The Art of The Smaller Deal

In 2009, Ron Kassan and Trevor Gale of Beitler Commercial sold a 60,511 square foot industrial property in Chatsworth, leased a 55,718 square-foot space in Valencia, and leased 33,088 square feet in San Fernando, to name a few of the duo’s larger deals. Not bad in a down market. But noteworthy transactions like these are few and far between, they said. “Now, 50 percent of our transactions are less than 5,000 square feet,” said Kassan, an industrial landlord and tenant rep. Stringing together a larger number of small transactions is one way brokers are staying afloat these days. Working longer hours, re-structuring leases, and providing more “strategic consulting” services are also commonplace. Despite challenges brokers face in the current economy, they said sale and lease activity in some Valley markets are up from last year. Some commercial real estate pros also view the downturn as an opportunity. “An economic downturn is the greatest time to call chief financial officers, because they want to hear what you have to say,” said Ron Wade, senior VP at CBRE. “The majority of long-term clients I have today, I developed during downturns.” The current market in a nutshell: Companies continue to “right-size,” vacancy rates increase, and rental and sales prices decline in many Valley commercial real estate sectors. Lack of access to credit and owners/landlords fielding less than low-ball offers are keeping many deals from closing. And the overall volume of transactions is down. Jay Rubin of Lee & Associates, who specializes in office real estate in the West Valley and Conejo Valley, said he’s not necessarily working on smaller deals in terms of physical size. He’s closing more short-term leases. “In a stronger landlord market, the average lease term may be for five years or more,” said Rubin. “Now, landlords are much more amenable to shorter term leases because many tenants are (financially) uncertain.” Landlords also need to boost occupancy rates. But he doesn’t shy away from short-term deals. One to one-and-a-half year leases are common and Rubin is doing a number of six month renewals. The tricky part, he said, is once you consummate the deal you’re practically on to the text term. Problem-Solver: Jeff Albee of Colliers International said clients need help on strategy. Financing hurdles There are not as many large tenants in the marketplace, he said, and obtaining financing is still difficult. But the current market is an opportunity for financially stable companies to lock-in longer lease terms at historically low rates. “It’s an art,” said Rubin. “You have to be aware of market conditions. And every property and tenant has different needs.” Some Valley commercial real estate markets are faring better than others, he added. Jeff Albee of Colliers International has worked on his fair share of smaller transactions lately. And in past downturns, he primarily focused on filling vacant spaces. But diversification is key to surviving the current market, he said. “A lot of clients need problem solving strategies and consulting,” said Albee, who specializes in investment sales, office and some multi-family and retail. In addition to conventional sale and lease transactions, he works as a paid consultant to landlords and tenants who need to sort out business problems. He also lends expertise to banks trying to understand the true value of commercial real estate and notes. Due diligence Performing more due diligence on prospective real estate transactions is also an important part of closing deals. “What we’re doing is making sure the transactions we’re working on get paid, so we’re spending more time qualifying,” said Albee. “You’ve gotta be thinking about the big picture.” Kassan and Gale are investing more time and money into marketing. They also regularly work 12-hour days. But their efforts are paying off. The duo closed more deals in Q1 2010 than any two or three quarters of 2009. “It becomes a numbers game where you have to work harder for the same pay day,” said Kassan. “Doing more deals, you’re dealing with more details and more contracts.” And right now it’s better to be working as a tenant rep, he added. Working on strategy More people were out kicking tires and looking strategically to get into long-term leases in Q1 2010, said Wade. He works with clients on strategy, restructures, extended lease terms, and conventional transactions, to name a few of his areas of expertise. Brokers need to do three things to succeed in this economy, he said. “The first is brokers really need to know their business, understand all pieces of the puzzle and understand landlords and tenants.” Number two: Know your client. Hopefully brokers are spending more time asking clients about their business than asking them what they plan on doing with real estate, he said. And three: Understand the impact macro-economic issues have on global and national real estate and how micro-economic issues impact local and regional real estate. “The biggest macro-economic question right now is whether we’re coming out of a “V” cycle, or heading to the top of a ‘Lazy W,’” said Wade, adding “I think it’s a Lazy W.” Valley Office and Industrial Markets, Q1 2010 The San Fernando Valley and Ventura County industrial market began 2010 with -733,200 square feet of net absorption in Q1. This caused the total vacancy rate to increase to 4.7 percent and total availability to increase to 9.7 percent, according to Colliers International. Weighted average asking rental rates for direct space continued to decrease to $0.57 per square foot, per month Triple Net. Average sales prices per square foot also continued to decrease to $124 per square foot. Sales and leasing activity increased with 1.2 million square feet of activity, as industrial users found favorable deals within the market. The area’s R&D market saw the total vacancy rate decrease to 11.5 percent and sales and leasing activity increase to 228,200 square feet. The office market experienced net absorption of -328,800 square feet in Q1, pushing the total vacancy rate up 90 basis points to 19.8 percent. Direct weighted average asking rents decreased to $2.29 per square foot per month Full Service Gross. The latter is the lowest average asking rent seen market-wide in more than three years, effectively wiping out any rental rate growth in the latter half of the decade. Office leasing activity decreased 25 percent over last quarter to just 359,800 square feet.