesses decided to remain virtual and thus needed to get out of their commercial space entirely. Others needed more space or reconfiguration of space to accommodate for social distancing. Others still had to consider how they would replace communal spaces like conference rooms and kitchens.

Having a tenant rep on your side to help navigate all these changes is a huge benefit. First, they can help with lease negotiations if you need to break or change the terms of your lease. Next, they can also help you secure more or different space, if needed. Doing this on your own is a big undertaking and you don’t know what you don’t know. That’s where a tenant rep can step in to take this off your plate so you can focus on running your business.

And the market has changed.

COVID turned everything on its head, which includes the commercial real estate market. It’s a new world out there, and the person who can best help you understand the changes and how they could be used to your benefit is a commercial tenant rep. It’s their job to monitor the market and help their clients adjust accordingly. With a tenant rep to guide you, the many unknowns of this market can start to make a little more sense.

Getting to know a new market is challenging.

If your business needed to find a new space during the pandemic, particularly in a different city, this is where a tenant rep can really help you out. With travel restricted in so many ways, it’s virtually impossible to get to know a new market without living there or having visited it. It’s like real estate shopping with a blindfold. But when you can call upon a tenant rep who lives in your new desired market, you will benefit from all of their knowledge and expertise about that market. They can help you identify the right options for your commercial space, allow you to virtually tour it, and work on your behalf to negotiate a favorable lease.

Not everything is represented online.

Another important consideration is what you see online isn’t the full picture. Many commercial properties cannot be found through an online listing. And with so many places to look, how can you be sure you didn’t overlook something. A tenant rep who knows the market knows what spaces are available, even if they’re newly listed and not represented online. They may even know of space that will soon be opening up and is not publicly known. All of this will work to your advantage to help you see your blind spots, and without having to take on the headache of this alone.

Negotiation is at an all-time high.

Thanks to COVID, nothing is immune to change. This includes lease agreements. Many, many negotiations are taking place between tenants and landlords to adjust lease agreements because of the sudden change in how tenants are using (or not using) their space. A tenant rep is skilled in such negotiations and can step in on your behalf to arrive at a reasonable and favorable outcome for your lease agreement with the landlord. It also helps that they know the market and what other commercial spaces are charging per square foot and any COVID clauses that might exist.

You need to protect yourself in lease agreements.

And finally, a tenant rep will be sure you are protected in your lease agreement for any future changes that might take place with your business. For example, does it make more sense for you to have a long-term or short-term contract? What should happen is you need to break the lease agreement? And what options are available to you should you need more or different space from the landlord? All of these unknowns should be addressed before you put your signature on anything and a tenant rep will be sure that all ground is covered.

Have you previously worked with a tenant rep to lease or purchase commercial real estate? If you have, what has been your experience? Do you agree that the role they play is more valuable than ever? Join the conversation by leaving a comment below.

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As Your Needs for Office Space Change, Understand the Role of a Tenant Representative

Posted on April 7, 2020 by Mike Kushner in Blog, Commercial Real Estate, Tenant Representative/Buyer Agent No Comments

The outbreak of COVID-19 hitting the United States has brought with it a tidal wave of challenges and uncertainties. This has been a wakeup call for so many businesses and individuals who must now struggle to adjust. Particularly for business owners who either own or lease commercial real estate such as a retail location, industrial space, or offices, the order to work from home and stay at home has drastically changed their need for brick and mortar space.

Whether it’s right now or once COVID-19 has passed, it’s highly likely that businesses in Pennsylvania and across our nation will have a drastic shift in their commercial real estate needs. In such times, business owners should be reminded that having a tenant representative on your side to represent you and negotiate for you as you reduce the amount of space you currently occupy, move to new office space, or change the terms of your lease is highly beneficial.

In an effort to help business owners understand how a tenant representative can be a benefit to them, and how this relationship works, we want to help answer some of the most common questions surrounding a tenant representative’s role. This first of which is “How do tenant representatives get paid?” Too often, the answer is confused with or lumped into the same category as how listing agents, who represent the landlord or seller, are compensated. But this is not necessarily the case.

What’s important to note is that exclusive tenant representatives, also called buyer’s agents, are unique in that they exclusively represent those looking to rent or buy commercial real estate. They never represent the landlord or seller, and for good reason. As you can imagine, that creates a conflict of interest which you can read more about here.

To answer the question regarding how a tenant representative/buyer agent is paid, here is a breakdown of important points to provide a clear explanation.

Typical Commission

The amount a commercial real estate agent receives on a commission is calculated as a percentage of the total commercial property sale price or lease value. The percentages are negotiated in the listing agreement. It’s important to note that it is illegal due to anti-trust laws to set a market or industry-wide standard for commission percentages, but on average most commissions range from 4% to 8%.

The variance in commission rates is due to a number of factors. In areas that have a surplus of office space, brokers may receive higher commission to entice tenants to particular properties. Brokers may also get varying commissions for office, retail and industrial spaces.

Co-Broke Commission – No Cost to the Tenant or Buyer

While tenant representatives/buyer agents provide their clients with incredible benefits, it’s important to note that the tenant/buyer is not responsible for a tenant representative’s/buyer agent’s fees. Properties for sale or lease that are listed with a broker specify a commission to be paid to the listing broker and shared with the broker representing the buyer/tenant. Landlords are the ones responsible for paying the fees. Most landlords have budgeted for the payment of commissions.

Although tenant reps/buyer agents are incredibly helpful for tenants/buyers looking for commercial real estate, their services also benefit landlords or their listing agent, as they help fill vacancies. Because tenant representatives/buyer agents allow listing agents to quickly turn over empty space, they are often willing to pay for their services. As a result, a buyer/renter can usually enjoy the services of a tenant representative without having to pay anything.

One caveat is that in very rare circumstances, landlords or listing agents may refuse to pay the tenant representative’s fees. Normally, this only happens when the tenant representative was not engaged from the very beginning of the tenant or buyer looking for space which can muddy the waters. This makes it all the more important to begin any commercial real estate search with a tenant representative on your team.

Advantages of Working with a Tenant Representative

If a real estate broker representing the landlord/seller encourages you to do a direct deal without a involving a tenant representative/buyer agent, proceed with extreme caution. The landlord’s/seller’s broker will likely tell you that you will save money by eliminating the tenant representative’s/buyer agent’s fees, but the truth is that the landlord/seller is likely to pay the same amount to their own representative even if you forgo a tenant rep/buyer agent. Plus, not having an agent to advocate for you during the negotiation process could mean ending up with a higher rent rate and less than favorable lease terms.

It’s important to have the knowledge and expertise of a tenant representative/buyer agent to guide you through the leasing/buying process and represent your best interests. A tenant representative/buyer agent can also make your property search less time consuming by showing you only properties that they know fit your criteria. Think of them as your tenant/buyer “concierge.”

Despite the fact that the landlord is responsible for paying the tenant rep/buyer agent, you should rest assured that the tenant representative/buyer agent is working for your best interests. This is because they don’t get paid until you find a great deal!

Has the impact of COVID-19 caused you to rethink the use of your commercial real estate spaces? If you need to downsize or renegotiate the terms of your lease, keep in mind how a tenant representative can be an advocate for your best interests.

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COVID-19 and the Economy: Changes Coming to Commercial Real Estate

Posted on March 27, 2020 by Mike Kushner in Blog, Commercial Real Estate, Local Market No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

No matter where you go to consume news, you will be bombarded by anything and everything related to COVID-19. The impact of this novel virus on our world is impossible to fully understand or appreciate at this time. The term “unchartered water” is being used quite frequently and it couldn’t be more accurate.

Every industry is wondering how this will impact their business, both immediately and long-term. The simple truth is that no one really knows right now. The best we can do is look to history to see how the world has reacted to similar pandemics, economic crisis, and panic. Though the world has not seen a virus causing a global shut down like we are seeing with COVID-19, we can anticipate the significant changes we may expect to see take right here in Pennsylvania. Here’s how commercial real estate is getting pulled into the fold.

Economic Uncertainty. With so much uncertainty in the stock market these last few days, people get nervous. Talk to anyone working in the financial services industry, and he or she will tell you that most of their time right now is spent talking people off the ledge of making panicked decisions. And their fear is not unfounded. After all, trillions of dollars in paper wealth have essentially evaporated.

As people watch their diminishing 401K balances, they feel rightfully uncertain. And if such uncertainty causes consumers to hit the pause button on spending, a ripple effect is bound to take place. When attendees avoid concerts, sporting events, movies, or restaurants, businesses suffer a decline in sales. Operations who supply these enterprises, such as the trucking, food, linens, security, novelties industries then feel the pinch as the ripples become waves of lost revenue. How does this relate back to commercial real estate? All of these businesses rent or own commercial real estate, meaning CRE gets pulled into the downward spiral.

Supply chain disruption. Here are the facts (changing daily), steel production is down 90% in China. Auto sales in Asia is down 95%. One of the Port of LA’s largest exports is auto parts. Couple these factors with the typical container cancellations during the Chinese New Year and you create an immense lag in product delivery which will ripple out to impact just about every other industry imaginable.

Whole industries have come to a sudden halt. Hotels, restaurants, construction businesses, retail stores – and this is hardly scratching the surface of the businesses across the Commonwealth mandated to shutter their businesses for at least two weeks – likely more. The ripple effect this will have immediately and well into the future is near impossible to quantify. It’s not unlikely that some businesses may fold as a result. If such businesses owned or rented commercial real estate, this is space that will be vacated. Additionally, a lull in new construction will decrease the amount of new space delivered to the market at least through 2020.

Interest rates. There is much conversation and reason to believe that we will soon see more favorable interest rates, making commercial real estate financing more affordable. The reason is that mass stock market sell offs will generate proceeds which must be invested. Typically, a safe harbor for this cash is short term instruments such as Treasuries. However, this needs to be taken with a grain of salt. On March 3rd, The Federal Reserve lowered the federal funds rate by ½ of one percent which was met with much applause. The truth is that this is irrelevant. The federal funds rate refers to the interest rate that banks charge other banks for lending them money from their reserve balances on an overnight basis. The hard truth is that the federal funds rate has no impact on ten-year treasury yields.

The Silver Lining – Despite the doom and gloom being predicted for many industries as the result of the spread of COVID-19, there are (at least) three reasons why commercial real estate should look to the silver lining in all of this. Here’s what they are.

#1. Some stock market investors fleeing the equity markets may choose to start investing in real estate. Why wouldn’t they invest in CRE? After the rapid downturn that’s transpired in the last few weeks, it only seems logical that some would say enough is enough I’m going to pull my money out of the stock market and invest it in a lower risk type of investment.

#2. Treasury rates have hit historic lows. On March 9th, the ten-year treasury bottomed out at 0.569%, rising to 0.981% by Friday, March 13. For comparison, a year ago, the ten-year treasury closed at 2.592% so the decline has been dramatic to state the obvious. Those of us who have debt, whether it is a home loan or loans on our rental properties, are going to benefit by refinancing debt with significantly lower interest rates.

#3. If there is increased demand for CRE and interest rates remain low, the logical result will be that capitalization rates will continue to compress even further than they are right now. This means that even if a real estate investor doesn’t refinance his rental properties, the value of his real estate will still go up as cap rates continue to compress. So bottom line is that those of us who have invested in commercial real estate will inadvertently benefit from this black swan event.

#4. It’s now a tenant’s market. The speed at which the market shifted from a landlord’s market to a tenant’s market can hardly be overstated. COVID-19 has effectively caused a collapse of U.S. office demand, which ironically comes after the market set a post-recession record just last year. For tenants who are hunting for new office, retail, or industrial space, chances are you’re going to be able to negotiate favorable terms and pricing.

In trying and changing times like these, I am very glad I chose to be an exclusive tenant agent representative/buyer’s agent for commercial real estate. I can still be an asset to my clients, whereas other forms of brokerage are more greatly impacted by the COVID-19 pandemic. During this historic time, I can serve my clients through subleasing, lease restructuring, and negotiating better deals based on current market conditions.

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

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Cannabis-Friendly States Get Major Boost in Commercial Real Estate

Posted on February 25, 2020 by Mike Kushner in Blog, Commercial Real Estate, Local Market, Trends No Comments

Already there are 33 states and the District of Columbia that have legalized marijuana use in some form. Many of these states, like Pennsylvania, allow for limited medical use. According to a recent article, dispensaries in Pennsylvania have sold more than seven hundred million dollars of medical marijuana since the Commonwealth implemented the program, just under two years ago. In that time, nearly 150,000 Pennsylvanians are now certified to buy weed.

While the debate of whether to legalize marijuana – medicinal or recreational – is heated, there is one aspect of this topic that is clear. The demand for the production and sale of medical marijuana is evident, both locally and nationwide. And for cannabis-friendly states, the demand for commercial real estate is on the rise. What does this mean for commercial real estate here in PA? Let’s take a look at a few key points.

Increased Demand for Both Commercial and Residential

States where medical and recreational marijuana are legal have seen increased property demand in both the commercial and residential sectors, according to a new study by the National Association of Realtors. The study also revealed that more than a third of real estate professionals polled said they saw an increase in requests for warehouses and other properties used for storage. In the same states, up to a quarter of members said they saw a spike in demand for storefronts, and one-fifth said there was a greater demand for land. States where marijuana has been legal the longest have seen the largest impact on both commercial and residential real estate.

A Double Edge Sword for Residential Real Estate

However, the residential sector has not benefited as much as the commercial sector; in fact there have actually been a few drawbacks as buyers assess the “new normal” of living near a grow house or dispensary. While between 7% and 12% of those polled said that they had seen increases in property values near dispensaries, between 8% and 27% said they’d seen property values fall. Homeowners are still adjusting to how they feel about purchasing property near areas of marijuana growth and consumption. In states where recreational marijuana is legal, 58 to 67 percent of residential property managers have seen addendums added to leases which restrict smoking on properties. The most common issue was the smell, followed by moisture issues.

CRE Investors See This as a Big Opportunity

Cannabis investors are buying up commercial property, particularly warehouses, in states where recreational and/or medicinal cannabis use has been legalized for more than three years, which was revealed in the same NAR study referenced above. Investors realize it is important to understand the supply and demand, and the regulatory dynamic in each state. Focusing on states with higher barriers to entry makes a license more valuable and makes that real estate more valuable. In 2018, warehouse demand in states with only medical use outpaced demand in states with recreational use, 34% to 27%, respectively, according to the NAR study.

The Economic Impact in Pennsylvania

Sales and participation have ramped up significantly since the program’s inaugural year. Last February, total sales had amounted to just $132 million, per the PA Department of Health. Fast forward twelve months, and the tally has risen to $711 million. That puts the Commonwealth at 439% sales jump from year one to year two. In a snap shot, Pennsylvania’s medical marijuana program has:

287,000 people registered
261,000 patients
1,800 registered doctors
1,300 approved doctors (practitioners)
168,000 active patients (2-2.5 visits a month)
4 million patient visits
$711 million in total sales
$288 million wholesale
$423 million in retail sales
$110 avg. purchase per visit
22 of 25 GPs are approved
15 of 25 GPs are shipping product
77 dispensaries are operational

Furthermore, dispensary operators don’t seem to think we’ve reached the saturation point yet. As more licenses are made available, and whatever lie ahead for further legalization of marijuana, one things is certain. As demand increases for marijuana, so will the demand increase for commercial estate.

What’s next for marijuana in Pennsylvania?

Back in October 2019, Governor Tom Wolf came out in favor of legalizing cannabis for recreational use. Last spring, a Franklin & Marshall College Poll showed that 59 percent, or nearly seven in 10 voters, support the idea of legalizing marijuana. But voter support alone is not enough. The legislation will have to pass both the House and the Senate, with much opposition particularly from the Republican Party.

While this doesn’t mean the possibility of someday legalizing recreational marijuana in Pennsylvania is off the table, it does mean there will be many hoops to jump through – just as there was for the legalization of medicinal use. Looking at the issue solely from an economic standpoint, there is much to be gained by continuing to open this market and remove barriers; however there are many other issues to consider.

Given the boost this has brought to commercial real estate, with the demand for more industrial and retail space, combined with more interest from CRE and cannabis investors, it’s wise to continue to watch for trends – both negative and positive. Looking to other states as examples also gives us insight into what to expect as the cannabis market in Pennsylvania grows, and how CRE professionals can continue to capitalize on the opportunity.

Do you agree with these trends and insights? Or do you have another viewpoint to share? Join in the conversation by leaving a comment below.

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Growing U.S. Economy Drives Demand for Commercial Real Estate

Posted on February 13, 2020 by Mike Kushner in Blog, Commercial Real Estate, Trends No Comments

The current economic climate in the United States has been a bit of a roller coaster, and depending upon the industry you’re examining, you may find more ups than downs or vice versa. Trade wars, combined with a slowdown in the U.S. manufacturing sector and around the globe, shook up equity markets and businesses in 2019. But robust job growth has extended the spending power of American consumers, which is ultimately our nation’s economic engine, according to CoStar’s 2019 Year in Review of the U.S. Economy.

To put this into perspective, the United. States is currently experiencing the longest economic expansion since World War II. Additionally, key indicators point to the economy staying solid in 2020, which will extend the record bull run for U.S. commercial real estate. While there are some risks that could eventually move the nation toward a recession, as it stands, the growing U.S. economy is driving demand for commercial real estate, with many factors emerging as a result. Let’s take a look at what the most profound outcomes of this CRE growth.

The growing economy bodes well for demand for commercial and multifamily real estate.

What it means for CRE: Expanding payrolls will continue to fuel demand for office space, while rising incomes and consumption will boost demand in industrial and retail sectors. As job growth continues, consumers appear quite optimistic and unconcerned by the trade war and any economic slowdown abroad.

Migration of workers from the Northeast and Midwest is growing the labor markets, which is fueling real estate demand, specifically in the South and U.S. West.

What it means for CRE: With the increase in labor as well as a growing demand for real estate in the South and U.S. West regions, CRE developers and investors should look to these markets as viable areas of growth. An increase in job creation also means a rising demand for office spaces and apartments. Property management will benefit from high occupancy rates, and job growth will lead to an increase in leasing. With low interest rates, commercial prices will likely see some gains.

The answer to combat rising development costs and rental prices in urban areas may be micro-apartments.

What it means for CRE: Simply put, micro-apartments extract the most value from every square foot. Standardized designs and “pre-fab” or modular construction cut development costs and shorten construction time, meaning developers could reduce expenses and start generating rental income more quickly. Some developers are designing studio apartments that are one-fifth the size and 40% of the cost of a typical studio, netting out to as little as 175 square feet.

Investing in industrial real estate, over retail, is the safer bet.

What it means for CRE: The industrial vacancy rate is extremely low, in many cities it’s below 5%, even 1% to 2% in some areas. Meanwhile, internet sales are cannibalizing traditional retail spaces, such as department stores, malls, and shopping centers. A unique aspect of this changing market is the emergence of “click-to-brick” retailers, like Amazon, that are establishing small retail stores in key areas. These spaces don’t carry much inventory, but they give customers the opportunity to interact with physical products and place an order. So for CRE investors and developers, industrial real estate carries more certainty and less risk than retail at this time.

Moving into the new decade, economists expect economic growth to slow somewhat as the labor market cools.

What it means for CRE: Consumer spending may lose some momentum and persistent global and trade policy headwinds weigh on business sentiment and investment. For commercial real estate, 2020 should remain a solid year of growth, especially for the industrial market. Though real estate professionals should remain strategic and always be looking ahead to factors that could impact economic growth, and CRE growth as a result.

What is your view of the current state of the nation’s economy right now? How do you anticipate this changing in 2020? Share your thoughts and insights by leaving a comment below.

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The Red Flags of an Unfavorable Commercial Real Estate Lease

Posted on September 9, 2019 by Mike Kushner in Blog, Commercial Real Estate, Tenant Representative/Buyer Agent No Comments

As a tenant needing commercial real estate space to run your business, it can be challenging to navigate the many twists and turns of finding the right space and entering into a favorable lease agreement. Your lease with your landlord can have a large impact on the success of your business, or it could cause many headaches. To ensure you’re entering into a fair and favorable agreement, let’s look at some of the most common red flags that can pop up in a commercial real estate lease.

Term of Lease – One of the most important pieces in a commercial real estate lease, short of the price, is the duration of the lease and how it’s structured. You want to be sure you fully understand when your lease begins and when it ends, especially when the landlord is making improvements to the space. A landlord may provide more favorable pricing or terms when entering into a lease that has a longer duration. While this is helpful from a budget perspective, be sure you feel confident that you will want to stay in this space for that amount of time.

Lease Renewal – Another possible red flag in a commercial real estate lease is when and how the lease will renew. When your current lease comes to an end, a landlord may desire the lease to auto-renew. As a tenant, you will want to be aware of this well in advance so that if you do not want to renew your lease you have options to exit the lease. Additionally, look to see if the lease specifies a change in price upon renewal. Sometimes there will be an increase that could hit you unexpectedly.

Lease Termination – Next, be sure you know the terms and penalties for breaking a lease. While it may not be your intentions to break the lease early, various factors impacting your need for the space could make it necessary. If the Lease imposes a steep monetary penalty for breaking the lease early, you may wish to negotiate that down to more favorable (and reasonable) terms.

Environmental Considerations – Some commercial real estate leases may specify that a tenant may not store any hazardous materials on the premises. This is not typically an issue; however, you will want to be sure that included in the lease is a warranty from the landlord that the premises are free of such hazardous materials. In a situation where you plan to use the commercial space (such as a warehouse) for storage of consumables (i.e., food and drinks), you may want assurance that your inventory is not likely to be contaminated.

Insurance – Be sure to check the required minimum coverages for a tenant’s liability insurance. Typical coverage minimums are $1 million per occurrence and $3 million in the aggregate. If the lease specifies higher minimums at a price that is concerning, you will want to make this part of your negotiations before signing the lease.

Maintenance – A commercial real estate lease should outline who is responsible for the repairs and maintenance of all building systems, including HVAC, electrical and plumbing. Should the lease place the responsibility on the tenant, you may wish to renegotiate this. In a situation where the tenant is only leasing a small percentage of the overall building space, it’s unusual for the tenant to assume the costs of repair and maintenance for things that impact more than their rented space.

Defaulting – Closely review the language in the lease regarding missed or delayed rent payments. It is reasonable to request at least one written notice during any 12-month period (to account for a reasonable mistake), as well as a 5-day grace period for rent payments.

Relocation – Some commercial real estate leases may include a section about relocation. Does this grant the landlord the right to relocate the tenant? Under what terms? Pay attention to this piece as it could greatly inconvenience you, if it ever takes place.

While this is by no means an exhaustive list of red flags of which you must be aware when entering a commercial real estate lease, this should provide a great starting point. What’s most important is to review every document closely, ask for clarification, and seek professional tenant representation early in the process. Having an exclusive tenant representative on your side will provide an added layer of knowledge, experience, and protection that will put you in the best position to negotiate a fair and favorable lease.

Do you have a question related to your commercial real estate lease? Reach out to Omni Realty today so we can help you find an answer!

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Tips for Promoting Your Commercial Real Estate Business on Social Media

Posted on July 22, 2019 by Mike Kushner in Blog, Commercial Real Estate No Comments

Businesses in every industry have turned to social media as a marketing tool to share information, grow their band and cultivate an audience. While in many cases, this has proven successful, there are plenty of businesses who miss the mark, and wind up disappointed when their social media strategy fails to deliver its intended results.

For commercial real estate professionals, social media can be a highly valuable tool, but only when used correctly – and consistently. Take a look as we discuss five important points for using social media to promote your commercial real estate business – or any business.

Brand yourself as a thought leader.

We all have to start somewhere. The same is true for building your online brand. Who are you going to be? Your content, and how you share it, will have a profound impact on the answer to this question. In business, I would think most of us want to be branded as a thought leader in our industry. In commercial real estate, you can achieve this by sharing expertise on technical topics, offer an analysis of data and trends, and partake in thought-provoking discussion. One of the most powerful platforms for this is Linkedin. Here, you can use your profile to reinforce your personal brand, you can share content through regular posting, and you can spark discussion in groups.

Make your content unique.

A staggering amount of content hits the internet each and every second. What’s going to make people stop and read yours? If you’re asking for someone to take time out of their day to read your words, it’s important to make them at least one, if not all four of these things: timely, importantly, relevant and interesting. For some added input, we asked John Webster, Owner of The John Webster Company and digital marketing expert.

“There is a lot of ‘noise’ on social media so your content needs to stand out,” explains John. “When sharing information about available properties do not simply inform about the property (everyone does that) take an additional minute to describe something special about the property, who would be a good fit for the property and why this specific property caught your eye.”

Be responsive and engaging.

If you want to create a true “audience” for your business’s content on social media, you need to remain present. This means you need to check in regularly on your posts to monitor comments, and respond. People appreciate and remember a personal response. This also increase the reach of your content. Sure, it make take 15 minutes out of your day to diligently login to your various social media accounts to monitor content, and engage with other people’s content, but make it a point to do this habitually, and it will pay off greatly as you cultivate an active audience.

Share the spotlight.

Once you build a valuable platform for sharing content, whether this is on your website, blog, Linkedin, Twitter, etc., you should consider sharing the spotlight every so often with other professionals who have an interesting perspective to share. Omni Realty often features guest Q&A blogs that expand our area of expertise while growing relationships with other respected professionals. When sharing the spotlight, this also opens up the door for others to do the same. My blogs are often published by TheBrokerList, and shared on their social media, which greatly amplifies their reach.

Build relationships with media.

Most people view the media as a tool, or approach outlets in a very self-serving manner. While, yes, at the end of the day promotion is an objective, you must also work to forge trust, respect, and even friendship with reporters and editors. Omni Realty has received a lot of earned media by approaching local media outlets in this manner. Through relationships with reporters, I’ve had 25+ articles featured in the Central Penn Business Journal, and none of it was paid placement.

Whether it’s a commercial real estate business, or any business that you’re trying to promote on social media, the most important thing to keep in mind is that your content creates your brand. What you share, how often, and how you engage with your audience, will leave a lasting impact and frame how people view both you and your business.

How have you found success when promoting your business on social media? Share a tip or personal story by leaving a comment below.

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