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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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COVID-19 Crushes an Already Delicate Retail Real Estate Market

Posted on September 1, 2020 by Mike Kushner in Blog, Local Market, Retail No Comments

You don’t have to dig far into the news before you’re hit with another announcement of a retail store closing its doors and filing for bankruptcy due to the global pandemic. For many retail businesses who were already in debt before the hit of COVID-19, this blow has proven to be one from which many businesses will not recover.

It’s reported that as many as 25,000 stores could shutter their doors in 2020 due to COVID-19 impact. This is 10,000 more than the previously estimated 15,000 stores that would close this year following a record number of closings in 2019 and the liquidation of chains like Payless ShoeSource, Gymboree and Dressbarn. And it appears this is only the beginning. The list of retailers filing for bankruptcy since just May now includes RTW Retailwinds, Lucky Brand, J.C. Penney, Brooks Brothers, Sur La Table, Neiman Marcus, Tuesday Morning, GNC Holdings and J. Crew.

In filing for bankruptcy, some retailers like Pier 1 Imports will close all of their stores permanently, while others like Victoria’s Secret and J.C. Penney, will only close 250 and 154 store respectively, but plan to keep the rest open at this time. Even the biggest brands like Starbucks are facing closures even though just moths prior drive-thru lines wrapped around the coffee shop most mornings. They are set to close 400 company-owned locations over the next 18 months. As People stated, it’s essentially every household name brand who is filing for bankruptcy or closing stores amid the pandemic.

A Crisis for Shopping Malls

Interestingly, it’s estimated that approximately 55%-60% of all store closures will be mall-based. This will result in heavily vacant malls that can’t attract the shoppers it once did, possibly forcing more store closures or the closure of the entire mall. As this sweeps across the nation, we will face large, unused commercial retail space with no fast or easy way for owners and investors of CRE properties to recoup their loss.

The challenges surrounding department store closures are unique and especially problematic for malls not just because of the foot traffic they’re supposed to deliver. Many malls also have clauses in their leases that allow other, smaller tenants to leave if anchor tenants drop out. So once retailers like J.C. Penney close this could open the flood gate for massive departures from smaller stores, without any real course of action from the malls.

This begs the question, can shopping malls survive the coronavirus pandemic with the reality of massive, permanent store closings?

Before COVID-19, shopping malls were just beginning to again hit their stride for those who smartly adapted to the shift to online retail. Many had gone to great lengths to incorporate more dining, entertainment, and fitness and personal services into their offerings to attract people to do more than just shop. Now that the pandemic has hit, all of these in-person past times have been severely impacted and forced to reduce occupancies or close entirely. As USA Today shared, “The whole business model of a mall, which is about pulling in as many people as you can and getting them to stay for as long as you can, has just unraveled.”

Analysts at Coresight Research predict a bleak future for shopping malls. They project that about 25% of America’s malls will disappear within the next three to five years. But add that this could rise to as many as 50% if we can’t stop the bleeding. If this happens, the face of America and the way people spend their time and make retail purchases will drastically change even more than they already have.

A Silver Lining – For a Lucky Few

What’s interesting to note is that some retailers have flourished during the pandemic. For these retail stores, nearly all of them – such as Walmart, Target, Kroger and Home Depot – offered essential services of some kind, including groceries and home improvement goods. Few are typically located in malls. And as we know for a while there, if you were a retailer who provided paper goods or sanitizer and cleaning supplies, your business instantly boomed beginning in March.

Additionally, these “big box” businesses are well poised to also benefit from online shopping, already having the infrastructure in place and the warehousing to store and ship items efficiently. For many smaller retailers and especially boutique businesses, it simply isn’t possible to adjust this quickly or finance it.

For retailers who remain hopeful that there will again be a day when people can get back to shopping like they did pre-COVID-19, it’s usually with the belief there will be a vaccine in the next 12-18 months. Unfortunately the reality is many businesses will not survive that long. And for the strong who do survive, they will surely feel the hit in the short-term.

How do you think such widespread retail closures will impact the way we shop and spend our free time? Better yet, what stands to replace the “experiential” model of shopping malls? Share your thoughts by commenting below.

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The Millworks Shares How COVID-19 Has Impacted the Restaurant Industry

Posted on August 23, 2020 by Mike Kushner in Blog, Local Market No Comments

Like most industries, the restaurant industry has faced a sudden and unavoidable need to adapt to the changes amidst COVID-19. Nationwide, restaurants that could typically pack their tables during mealtimes, happy hours, and late night gatherings were forced to shutter their locations for weeks, even months on end. And now, even though restaurants in Pennsylvania were allowed to again open their doors, it’s far from business as usual.

Although this was a huge blow to our restaurants, one thing is certain: people always need to eat. This means that so long as restaurants can find a way to safely prepare and serve food, there is demand for their services. Restaurants have adapted by expanding their outdoor seating, limiting tables in use, offering contactless, curb-side pickup, frequently sanitizing common spaces, and of course requiring face masks for both staff and guests. The question now is how sustainable is this model? And can restaurants anticipate their revenue to pick back up?

To provide a local perspective as to what’s going on here in Central Pennsylvania and how the restaurant industry has had to make rapid and drastic changes to the way they do business, Omni Realty Group reached out to a Harrisburg restauranteur. Josh Kesler, owner of The Millworks located in downtown Harrisburg, joins us to weigh in on how his business has been impacted by COVID-19 and how he has adapted to changing circumstances.

Omni: Describe how The Millworks has been impacted by COVID-19 and your decision to temporarily close.

JK: After being closed for several months during the initial shutdown, we were excited to get back open, even at a more limited capacity of 50% in Pennsylvania. But several weeks after reopening, we had a staff member test positive for COVID-19. We immediately closed again pending test results. Because of testing delays, several days turned into several weeks, and I ultimately made the decision that we wouldn’t be able to function by closing every time an employee tested positive. So for that reason we are closing operations until there is at least one of the following: sustained down swing in new case numbers, a COVID-19 treatment that greatly reduces the death rate, or a vaccine.

But the circumstances are vastly different for many restaurants. Ones that were positioned pre-COVID-19 with a robust take-out business have been better able to transition into the new environment. Others, such as The Millworks, is a destination business that has built its core from experiential dining and shopping. So there’s no ‘one size fits all’ approach to how to react to the situation. It’s really dependent on the market positioning before the pandemic. Some restaurants are also struggling with converting to a take-out model because of the adjustment in office work. For years take-out was really location driven, i.e. grab a bite to-go on your way home from the office. But with most people working from home, traffic trajectories have changed greatly. Proximity to residences, not offices, is the key. And that factor may continue to play out after the pandemic if businesses decide not to carry the expense of office space.

Omni: Looking to the future when and how do you plan to resume business? What factors will play into this decision?

JK: Our handling of the virus will ultimately decide when the best time to reopen is. If new infections decrease, I think we all hope that the Governor will loosen the capacity restrictions on bars and restaurants. At the current 25% capacity restriction and colder weather approaching (losing outdoor dining), it doesn’t seem viable for most restaurants to weather that sort of downturn. Remember, most dine-in restaurants survive to a large degree on alcohol sales, and with bar service limited and general capacity reduced, the economics become difficult.

The timing of losing outdoor dining is also coupled with the end of the PPP for most restaurants, and I believe staffing and overhead will become too great for many to continue forward. Fortunately for The Millworks, I have built a solid war chest that will be able to sustain us for an extended shutdown, but I do worry that many of my colleagues won’t be able to, and I really feel for them right now.

Omni: How are you using the adjustments due to COVID-19 to reinvest in your business, such as renovations, changes, or improvements?

JK: I’ve really limited expenditures on improvements to pivot to the new COVID-19 reality, for no other reason than that the reality is changing rapidly, sometimes daily.

Omni: Of the staff you have retained during this time, how have their roles and duties shifted?

JK: At the current time, all but two of my 85 employees are laid off. It is by far the single greatest feeling of defeat, having had to lay off staff that have been the foundation and fabric of my business. But in the end, by making the decisions I have and by years of positioning before the crisis, I can guarantee all of them a job on the other side of this. I’m sure there are varying political views, but I strongly urge the support of extended unemployment insurance for restaurant workers until we get past this crisis. The looming income shortfalls will force millions of talented people to seek careers in other industries. That is already happening to some degree.

Omni: Is there any silver lining you have found through all of this?

JK: As dire as all of this sounds, I do think those who survive the crisis will flourish on the other side. It may take some time for all of us to readjust our habits, but let’s face it, restaurants are critical in how we enjoy time with our friends, family, and co-workers. It’s like going to church, or the baseball game, or the backyard barbeque. It’s just who we are and what we do as people, and there will never be a shortage of that over the long term.

***

Omni Realty Group thanks Josh Kesler for sharing his insight and experiences adapting to COVID-19. Each restaurant has taken a unique approach to adapting to COVID-19, and it’s very interesting to learn the thought behind the changes and future adjustments that may still be yet to come.

As it relates to commercial real estate, one of the biggest obstacles is making the best use of whatever space you have, whether that’s looking to add outdoor seating, reconfigure your indoor seating to accommodate social distancing, or choosing to downsize if business demand is down. For restaurants owners, what’s most important is to remain flexible creative with your business solutions so that you are in the best position to safely remain open during COVID-19.

Have you patronized a restaurant since COVID-19 hit? Did you dine inside, outside, or get takeout? And what was your basis for this decision? We’d love to hear your perspective on restaurant dining and COVID-19 concerns. Join in the conversation by leaving a comment below.

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How Commercial Tenants Can Negotiate Rent Relief During COVID-19

Posted on June 18, 2020 by Mike Kushner in Blog, Commercial Real Estate, Local Market, Tenant Representative/Buyer Agent No Comments

Our world remains in a global pandemic and there is a long road to economic recovery. Seemingly overnight, our ways of working, living and playing drastically changed, and we were forced to sustain these changes for weeks and months on end. As a result, businesses closed their doors to the public, some temporarily and some permanently. This has led to the sudden need for these businesses to shed, or at least reduce, their commercial real estate overhead.

Think of it this way. When a business agrees to a rent amount, it does so with the expectation that it will have a certain level of income. All those expectations were upended with COVID-19, as many businesses have been forced to fully close for months or significantly reduce their use of their commercial space. Even though offices, restaurants, and stores are starting to reopen, their capacity for employees and customers — and, therefore, for revenue —remain diminished, making rent renegotiation necessary for staying afloat.

It’s important for commercial tenants who have lost the use of their spaces as a result COVID-19 to understand what options might exist for them to favorably negotiate some form of rent relief from their landlords. Take a look as we examine the key steps any commercial tenant or business owner should take when venturing down the path of lease negotiation.

Know the terms of your current lease.

Start with closely reviewing your current lease. What are the terms, conditions, and pricing you originally agreed to? What does it say about lease negotiations or early termination? Does it give conditions for if and when this would be considered? In order for your lease negotiation to be most effective, you must come armed with all the information related to your lease, and your leasing experience. Upon reviewing your lease, make note of the most important details and write or type those out on paper so that you can have it with you during your conversation. This will help to keep these details top of mind and easily accessible.

Seek representation and advice.

One of the most important things you can do is seek the representation and advice of a commercial tenant representative. This person is different than a real estate agent in that they exclusive represent the rights and interests of commercial tenants, not landlords. A tenant representative, like Omni Realty Group, would help review your current lease, advise you of your best plan for negotiating more favorable lease terms or even an early termination, and represent you at the meeting with your landlord. This not only provides peace of mind, but it gives you the best potential for a favorable outcome.

Be direct and professional with your request.

Schedule a meeting with your landlord and be direct that it’s to discuss your current lease terms. In your meeting, be clear and professional with your communication. Present your plan for new lease terms or early termination just like you would present a product or service to a client or customer. You want to sell your landlord on your plan; therefore, you need to make it clear why he or she should “buy” it.

Back your position with facts and data.

You can expect that your landlord will have questions and rebuttal. Why should he or she grant you new lease terms that are likely more favorable to you than they are to the landlord? Come armed with facts and data that support your plan. And also speak from a point of reason. Explain how your business was impacted by COVID-19. What were your losses or layoffs? How long were your doors closed to customers? And also look to other cities or states where possibly new laws are coming into place to offer rent relief for commercial real estate. This is taking place in California where a new bill, if it becomes law, allows businesses, particularly bars and restaurants, to terminate their lease agreements. While this may not be a law in your state, it’s worth discussing with your landlord how other places are approaching this difficult topic for perspective.

Finally, it’s worthwhile to research and consider how certain lease clauses could play in your favor and back up your position. Force majeure is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, like COVID-19, takes place. There is also the frustration of purpose doctrine, which comes into play when an unforeseen event undermines a party’s principal purpose for entering into a contract, such as how COVID-19 left many businesses without the need or ability to use their commercial space. And these are just a few examples. Upon more research and seeking legal counsel, there may be additional clauses and doctrines that could protect you in this situation.

Present the benefits of both parties.

Sure, the benefit to your business is clear. Shortening your lease terms or negotiating lower rent for less space will help your business stay afloat financially and shed overhead that is no longer needed as a result of COVID-19. Be sure to also make it clear what could be in the deal for your landlord. Could you recommend a new tenant, such as another business you know? Could you negotiate taking less space rather than leaving the building completely? Or could you reduce the length of your lease, but not terminate it immediately? Another option, if it’s of value to your landlord, is leaving behind desks, chairs, and other office furniture so that the space can be offered as fully furnished to new tenants.

Prioritize what’s most important, and be flexible with the rest.

Go into your discussion with your landlord knowing what you absolutely must accomplish in order for your lease to be sustainable for your business. Maybe this must be lower rent costs, or maybe you need to downsize your space. Try to pick your one most important thing, and then be prepared to make some concessions in other areas. If your landlord is willing to terminate your lease early, he or she may ask to keep your security deposit, or charge for one more month of rent. Or maybe they’re willing to let you downsize your space, but they need you to move to a different floor or location because it makes it more feasible for them to rent out other space. Be willing to listen and to negotiate.

Remember that you have options and support.

Omni Realty Group is working hard to address the ever-changing needs of businesses that have been impacted by COVID-19 and now need to rethink their commercial real estate leases. We want to help be a part of the solution. With the right strategy and presentation of your proposed changes to your lease, it’s reasonable and possible to find a favorable outcome with your landlord. Keep in mind that landlords have also been impacted by COVID-19 in ways you might not imagine. The right tenant representative can help guide you through the complexities of negotiating rent relief, share the most current updates on how they and/or others are addressing similar challenges, and provide the necessary thought leadership to help you make informed decisions.

Has COVID-19 impacted your business’s need for and use of its commercial real estate space? Are you considering asking for new lease terms as a result? If you have a question or need assistance, don’t hesitate to contact Omni Realty Group, Central Pennsylvania’s exclusive commercial tenant representative today.

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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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4 Reasons Why 2019 Was a Great Year for Commercial Real Estate

Posted on December 8, 2019 by Mike Kushner in Blog, Commercial Real Estate, Trends No Comments

For various reasons, 2019 proved to be a year of advancement and change. This was the year that the driverless revolution finally hit the road, China accomplished the first landing on the far side of the moon, and many other social and political issues advanced. We also lost legends like Doris Day and Karl Lagerfeld.

Beyond the tech, science, social, and political advancements, there were many other industries that were significantly shaped by 2019. Particularly for commercial real estate, there are four things that took place this year that changed the CRE industry for the better. Here’s why 2019 should be considered a great year for commercial real estate.

Low Interest Rates

An increased capital flow in the U.S. has helped to keep interest rates low despite an optimistic economic outlook. Additionally, the Federal Reserve issued three rate cuts in 2019, twice amid trade tensions with China. Economists predict that interest rates will remain low by historical standards for at least the near term. Additionally, multifamily originations are projected to hit an all-time high in 2020.

Despite the dip in mortgage rates, cap rates have stayed relatively flat, at 5.6% during the first half of 2019. Cap rates across all major segments, except for the retail sector, which has seen some cap rate expansion, have been largely unaffected by interest rate fluctuations and remain a favorable asset class. It’s expected that the hunt for yield will continue to drive more capital into real estate acquisitions in the near future.

Good GDP Growth

The United States kicked off 2019 with growth of 3.1% in the first quarter, the growth then slowed into second quarter. Ultimately GDP growth went on to exceed what was initially expected in the third quarter. The economy expanded by 2.1% between July and September, more than the initial reading of 1.9%, and more than the 2% growth rate in the second quarter. The last time it grew at a pace of less than 2% was in the final quarter of 2018.

Manufacturing, both in the U.S. and globally, was hit hard by the on-going trade war with China. On top of that, the positive effects from the 2017 tax reform (see below), which gave the economy a boost, also tapered off this year. Though economists are still expecting economic growth to slow further in the near-term, that slowdown appears to be more modest than initially expected

2017 Tax Reform*
It has been expressed that commercial real estate was the real “winner” of the tax reform of 2017. The new tax benefits these changes brought to commercial real estate investing include:

Individual tax rate – The tax changes made in 2017 included tax rate cuts across the board with corporate rates being slashed to 21% (which received most of the publicity). The individual rate reductions were not as dramatic, but do provide relief especially with the wider tax brackets.
Depreciation – The 2017 tax reform brought back 100% bonus depreciation through 2022, meaning the cost may be fully expensed in the year placed in service for qualifying property.
Interest expense limitation – As part of the 2017 tax reform, there is a new limitation that restricts the ability to deduct interest expense in certain situations. Fortunately, commercial real estate should not be impacted in most scenarios. The deduction for interest expense is limited to 30% of taxable income before interest, depreciation and amortization deductions.
Like-kind exchanges – Fortunately, the impact on like-kind exchanges on commercial real estate was minimal. Real property for real property exchanges are still allowed, meaning there is not a requirement to exchange into the same asset type. Meaning an apartment complex can be exchanged into a commercial property.
Tax-exempt Taxpayers – For tax years starting after January 1, 2018, losses from any CRE investment activity are only allowed to offset income or gains from that activity. Though this will likely accelerate tax liabilities for tax-exempt investors that have multiple investments generating unrelated business income, they can protect themselves by using an IRA to make additional investments in commercial real estate.

*The full details of the 2017 tax reformed are quite complex and beyond the scope of this article. As always, investors are encouraged to discuss the potential impact of this limitation with their tax advisor.

Low Unemployment

Historically low unemployment rates were an earmark of 2019. Contributing to this was a boom in CRE construction which created an increased demand for commercial construction workers. To put the current state of real estate growth into perspective, demand over the past five years has exceeded housing inventory by 1.4 million units, and vacancies are at their lowest levels since 1984. All of this demand for more real estate creates a demand for new construction, and more construction workers to complete it.

While (most) growth is a good thing, there’s a flip side to every coin. The nationwide shortage of construction workers posed significant challenges for the commercial construction industry, including struggles to meet deadlines, raised costs to complete projects, and firms having to ask their existing skilled laborers to do more work. While there is no quick solution to resolve this in the near-future, those in the field are making efforts to resolve the problem while keeping their CRE projects on deadline.

What Can We Expect In 2020?

The commercial real estate industry has benefited from the unusually long length of the current expansion cycle. But more than 10 years in, while growth in many fundamentals has slowed, the cycle marches on. Many experts believe we’ve entered a new kind of cycle marked by prolonged periods of low growth, low inflation, and low interest rates. Such an environment would prove favorable for continued stability in the commercial real estate sector for the foreseeable future.

Which of these four changes in 2019 do you believe to be most powerful? How will any of these also impact your industry? Join in the conversation by leaving a comment.

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Considering a Commercial Real Estate Investment Property? Read This First!

Posted on November 26, 2019 by Mike Kushner in Blog, Commercial Real Estate No Comments

Investing in commercial real estate can be one of the most lucrative real estate investments you can make. Investors can realize extraordinary capital gains and huge cash flow wins. On the flip side, there can be quite a drastically different outcome when your CRE investment properties sustain long vacancies or big drops in market value.

For many reasons, investing in commercial real estate can be higher risk than other types of real estate investments. This is why it’s so important to be well versed with its nuances and trends – or to have a trusted advisor who is. To put yourself in the best position for a favorable return on your investment, there are certain things anyone thinking about investing in commercial real estate should know. Here is a brief overview of the things you should think about to determine if investing in commercial real estate is right for you.

Start with a Solid Plan

Before you embark on any big undertaking, you should always begin with a plan. The same is just as true for commercial real estate investments. Before investing your hard-earned cash or equity in a commercial property, you should first have a proper investment plan in place that fully equips you to identify the right property for your portfolio. Without a framework to guide your decisions, you may make the mistake of buying a property on impulse or out of pressure from others, even when it really doesn’t fit your goals for long-term strategy, risk mitigation, capital growth and, cash flow.

Understand the Time Required to See a Return

Next, do your research to gain an understanding of a realistic time frame to see a return. Many new investors dive into things thinking they’ll surely see a return in a fraction of the time it will really take to fully develop the investment and make it profitable. Pulling out too early can mean losing a substantial part of your investment, so be sure you plan for the appropriate amount of time that your money may be tied up in a particular commercial real estate investment.

Join with Other Professionals Who Share Your Goals

Successful commercial investors rarely go it alone. They build a team of other professionals who share their same goals. A successful team includes commercial buyer’s agent, appraisers, commercial property inspectors, engineers, lenders and closing attorneys. All of whom are all an essential part of achieving success in real estate investing and who work together to set a clear strategy, conduct detailed research, and source the correct property at a fair price, and with the right conditions that fit the team’s goals. When it comes to choosing your team, choose wisely. Others involved should complement your own shortfalls in knowledge, and in return you may be able to supplement theirs.

Compare and Contrast Your Investment Opportunities

It might seem obvious, but those new to commercial investing often overpay. One of the best ways to prevent yourself from making this mistake is to know where the value point is on the property, be fully aware of comparable prices for any similar properties, and not become focused on the cash flow and lease structure. Paying too much for commercial property locks up your funds in a more rigid way than it would with residential real estate. Banks are far more reluctant to provide equity releases or cash outs for commercial investing.

Do Your Due Diligence

It’s okay to start out cautious. One of the biggest mistakes new commercial real estate investors make is signing on the dotted line without doing their due diligence. If this feels like a daunting task to take on, consider working with an experienced buyer’s agent whose job it is to analyze the property cash flows, educate the buyer on market value and market lease rates, and recommend other professionals (mentioned above). It takes time, resources, and an understanding of market connections to fully vet a commercial investment opportunity.

Consider Additional Expenses Beyond Your Investment

Smart commercial real estate investors know they must carefully allocate their budgets so there is sufficient coverage for expenses such as the mortgage, taxes, insurance, and advertising. When you don’t have enough cash flow to fund these areas, your property can quickly become a liability when really it should be an asset.

Keep an Open Mind

Just because your former tenant was a medical office doesn’t mean your new tenant has to be. This is why buying versatile commercial properties that allow a number of options is a wise investment strategy. When the real estate market fluctuates, you’re better prepared to tackle unexpected situations and experience fewer losses when doing so.

Have Contingency Plans

Finally and most importantly, you need to have at least one, if not multiple contingency plans in place in case things should take an unexpected turn. Investing in commercial real estate always comes with risks, some more than others. You need to be prepared to lose it all; therefore, you should have a plan in place of how you will react – and rebound – if that happens.

What is your experience with commercial real estate investments? Whether you’re a seasoned expert in this field, or have just started to explore the options available to you, giving these topics close consideration with each and every investment will put you in the best potion for a favorable return.

Do you have something to add to this list? Share your input by leaving a comment below!

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How Central PA’s Growing Population Impacts Local Businesses

Posted on October 25, 2019 by Mike Kushner in Blog, Local Market, Trends No Comments

According to a 2018 report from the Pennsylvania Data Center, Pennsylvania’s population is expected to grow approximately 1% from the 2010 to the 2020 population, which is 1% better than no growth or a loss. What’s even more remarkable, is Pennsylvania’s growth is focused in about 16 counties, 14 of which are in Pennsylvania’s South Central Region, South East Region and Lehigh Valley, including Pennsylvania’s fastest growing county population in our own Cumberland County, here in South Central PA.

Furthermore, estimated population growth in those 14 counties is about 3.8%, which is driving Pennsylvania’s overall modest population growth, while counties in Pennsylvania’s West and Northern Tier are losing population with only Butler and Centre Counties showing expected population growth.

All of this data raises a very important question…

How does Central Pennsylvania’s changing population stand to impact the economic development of our local businesses?

To help answer this, we asked David Black, President and CEO of the Harrisburg Regional Chamber and CREDC, to weigh in from his perspective and the changes he is seeing taking place in Central Pennsylvania. Here is what he shared.

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Focusing on South Central Pennsylvania, which includes Adams, Cumberland, Dauphin, Franklin, Lancaster, Lebanon, Perry and York, it’s pretty good news for us. Population growth drives demands for products, services and community amenities – quality of life factors. The quality of life factors – everything from good restaurants, entertainment, quality public education, exceptional health care, transportation access and cost of living – are in part driven by more people paying more taxes and needing more services that feed into our positive economic cycle.

Given our region’s transportation advantage via highways, rail and air and other amenities, South Central Pennsylvania is a great place to live, raise a family and have fun, plus we are close enough that if large metros like Washington, Baltimore, Philadelphia or New York is your thing, just a few hours will get you there. Quality of life issues help to attract and retain workforce, which is the business community’s number one issue these days, due largely to the fact that 10,000 baby boomers nationwide are retiring each and every day, leaving workforce challenges in many industries.

People want to live in vibrant communities. Some people prefer urban lifestyles, some are suburbanites while still others prefer the more natural rural lifestyles. Guess what? South Central Pennsylvania has it all. You can live on your 10 acres in Perry County and be to work in 30 minutes in downtown Harrisburg or walk to your job in center city Harrisburg from your apartment downtown, or your own home in Midtown, or commute 10 or 15 minutes from your suburban community to your job.

Population growth helps to drive business growth, it helps to drive additional growth in our region. While we think of ourselves as Harrisburg or Lancaster or York, commuting patterns show us that people commute from county to county to work because they can. I have a theory, with no disrespect to Lebanon County, that everyone in the Palmyra area actually works in Dauphin County at someplace with Hershey in the name! Businesses provide jobs, but people with the ability to spend drive local economies while our strategic location and transportation advantage help to connect us to the global economy and make South Central Pennsylvania such a special place to call home.

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To offer additional insight, specifically on working age population growth in Pennsylvania, we asked Ben Atwood of CoStar, a national commercial real estate research firm.

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One of Costar’s recent articles entitled “Latest Census Data Shows Lehigh Valley Leading Pennsylvania in Working-Age Population Growth” stated that the latest data from the Census Bureau shows Pennsylvania continues struggling to lure in new industries and working age residents. The U.S. population aged 20-64 increased by 0.25% last year, but of Pennsylvania’s 67 counties, only seven surpassed this growth rate and 55 experienced net declines.

Harrisburg and its satellite markets are pretty underdeveloped (excepting Lancaster), relatively speaking. And the lack of modern office supply and relatively stagnant population growth means there likely won’t be major companies relocating into the area. Right now, that capital investment would have to be largely local, and how much are people locally willing to risk?

Central PA is in the position to grow in ways other areas in the state aren’t, but that doesn’t mean that growth will be rapid, or even guaranteed. The new developments will be riskier, hampering investor interest. This combined with stagnant, even waning growth in working age population can be cause for concern both near and long-term.

To some extent, the optimism about population growth is misplaced because it could just mean these areas will have a slightly easier go of it over the next few decades, as automation continues to eat away at blue collar jobs in retail, shipping, and professional services in the Commonwealth’s smaller markets.

Things change and evolve, and no one can predict the future, but a lot of growth in these areas is in transportation and manufacturing, industries with long term automation risks, and there’s plenty of reasons to believe automation will expand into white collar employment in the near future.

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Omni Realty Group is very grateful for David and Ben’s expertise and input. It’s fascinating, yet not surprising that population growth can have such a profound impact on quite literally everything else. Here in Central Pennsylvania we have a valuable opportunity to harness this growth and use it to fuel our economy. This further emphasizes the point that there are many unique benefits to live, work, and play in this region. Whether you call Central Pennsylvania home, are employed in the region, or simply enjoy visiting to experience its social offerings, you are playing an important role in the growth of our economy.

How else do you feel that our region’s changing population stands to impact local businesses? Join in the conversation by leaving a comment below.

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