Season’s greetings readers as we eye Christmas in the rearview mirror and Kwanzaa and Hanukkah as they’re proceeding. It’s truly the season of giving, and from all of ours to all of yours — best wishes!
Two of my favorite columns to write annually occur at this time of the year, when I reflect on my scorecard from the previous year and offer predictions for the upcoming one.
Last year, I wrote my 2024 prognostications on the heels of an Alabama football defeat — which as a native Arkansan — warmed my heart. We’ll have to wait much longer this year as the Division I NCAA football champ will be crowned in a few weeks. But I digressed. How were my predictions in 2024?
In 2024, I wrote: Industrial lease rates will soften. This time last year, a client of ours was facing an expiring lease. We tried to find a suitable alternative to move his operation. Nothing was ideal. We advised him to stay put, negotiate a short term lease of six to 12 months and continue our search. His owner would only agree to six months, so we had a new deadline — June 2023.
We nearly struck pay dirt in March but jettisoned the opportunity due to its size — just not quite big enough. Once again, we approached his owner asking for more time. He agreed to extend through December.
Our gamble paid off as we secured a suitable building at a 15% discount. Why, you may wonder? Simple economics.
We tracked new avails and ones leaving the market and noticed an imbalance. Yep. More was coming than going. We knew someone would drop their rate to secure a great tenant. Expect more of the same this year — especially with Class-A buildings above 100,000 square feet. At last count in the OC — 11 were open for business and seeking a resident. Two left the market last year. Hmmm, someone will get motivated and make a deal, comps will reset to the new level and the frenzy will begin. Boom! Nostradamus, take note.
In the Inland Empire where big boxes prevail, a precipitous increase in concessions has occurred — free rent, tenant improvements, beneficial occupancy, etc. Rates have dropped another 15%. Expect more of this as we absorb the remaining spaces.
In 2024, I wrote: Expect sales volume to increase. The forces outlined in the paragraph above will trickle into the sales world. By that, I mean an owner awaiting a tenant may choose to sell. A further catalyst could be the underlying debt on the asset. Imagine you’ve originated a short-term construction loan to build a Class-A structure. You considered construction costs, time to build and lease. Your calculus was based upon conditions in early 2022.
You’ve delivered a new building into an entirely different market — longer vacancy and lower rates. Your lender might be getting a bit nervous. When will the maturing debt be repaid? Thus, pressure to dispose of the new build. Yes! Selling in the beginning of 2024 was a pipe dream — no one was a seller. Now, sales are happening at a higher clip.
In 2024, I wrote: Recession or no? I say no. Last year, I took a contrarian approach and predicted we would avoid a recession in 2023. Recall, recession is a decline in gross national product for at least two quarters. I believed in the resiliency of the United States economy, especially the consumer, and we skated by a recession in 2023. As I write these predictions today, the only storm clouds I see on our horizon are global uncertainty in the Middle East.
Specifically, will the Red Sea shipping lane disruption cause inflationary pressures on goods delivered? If this proves to be the case, the Federal Reserve may be persuaded to delay cuts in interest rates, which are predicted for this year. However, I’m reminded of our status in January 2020. We were rocking along when a microscopic foe sent us to our spare bedrooms. Therefore, beware of the Black Swan event. Wow! Three for three.
In fairness, I did walk this back a bit in my mid-year adjustments, but alas, we avoided a recession and stuck to the landing. Fed Chair Jerome Powell in da’ house. But will he be there next year?
In 2024, I wrote: Interest rates could fall some. Last year, for the first time in a couple of decades, you could actually make money on idle cash. We saw a peak in U.S. Treasuries occur last year when the 10 year, T-note eclipsed 5%. The rate this morning is slightly above 3.8%. This is good news for borrowers, bad news for savers and could cause an uptick in institutional buying activity.
These behemoth money managers are constantly seeking return and might view commercial real estate as a safe haven to earn some additional juice. I believe the 10-year notes will level at around 4-4.25% this year.
Mic drop! OK. We’re a bit above the 4.25% level but significantly below the 5% we eclipsed this time last year. Plus, the yield curve has flattened so that short-term rates are below long term rates — a good thing for lenders.
So, I’ll give myself a 3.5 out of 4. Not bad for a rookie. Stay tuned for next week when I’ll see what’s in store for 2025.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.
