Why a real estate broker is such a valuable asset

Real estate professionals provide clients with indispensable knowledge, tools and techniques that allow them to make a more informed decision when looking to buy, sell or lease a property, says Simon Caplan, SIOR, a partner at Cushman & Wakefield/CRESCO Real Estate.

“The access to market information, the negotiating skills and the ability to manage the various components of the transaction provide the client with tremendous value that is worth its weight in gold,” Caplan says.

Brokers have access to information that allows you to look beyond the basics. Their market knowledge and experience can help you make the right move, Caplan says.

Smart Business spoke with Caplan about the benefits of using a real estate broker.

Why should you hire a real estate broker when buying, selling or leasing a property?

A good broker should always suggest to a seller or landlord multiple ways to improve their property value by making it more enticing to prospective buyers or tenants. You only get one chance to make a first impression. Good or bad, that first impression can greatly influence a prospective buyer’s valuation of your property. These improvements should be done on a priority basis to minimally make the client’s property equivalent to similar available properties. This might include things such as cleaning, painting, fixing lighting, replacing damaged or stained ceiling tiles or repairing obvious building code violations. The increase in value achieved through these improvements typically is much greater than the cost of doing the work. If your property looks like it has not been cared for or has been poorly maintained, most offers to purchase or lease will be below expectations. Your property needs to look sexy and appealing so that prospects want to come back for a second date. A broker should be able to show interested parties why your property is worth the asking price by talking about its amenities, as well as comparing it to recent deals in the same part of town.

When participating in today’s volatile, overpriced market, you need to have a knowledgeable real estate expert on your team.

What should you know before going to market?

A good broker will want to understand multiple things about you and your company. What are your space requirements? Why are you looking to move? What benefits are you looking to achieve in your new space? What amenities do you require and what constraints are you placing on the search? Expect to answer a lot of questions from your broker and, depending on your requirements, have multiple people in your organization ready to share their perspective on the project to provide your broker with a good understanding of what you want to accomplish.

Once everything is clear, your broker will be ready to start showing you properties. A good broker should be a consultant to you, explaining the good, the bad and the ugly about the properties you tour and in a short time, be able to provide values to the properties that have piqued your interest. In today’s market, quality industrial buildings are in short supply, overpriced with many times multiple offers, and are often difficult to find. However, there is a fair amount of office space available throughout the market.

Once the property is selected, initial offers are usually made through a broker’s nonbinding letters of intent to negotiate the major business terms of the transaction. Once you have a basic agreement between the buyer and seller or tenant and landlord, a purchase agreement should be prepared and negotiated, including all business and legal terms.

What are some key points with regard to your due diligence process?

There are several areas that should be addressed during this process. Look for potential governmental concerns such as zoning, lot coverage, fire code compliance and economic incentives, as well as possible title issues like liens or easements. It’s also important to do a physical review of the property to examine for structural, mechanical or roofing concerns, as well as possible environmental issues. Addressing problems before you finalize the transaction can help you avoid a lot of headaches.

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How to get the property you need in today’s market

In the Northeast Ohio commercial real estate market, there are many challenges. For those who have the right strategy, there are also opportunities.

Smart Business spoke with Joseph V. Barna, a principal at Cushman & Wakefield | CRESCO Real Estate, about how to get what you want out of today’s commercial real estate market.

What’s happening with office properties?

Office users are looking for time, patience and flexibility from landlords right now as they pause, rethink their space needs and determine their future needs. Some companies’ offices are only accommodating skeleton crews to keep a presence while most of their people work from home. That’s led to a tremendous amount of subleasing and underutilized space as some landlords worry about how they’re going to pay their mortgage and tenants try to figure out how they’re going to meet their commitment to their landlords.

How are industrial users and owners faring?

The industrial sector is coping with supply chain issues as well as accelerated demand, so there’s high demand for industrial properties, especially for mid-sized owner-operated shops. However, there’s also an extreme lack of property available in the market that’s driving prices up. Demand is high, so when a building meets a buyer’s requirements, it’s essential to act quick.

Nearly every property is experiencing multiple offers. That can be problematic for large organizations that have a process for approval. In some cases, when a buyer of this size loses a deal, it becomes clear that they need to accelerate their approval process or they’re going to continue to lose out on limited opportunities.

With the exception of some big box development by a few developers, there’s not much other speculative construction happening in Northeast Ohio. That’s in large part because the cost of construction has increased so much that it doesn’t make sense to build unless the property is more than 150,000 square feet. Such a big product isn’t something the everyday entrepreneur can or should commit to.

Amplifying these problems in industrial is an extreme shortage of shovel-ready land. Buyers are running into properties that lack basic infrastructure, are environmentally challenged, or have zoning issues. Typically, in a market as tight as this, developers come in and buy large parcels, make improvements and sell it off a few acres at a time. Right now, however, that’s not happening. Land sales are slow, the cost of construction has increased, and developers don’t want to sit on the land. That’s creating a hole in the market.

What strategies can be used to offset these issues?

To try to offset these challenges, some office space can be converted to an alternative use such as residential. When done right, that can be a smart move that’s great for the city as people continue to look for living spaces in or near downtown. It’s best for office owners and users to stay flexible and open to new ideas in order to capitalize during this uncertainty.

On the industrial side, those in need of property and buildings should look to redevelop vacated retail centers or mall properties. In a few cases, a developer has come in and demolished the existing property and then focused on built to suit. These properties don’t have the environmental concerns that old industrial properties might have. They also have infrastructure in place and are usually close to highways.

And because new construction is a significant investment, partnering with a developer or institutional group could be a logical solution. Those who own a business and don’t want to put every penny they have in the real estate can team up with a developer in a master plan development where they’ll either lease or take an ownership position in a much larger development. A developer that has the wherewithal, experience and buying power for such a project should be able to this more cost-effectively than someone who is looking just to create a space to run their business.

Also, look into taking advantage of state or municipal financing, tax breaks or other incentives. A real estate firm with a dedicated group of individuals that understand these incentive programs can guide you through the process.

Insights Real Estate is brought to you by Cushman & Wakefield | CRESCO Real Estate

Struggles expected to continue in the industrial market

In the industrial real estate market, difficulties continue for those looking for property. These challenges are being multiplied by supply chain issues, which are leading to material shortages and price increases, as well as the industry’s struggles with labor. This has made build-outs, renovations and new construction a challenging endeavor.

“We’ve been seeing inventory constraints in the industrial market for a few years now,” says George J. Pofok, CCIM, SIOR, senior vice president, Cushman & Wakefield | CRESCO Real Estate. “And these recent challenges have made things worse.”

Smart Business spoke with Pofok about the state of Greater Cleveland’s industrial real estate market, and how long these woes are expected to continue.

What does the industrial real estate market look like?

Across Greater Cleveland there is a lack of available viable industrial product. There is a struggle to find anything suitable, regardless of size, but for those looking for properties with a larger square footage, say in the 100,000 square feet range, it’s an even greater challenge. This dearth of inventory within Cuyahoga County is driving the search for industrial properties out into the surrounding counties, creating more urban sprawl.

These conditions have led to more redevelopment of older manufacturing plants — for example, the former Ford aluminum casting plant in Brook Park that recently changed hands is bringing approximately 200 acres of available land to the market. Currently there’s a 1.7 million square foot manufacturing plant that is being demolished on the site. Once that’s cleared, it will allow for new construction, surely making it the most in-demand site in all of Northeast Ohio.

Complicating the conditions in the market is the trouble owners and tenants are having scheduling the trades to come in and complete renovations, such as reworking electrical or renovating aspects of older buildings. Trying to find available help to get work done is a struggle because of the high level of demand for that work, as well as the scant availability of labor within the trade. That’s stretching out timelines to get work started, and in some cases adding to a project’s costs.

What position are landlords and owners in?

It’s definitely a market that favors landlords and owners. Prices are escalating to levels that are higher than I’ve seen in my 25-year real estate career. Those who’ve got viable properties are in a good spot.

There are more longer-term deals than there have been in the past because tenants do not want to get shut out. Landlords of industrial properties are seeing a minimum of three years, and most are even pushing them to five, seven, even 10 years.

What are some of the other contributing factors?

Search activity is slightly above average right now — about what would be expected during the summer months. The issue really isn’t an incredible demand for industrial properties, but the lack of available viable properties.

There is about 18.5 million square feet of industrial property that’s on the market right now — about 3.5 percent. (Total inventory in the market is 515 million square feet.) Some of that includes properties that would be considered functionally obsolete. If that was pulled out, the vacancy rate for available properties would be in the 2 percent range. The Greater Cleveland area has been hovering around 3.5 percent for a few years, which is overall considered an unhealthy market. A more ideal position would be 4-5 percent. And new construction is where that ground could be gained. Unfortunately, new construction is difficult to build at the moment because of the supply chain and trade labor constraints.

These conditions are expected to continue for at least another 18 to 24 months, especially because of the constraints in the supply chain that are holding up materials. Given these challenges, if there is an industrial property that’s maybe not ideal but works for a user, they need to act on it. They can’t wait.

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Material shortages complicate the real estate picture

It’s an uneven real estate picture in the Greater Cleveland area. The industrial market is incredibly tight with a record-low vacancy rate — around 3.8 percent — that’s creating significant challenges for those looking for properties.

Office space is plentiful. With many companies’ workforces yet to return, there’s been an increase in sublease as tenants look to make use of unoccupied space. It’s a strategy Eliot Kijewski, senior vice president of Cushman & Wakefield | CRESCO Real Estate, says is really about buying time until people come back to offices, the lease expires, or the office tenant finds a new right-sized space.

“A tenant could have 20,000 feet that they’re subleasing,” he says. “The landlord is still getting paid rent, but no one’s showing up to go to lunch downtown.”

Much the same is happening in retail. Properties are available, but macro factors are affecting occupancy. For instance, many people are now far more comfortable ordering products online. That’s shifted how retailers use their brick and mortar buildings, with some converting their space to fulfillment centers.

“More retailers that had set themselves up for consumer traffic are now playing the just-in-time game,” Kijewski says. “Some of them are taking 100,000 square feet of warehouse and dedicating it just to inventory.”

Further complicating the real estate picture is the materials crunch. Timelines have been extended for new construction and renovations as materials have drastically increased in price and are increasingly tough to come by.

Smart Business spoke with Kijewski about the real estate situation in Greater Cleveland.

What are seekers of industrial properties finding today?

Industrial properties are practically non-existent ,and it’s been that way for the past nine months. That issue is being exacerbated because the cost to build has gotten more expensive — land is more expensive, and so are the materials and labor required for both new construction and renovation.

Buyers are either paying much higher prices or they’re making sacrifices in space or amenities to ensure they get what’s absolutely necessary for their operations.

In 2019, there were some landlords and buyers who found success converting unused office and retail space into industrial to take advantage of the tightness in that market. However, with the material issues, combined with structural limitations, that’s off the table. Additionally, most everything that’s been built on spec in Northeast Ohio is getting leased by the time the final coat of paint is on and the lock is installed.

What’s happening in office and retail?

The office and retail situations in Greater Cleveland are the complete opposite of the industrial situation. Those who are looking to do a retail or office transaction are going to get a deal in this environment. Landlords, however, aren’t as willing to make the same concessions as they had when the pandemic hit. In March and April of 2020, landlords were eager to work with tenants, offering a few months of free rent in exchange for a tenant adding a year or two to the term. Those enticements have largely ended. But still, those looking for office or retail space have a lot of options, and there is exceptional pricing and other incentives out there.

How is the materials crunch affecting the real estate picture?

The lumber, steel, concrete and glass required for renovations and new construction could have at least a three- to nine-month backlog. Companies that aren’t dealing with a builder or a contractor that has an inventory of these items should expect delays, and it’s unclear when that will work itself out. There are materials sitting at ports that need to be shipped, which means getting trucks on the road. It’s also about getting people back to work. Some indications suggest that material availability could improve by the end of the year, but it’s more likely that the current conditions persist into the first or second quarter of next year.

The bottom line is business leaders have got to be prepared. Expect delays and build that into the timeline of the move or renovation. And get everything scheduled and ordered as soon as possible. Then be ready. The instant things start opening up again, you’ll need to act quick.

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Uneven commercial real estate market a challenge for buyers

Commercial real estate buyers and investors are facing a mixed market in Greater Cleveland. Competition is significant for industrial properties, while those in the market for office space are searching available inventory for the deepest possible discounts.

Factors such as a labor and material shortage are straining progress in new construction and renovations. And though some buyers and prospective tenants are pushing out to the suburbs, there’s still heavy interest in city locations to appease urban-oriented millennials.

This mixed and ultra-competitive market is a challenge that requires knowledge and expertise to navigate.

Smart Business spoke with Cushman & Wakefield | CRESCO Real Estate Partner Simon Caplan about the state of Greater Cleveland’s commercial real estate market.

What is the state of the industrial market?

There is a great deal of interest in Greater Cleveland’s industrial real estate market. Buyers are looking for properties to invest in and/or occupy. The market has stayed active since 2020’s second quarter and is showing no signs of letting up. Many manufacturers are looking to expand their facilities because business is good and long-term prospects look strong as well. Currently there is a shortage of both quality industrial buildings for sale as well as viable space in existing buildings to lease. The current industrial vacancy rate is lower than it has been in over 20 years. Sale pricing and lease rates are up. Rather than finding themselves on a waiting list, some buyers are looking to build. But that comes with its own pandemic-related challenges. Both demand and supply chain disruptions have pushed wait times for certain construction materials months out and driven up costs. Further, a shortage of workers in the construction industry has been exacerbated by the pandemic, leaving contractors short on help. These factors have left owners who are looking to expand their properties to face construction pricing that is considerably higher than it was two years ago, compelling many to look for a bigger facility to buy. Quality investments are getting harder to find.

What is happening in office and retail?

In the office sector there has been an uptick in prospective tenants out in the market both downtown and in the suburbs. Most office users, whether looking to lease or those who are looking to buy, are hoping to capitalize on super deals in a soft office market. But there is a shortage of quality office buildings for sale.

Many companies are starting to bring employees back into the office to improve collaboration and productivity. They also want to effectively attract and onboard new hires. Some companies are seeking to expand into larger office space to take advantage of perceived lease discounts. Others are looking to downsize, either because they took a hit during the pandemic, have adjusted to remote work, or can utilize hoteling for their employees.

Closure of many big box retailers has opened opportunities for conversion to warehouse or other non-retail uses, which usually lowers the value of the real estate. However, as COVID restrictions are lifted, retail will come roaring back. People will go back to shopping in stores, dining in restaurants and frequenting sports and entertainment venues. As a result, business demand for existing retail space is on the rise, with new businesses popping up in many formerly occupied places.

How can buyers best navigate the current market?

Today’s commercial real estate market is very competitive. To keep up with what is happening, buyers need to act quickly. That requires working with an expert who is tuned into the market and can get in front of a deal the moment that it becomes available This is often well before it gets published on lists the general public can access. Buyers and prospective tenants need to connect with an experienced commercial realtor who can assure accurate and timely information. This, along with a realtor’s regional knowledge of properties, trends and business needs, will assure buyers know when, what and how to act on market opportunities.

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Fulfilling your requirements during unexpected times

Companies operating in the industrial sector today are looking for facilities that are user-friendly, rich in amenities and can be best utilized to enhance the work experience of their employees.

“Historically, most users just focused on amenities required to produce or distribute product,” says Joseph V. Barna, a principal at Cushman & Wakefield |CRESCO Real Estate. “Preferences have changed significantly today, and that’s making the limited buildings in the market borderline obsolete.”

He says some of these buildings can be renovated, but often the required investment is cost prohibitive.

“Employers in the industrial sector are increasingly concerned with keeping employees happy, which translates to keeping employees — something that’s important in a market in which skilled workers are in high demand,” Barna says. “That shows up in the amenities they want in their facilities, and it has meaningful implications for landlords.”

Smart Business spoke with Barna about identifying suitable industrial properties in a tight market.

What’s contributing to the change in the way industrial users choose real estate?

Industrial has become more sophisticated, which has exacerbated the already severe shortage of skilled tradespeople at the local, regional, national and global levels. There are a few other reasons for that shortage. The population is aging, while the birthrate is decreasing, so there are fewer people entering the workforce with these desired skill sets. The young people entering the workforce have tied personal fulfillment and contribution to their professional lives. So if they’re not happy, if they don’t feel their job is meaningful, they’re not interested. That’s put an emphasis on job retention. Therefore, keeping employees happy is now seen as essential to retention. A facility’s amenities can go a long way toward that end.

How does this change affect the market for real estate in the Greater Cleveland area?

The site-selection process in the Greater Cleveland market has become extremely complex. Our industrial inventory totals about 511 million square feet. But most of that product is aged and functionally obsolete based upon current standards. Class A industrial real estate represents about 3 percent of our total inventory; everything else is B, C, D, or obsolete. In addition, our 3.7 percent vacancy rate is at an all-time low, so when buildings do come on market, there can quickly be multiple offers from qualified buyers or tenants. The industrial real estate market is now very competitive.

How can industrial real estate users get what they want?

Plan well in advance. When a lease is coming up or sales are rising to the point that fulfillment will require a larger facility, get ahead of it. Then, define the requirement. Companies should think about the need they’ll have in five to 10 years. Once their requirement is defined, they should immediately start analyzing the market.

It’s also advantageous to explore new construction. It can be expensive to build as construction costs continue to increase. However, incentives through municipalities, the state and county can offset the cost of new construction. Buying an existing property means making a significant investment in what is still, essentially, in terms of the brick and mortar, an aged building. New construction could have incentive advantages that can help close the financial gap and get the user exactly what they want. Additionally, energy-efficient construction, including mechanical systems, will significantly reduce going forward operating costs.

Also, think outside of the box. If you only need a 50,000-square-foot building, consider buying a 100,000-square-foot building and finding a partial tenant to offset the costs. Or buy a larger building from a company that’s looking to downsize and keep it as a partial tenant.

There are multiple approaches for industrial users to explore in order to fulfill their need, as well as maximize value. Accomplishing that can be made easier by assembling the right team — a financial consultant, real estate specialist and attorney — and then exploring all options to maximize results for the end user.

Insights Real Estate is brought to you by Cushman & Wakefield | CRESCO Real Estate.

Speculative developers must act quickly as competition heats up

In the Cleveland industrial market, the vacancy rate in the fourth quarter is projected to decrease to 3.7 percent, which historically is the lowest it’s ever been. That’s driving demand for newer, more functional structures, particularly high-bay bulk distribution warehouses, as the economic pendulum continues to swing toward a service-oriented rather than production-oriented market.

Though speculative properties in Cleveland tend to be constructed by homegrown developers, competition in larger markets such as New York and Chicago means Cleveland is getting some attention from national developers.

“We’re getting calls each week from developers that want land for spec buildings,” says George J. Pofok, CCIM, SIOR, senior vice president at Cushman & Wakefield | CRESCO Real Estate. “Out-of-state developers definitely are taking interest in the Northeast Ohio market.”

It’s difficult now to find large tracts of available land in Cuyahoga County, so interest is picking up in tertiary markets such as Summit and Medina counties. That means opportunities abound for developers capable of striking while the iron is hot.

Smart Business spoke with Pofok about speculative development in Cleveland and the surrounding markets.

What is happening to the real estate market as building on spec increases?

Tenants are seeing an increase in occupancy costs. In the past, a tenant could do short-term one- to three-year flat deals. But the market has shifted and landlords are getting five- to seven-year deals with 2 percent annual increases.

Costs are also increasing for buyers. A company that recently purchased a property in Parma set a high benchmark for value per square foot, and the building the company left and put on the market came under contract after just three showings.

That’s not to say all buildings sell quickly. It’s really about connecting the right buyer to the right property at the right time.

How does an increase in spec-built properties affect lessees?

With the vacancy rate so low, tenants could benefit from a couple million square feet of spec construction because there’s still such a demand for more modern facilities. Developers are building more distribution or light assembly structures. These buildings range from 125,000 to 250,000 square feet, have 28- to 32-foot ceilings, truck docks in the rear and nominal office space. Companies are often able to take advantage of the cube height, thus reducing their footprint, which helps offset the higher rents for new construction.

Who should capitalize on this?

Developers that are aggressive, have cash and can react quickly should act now to take advantage of the current market. There is an element of, ‘if you build it, they will come’ in the market right now. Companies that are aggressive and can move quickly should see a lot of success in this market.

It’s really about getting a shovel in the ground as quickly as possible. Once a property is purchased, developers need to be out there, breaking ground within days or weeks. Developers that have bought land and expect to wait until next spring will be six months behind the curve.

While expediency is important, so is due diligence. Developers also need to complete zoning and environmental work, and have site layout discussions with the municipality. Developers that have experience with that will do well.

There is demand in the market from tenants, and there is investor money looking for deals and a return. Both are relying on developers to initiate the process.

What are the risks?

Timing and location are as critical as building the right product. It doesn’t yet make sense to go out to an extreme tertiary market and put up a 500,000-square-foot spec building. The focus still is in the primary and secondary markets.

There is significant opportunity in the market now. But looking into 2021, though the economy seems to be moving along at a good pace, there is less certainty.

The Cleveland market can easily absorb another couple million square feet of spec properties without a significant impact on the market vacancy rate. But that requires developers to be aggressive, find the right piece of dirt and get to building.

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Leverage real estate advisers to navigate unprecedented challenges

The COVID era is affecting us all, but its impact on real estate is uneven. In any economy, certain real estate sectors move more than others, and today’s uncertainties are no different. Reliable, expert advice is key to successfully navigate the challenges today’s market presents to buyers, sellers, landlords and tenants.

“We’ve been talking nonstop to clients, all of whom have different goals and challenges, but all of them are impacted by today’s market uncertainties,” says Eliot Kijewski, senior vice president at Cushman & Wakefield | CRESCO Real Estate. “Anyone that says they have all the answers during these unprecedented times is posturing. But we can improve a client’s position with data, experience and the benefits of knowing what else is happening in the market.”

Smart Business spoke with Kijewski about the importance of expert advice in an uncertain market.

How is the market affecting buyers?

This market is tough on buyers because of the lack of real estate inventory — the available spaces for businesses to move and grow with ease. The record-low 3.8 percent industrial vacancy in Northeast Ohio makes it a crowded field for tenants looking to move. Low interest rates put more pressure on demand as buyers are searching aggressively as well. Despite COVID impacts in other real estate classes, industrial real estate remains in high demand for manufacturers and distributors that are changing and growing in response to changes in the economy. In many instances, these changes have become localized.

When a property is for sale or available, it goes fast. In many cases, landing a property in this market means finding an off-market transaction, or uncovering hidden availabilities. That’s where deep experience and a broad network are most valuable.

Moving fast can also create haste, and due diligence cannot be overlooked. Increased demand and COVID-related challenges have made it tough to quickly examine a property. A knowledgeable real estate adviser, however, usually has strong relationships with those professionals to ensure excellent due diligence with reasonable turnaround to not jeopardize that hard-to-find property.

Real estate agents have exclusive means to show properties to help with COVID sensitivities and eager buyers. Sometimes a well-known agent ican get prospective buyers in to see a property early. Others have used virtual and video tours to showcase a property so prospects can be safe and see available properties in a timely manner.

What does the market look like for sellers?

Sellers are seeing increased demand and the market is responding with higher prices. These conditions have also created an opportunity for owners to leverage their property to capitalize on the market while largely staying in place. Industrial real estate prices are as high as they’ve ever been per square foot, but finding available properties is a challenge. That’s created opportunity for owners who are willing to think outside the box to capitalize on the market.

Owners of office properties may be able to increase the value of their real estate if they’re able to adapt it to an industrial use. This won’t work for some office buildings, multi-floor buildings, for instance, but if it’s flex space or industrial, owners should convert as much as they can to shop space.

There are lots of indicators that suggest office properties won’t realize anywhere near their historic values anytime soon. But with high demand for industrial property, the faster a landlord can convert their building to something that has utility to an industrial business, the greater their chances of realizing a high price in a sale.

What’s the best way to navigate the uncertainty in the real estate market?

Experienced real estate advisers can work with landlords and tenants to find a way to reshape existing agreements, making them more comfortable for both parties at an uncomfortable time. They can work with sellers to advise them on how to reimagine their office properties to get top dollar in a hot market, and they can give buyers an upper hand because what they want or need isn’t likely to be found with a web search.

In a time of uncertainty, it’s best to have expert advice and guidance to resolve difficult challenges.

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Commercial real estate mostly holds steady, for now

The Northeast Ohio commercial industrial real estate market hasn’t changed much since before the pandemic. Prior to the start of the year, office and industrial property values were very strong, industrial especially, and the outlook for them was continued strength and growth. Retail had a similar outlook, but not as strong as other property categories because of the competition brick and mortar has been facing from ecommerce.

Overall, there was a very positive outlook heading into 2020. And though many businesses have been disrupted by the pandemic, values have generally held steady, though there are weak spots in some sectors that could worsen if the recession continues.

Smart Business spoke with Simon Caplan, SIOR, a partner at Cushman & Wakefield/CRESCO Real Estate, about the state of the Northeast Ohio commercial real estate market and what the remainder of 2020 could bring.

How has the pandemic affected Northeast Ohio commercial real estate?

There are a lot of people in the market looking for industrial properties and they’ve been faced with a shortage of functional available space for lease and quality buildings for sale. Fortunately, there was a lot of new construction started last year that is occupiable this year. It is being gobbled up by companies that are doing well and need more space for manufacturing or distribution.

The office market has been negatively affected. Most companies have been very slow to address leases that are expiring this year or next year. There is some lease renewal activity, but instead of wanting to renew for five years, they’re more likely signing for one or two years. Occupants are making fewer improvements to their space because of these short-term leases, instead wanting flexibility for the future.

What’s happening when it comes to lease agreements?

Most companies want to do shorter terms. They want the flexibility. And if they’re taking ‘as-is’ space, they can get short-term deals. Landlords who normally are looking for five- to 10-year leases are now willing to do two-year deals with tenants, especially if it’s a lease extension with a business currently in the space. Tenants, in many cases, are looking for rent concessions or are negotiating to renew leases at their current rent or below to avoid the normal increases that tend to come with renewals.

Ultimately, landlords still have to make their mortgage payments and generate a little bit of a profit. That’s been made more difficult recently because there are tenants who haven’t been able to pay their rent for a few months. In some cases, lenders are working with landlords that can prove that they have not been receiving full rent and are accepting lesser payments on those mortgages.

How has the pandemic affected commercial real estate investors?

Overall, there’s significant demand. There’s still solid interest in industrial where prices, at the moment, are holding steady. There is also a lot of interest in vacant or about to be vacant big box retail space for repurpose uses. However, there are categories that are slowing down. In those sectors, prices are getting depressed.

Interestingly, the vacancy rate in Northeast Ohio’s industrial sector was just under 4 percent at the end of 2019 and reached 4 percent at the beginning of the year, where it has stayed. There hasn’t been any negative absorption — absorption being the amount of occupied square footage.

What’s the outlook for Northeast Ohio commercial real estate for the rest of 2020?

Industrial should stay strong, in part because it’s propelled by ecommerce right now, which is definitely going to continue to thrive. The office market this year is on pace to experience negative absorption for the first time since 2009. It’s unlikely that anything that happens in the second half of the year is going to change that.

And there is no doubt that retail is changing. Operators in that sector are going to have to adapt quickly, or real estate in that category will see significant price decreases. Right now, it’s not wise to buy into that sector unless it’s an amazing deal or it’s a subcategory like grocery that’s resilient.

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Property owners can turn assets into cash with a sale-leaseback

Many businesses have taken a massive hit because of the pandemic. In the real estate market, current conditions are affecting both tenants and property owners. Tenants, many of which have seen a huge dip in income, are having difficulty paying rent. That’s put a strain on landlords, who often have lenders to pay. More important, if you are an owner/occupier, this quickly becomes a double-edged sword.

The situation has led some property owners to seek out liquidity and mitigate some of their risk. They’re finding that sale-leasebacks, which bring in investors who can provide immediate cash, often provide a logical and time-sensitive solution.

Smart Business spoke with Joseph V. Barna, SIOR, a principal at Cushman & Wakefield/CRESCO Real Estate, about sale-leasebacks and what property owners should consider as they look for investors.

Why should commercial property owners consider a sale-leaseback now?

Many property owners are looking to convert assets into liquidity, and there are a lot of qualified investors and institutions that are flush with capital looking for places to put it. Many regional and national investors are interested in Cleveland as there is less competition for deals compared to top-tier markets such as Los Angeles, New York or Chicago.

In sale-leaseback transactions, the owner sells their property to an investor, gets immediate capital to deploy elsewhere and retains use of the asset.

Property owners that also run businesses may need to invest in equipment, want to expand or need to pay down other debt, and the capital required to accomplish those things may be tied up in their property. Through a sale-leaseback, they can take the equity out and put it where they can get a higher return while getting the benefit of using and occupying the property.

What should property owners look for in an investor?

It’s important for sellers that operate out of their property to recognize that once the sale-leaseback transaction is complete, they’ll be a tenant and there’s going to be a new owner. It’s a partnership — the new owner is looking for a return on the investment and the former owner needs a property that can meet their business’s needs. Both parties need to understand the other’s objectives and long-term goals.

One consideration as sellers talk with potential investors is how experienced the investors are with this type of investment and property — how capable they are of being a landlord. For instance, if the building needs a new roof, can the investor write a check and make it happen? It really comes down to experience, how well capitalized they are, and their history.

While investors are eager to put their money to work, they’re still selective. It may be tough for retail property owners to find investors right now because this specific market sector is struggling. Also, office investments are not as hot as they had been as more people work out of their house and it’s unclear how many people are going to return to an office environment. That could be made worse if businesses downsize their office space to accommodate this potential new normal.

What might deal negotiations look like?

Investors may want the tenant to sign a long-term lease — eight or 10 years. In that case, they’ll want to make sure that the tenant is capable of being in business that long, so they will need to be comfortable with the financial stability of the business.

The tenant should have a clear understanding of their future business requirements and the trajectory of the business should be reflected in the lease. For instance, if the business is expanding, provisions should be included for the investor to renovate or expand the premises to accommodate that growth. On the flip side, the tenant might want to include contraction and/or sublease rights.

Property owners who are looking to convert their asset to cash should work to understand the current market conditions and talk with the right experts — accountant, legal and financial advisers, real estate consultant — to determine where the market is and where it’s going. That will help them make the best decision, and ensure a positive outcome despite the current challenges.

Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate