What to expect for 2024’s commercial real estate lease rates

Over the past three years, we experienced changing markets. By that I mean the dynamic between buyers and sellers that sets the stage for negotiation and results in transactions.

At the beginning of 2021, as we slowly awakened from the ether of pandemic lockdowns, two trends emerged: rampant online shopping and hybrid workforces.

Both of these phenomena affected commercial real estate and its three asset classes — office, industrial and retail — in different ways.

Owners of industrial spaces — especially those equipped to welcome logistics providers — saw a rapid increase in demand. Fulfilling online orders quickly and efficiently required more on-hand inventory. That translates to a place to receive, stage, store and distribute said goods.

Conversely, as our shopping experiences turned from visiting our local retailer in person to surfing the web, foot traffic to brick-and-mortar stores lessened and spaces became ghost towns.

On the office front, tenants choreographed a thoughtful dance, keeping its workforces safe vs. enforcing in-office work days.

We realized we could ply our trades from just about anywhere, and many did. Therefore, office and retail tilted toward tenants. Industrial spaces were heavily slanted in the owners’ direction.

As we march into 2024, the aggressive pursuit of available inventory by industrial tenants has ebbed, investor activity has been reduced to a trickle and we’re seeing signs of lease rate softening.

In light of changing markets, how should you — as an occupant of industrial space — tender your offers? That, dear readers, is the focus of the balance of this column.

The trends

At the beginning of 2023, we advised our industrial occupants to watch lease rates. Our prediction was significant softening would occur by the end of the year. Therefore, to transact at the beginning of the year might result in a rate higher than anticipated. Our gamble proved prescient, as we experienced a declination of rates, in some cases by 25%.

The metrics

A simple review of how many available properties within a certain size range exist, vs. how many similar properties have leased or sold, is a good way to measure the velocity of a market.

As an example, if during the past year, three buildings between 25,000 and 35,000 square feet have leased or sold, and presently there are 15 available, one could surmise that five years of supply exist.

This, of course, assumes everything stays the same, pricing is not reduced to spur demand, or something outside our economy causes the need for space to increase — such as a pandemic.

The owners

If an owner is carrying a vacant building, it’s important to gauge how willing she will be to accept a deal.

For someone who bought the building at the peak of the market with the usual increase in operating expenses and potential debt service, her willingness to strike at a number less than her carrying costs might be difficult.

By the same token, if ownership has existed for many years with low operating expenses and little to no debt, any deal might look appealing.

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.

Source: Orange County Register