Most property owners can simply put up a leasing sign, post a listing online, and wait for the phone to ring. However, many owners want to differentiate their property from the competition, and that’s why they look to their agents to creatively market their property and attract activity to the listing. One way we do that is by offering leasing incentives.

On the tenant side, these incentives are concessions offered by a landlord to get a new tenant to sign up and can also be used to get an existing tenant to renew a lease. Another form of incentives is broker incentives for the procuring broker that represents the tenant. These can include touring bonuses for qualified tours as well as commission bonuses for deals that get signed. While broker incentives can be a useful tool, this article will focus more on tenant incentives.

TRENDS

The most popular form of tenant incentive that we see is rent abatement that offers the tenant a free rent period. It is designed to catch attention because, after all, who doesn’t want free rent? For the tenant, this incentive can bring down the overall “effective rent” that they will be paying. For the landlord, they can maintain their “face rent,” and the property value can be preserved. Most of the time, we see the free rent at the start of the lease term. For a retail or restaurant tenant, this can give them time to build out the space with tenant improvements and get up and running. For office and industrial tenants, this can offset moving costs, help create a transitional moving period from the previous location to the new location, and help avoid paying double rent on two locations. Other times, we see the free rent spread throughout the lease term. For example, on a 3-year lease, we may see free rent on months 1, 13, and 25. By spreading it out, the landlord will be collecting the monthly rent sooner; however, it is worth noting that if there are annual rent increases in place, then the value of the abated rent further on in the term will be higher, thus bringing down the total leasehold value. Another method of rent abatement is having the tenant pay a reduced rent for a specific period, such as half rent. This can be beneficial to a landlord in that the reduced paid rent can be used to offset operating expenses such as property tax, building insurance, and CAM so they don’t need to come out of pocket on these items while waiting for the full rent to commence.

VARIATION

While free rent is a general type of incentive, different types of property listings may see different types of more specific incentives being used. Marketing that is focused on anticipated tenant needs is a no-brainer. For example, in a retail lease, it is common to see tenants customizing their spaces with tenant improvements specific to their use, so a retail leasing incentive may be based on the tenant receiving a TI allowance. Sometimes landlords will do the work, and other times the tenant will do the work and be reimbursed by the landlord upon completion. With office listings, tenants often have furniture and equipment that they need moved, and they can receive a moving allowance being offered as an incentive. This can often be based on a certain dollar amount on a per square foot basis. Another more specific type of leasing incentive is to offer free parking. This can be attractive in a market that has limited on-site parking available. It can also be a benefit to offer reserved parking if a landlord is able to make it available.

These are just some of the leasing incentives that we use in commercial real estate. If you are an owner looking for a brokerage to creatively market your property, please reach out to any of our agents to discuss further.

As Mark Twain once wrote, ‘Buy land, they’re not making it anymore.’ It seems easy enough, right? However, current interest rates in today’s financing environment have many businesses choosing to lease commercial property without giving consideration to purchasing.

Nevertheless, purchasing a building can offer many advantages for a business that can be worthwhile. One benefit of owning a property is that over time, real estate generally appreciates in value, serving as an asset for the business. Monthly mortgage payments build equity in the property with each payment, and that equity can be leveraged for other financial needs in the future.

Another reason is stability and predictability. When you own the property, it eliminates some uncertainties associated with leasing, which can include lease expirations, terminations, and non-renewal. If you have a fixed-rate interest loan, it can also eliminate uncertainties associated with rent increases and maintain a sense of security for long-term planning. However, it is important to consider that more often than not, commercial financing has adjustable interest rates, which eliminates some of this predictability regarding payment fluctuation.

One of the greatest benefits of property ownership is that it gives the owner control to modify their space and feel confident that they are investing their money in their asset as opposed to adding value in someone else’s property. So, you don’t necessarily need to look for the perfect place when you can find a place and make it perfect. Customize your property to meet your specific needs without any lessor restrictions.

There are also tax benefits, including deductions for mortgage interest and depreciation of the property. These contribute to overall cost savings for the business and can improve the bottom line, ultimately making a difference no matter what type of economic climate we are experiencing.

The events unfolding in the North Bay’s commercial real estate market exemplify the concept of creative destruction. This economic theory, as observed in the region, is demonstrated by the closure of long-standing retail stores and entertainment venues, which are giving way to emerging industries and changing consumer preferences.

What is “Creative Destruction”?

Creative Destruction describes the process where new innovations replace and render old innovations obsolete. The departure of national retailers like Burlington, Bed Bath & Beyond, and Forever 21 from the North Bay region points towards a shift in retail dynamics. This is likely a response to the changing nature of consumer shopping habits, where e-commerce is becoming more dominant, leading to the consolidation of brick-and-mortar stores.

It is not just big box retail that is changing. The decision by Bank of America to not renew their downtown Petaluma contract indicates a move towards digital banking services, as more consumers manage their finances online, reducing the need for physical bank branches.

The transformation of Pepper’s restaurant into a medical clinic and the closure of movie theaters in San Rafael and Rohnert Park reflect a reallocation of real estate to services that are in demand, like healthcare, at the expense of traditional entertainment venues, which have been heavily impacted by digital streaming services and changing leisure habits.

Conversely, Amazon’s planned expansion of their Vacaville complex to 2.1 million square feet signifies the growth of the e-commerce sector, necessitating larger distribution and fulfillment centers. This is a direct response to the increase in online shopping and the need for efficient logistics networks.

What does this mean?

These changes in the North Bay area are indicative of creative destruction, where outdated business models and less efficient uses of real estate are phased out to make room for new, more profitable industries that better reflect current economic trends and consumer behaviors. This process, while often disruptive in the short term, is a natural part of economic evolution and can lead to a more dynamic and resilient economy in the long run.  The concept of creative destruction, as observed in the North Bay area, is a critical and natural part of an evolving economy. It’s a process that allows for the reallocation of resources to more productive and innovative uses, which can lead to overall economic growth and increased efficiency. Here’s how this process can be beneficial in the long term:

 

  • Reallocation of Resources: When businesses close or relocate, their former premises don’t remain unused; they often become opportunities for other businesses. For example, a closed restaurant turning into a medical clinic represents a shift in resource allocation from one sector to another, potentially more in-demand, sector.
  • Technological Advancement and Innovation: The expansion of Amazon’s facilities in Vacaville reflects the growth of technology-driven commerce. Such innovations often lead to new business models and job opportunities, including roles that didn’t previously exist, thereby contributing to economic diversification and resilience.
  • Productivity Increases: The shift away from traditional brick-and-mortar retail toward e-commerce can lead to increased productivity, as e-commerce platforms often provide broader reach and higher efficiency than physical stores.
  • Consumer Benefits: Changes in the economy often come with advantages for consumers, such as greater convenience, lower prices, and a wider array of services and products.
  • Job Creation: While some jobs may be lost in sectors that are contracting, new jobs are created in expanding sectors. Over time, the workforce adapts through retraining and upskilling, leading to a more skilled labor force.
  • Growth: Creative destruction can lead to overall economic growth. New industries often grow at a faster rate than the ones they replace, contributing to a higher Gross Domestic Product (GDP).
  • Social Adaptation: As society adopts new technologies and changes its consumption patterns, the economy adapts to meet these new demands. This adaptation is crucial for long-term social and economic well-being.

 

In the context of creative destruction, the economic landscape is often likened to a game where there are winners and losers, which is a fundamental aspect of market economies. This competitive process is driven by innovation and the constant pursuit of efficiency, which inevitably leads to shifts in who benefits and who does not.

Commercial real estate investments are strong for a number of reasons. First, commercial properties tend to have higher cash flow than residential properties. This is because commercial properties are often leased by multiple tenants, which means that there is a steady stream of income coming in. Second, commercial properties tend to appreciate in value over time. This is because the demand for commercial space is usually growing, which means that there is more competition for properties. Third, commercial real estate investments can provide tax benefits. For example, investors can deduct the depreciation of their properties from their taxes.

Commercial real estate investments can be a great way to generate income, build wealth, and save on taxes. If you are looking for a strong investment, commercial real estate may be a good option for you.

Here are some additional details to support the points made:

  • According to the National Council of Real Estate Investment Fiduciaries (NCREIF), the average annual return on commercial real estate investments over the past 15 years has been 12.7 percent, compared to the S&P 500, which has had an average annual return of 8.8 percent.
  • Commercial real estate investments can provide a steady stream of income, as tenants typically pay rent on a monthly basis.
  • Commercial real estate investments can appreciate in value over time, as the demand for commercial space continues to grow.
  • Commercial real estate investments can provide tax benefits, such as depreciation deductions.

If you are interested in investing in commercial real estate, it is important to do your research and consult with an advisor at Keegan & Coppin to determine if this is the right investment for you.

The real estate market is constantly evolving. It’s influenced by various factors such as economic conditions, market trends, and investor sentiment. As such, forecasting the capitalization rate of  property types such as office, industrial, and retail properties, requires careful analysis and consideration of multiple variables. We at Keegan & Coppin will delve into the North Bay Area real estate market and provide an estimated 5-year forecast on the capitalization rate of these property types.

The North Bay Area, known for its picturesque landscapes and proximity to major metropolitan areas such as San Francisco, has long been a desirable location for real estate investors. However, like any other market, it is not immune to fluctuations and changes. Let’s take a closer look at each property type and their respective capitalization rate forecast.

Office Properties: The office market in the North Bay Area has historically been strong, driven by demand from various industries such as technology, healthcare, and professional services. However, in recent years, the office market has experienced some challenges due to changing work dynamics, including the rise of remote work and flexible office space options.

Over the next 5 years, it is expected that the capitalization rate for office properties in the North Bay Area will experience some upward pressure. This can be attributed to potential oversupply in certain submarkets, as well as the continued uncertainty around the future of office space demand. As remote work becomes more prevalent and companies reassess their office space needs, some investors may demand higher returns to compensate for increased risk. However, prime office properties in prime locations with strong tenant profiles are likely to remain resilient, and the impact on capitalization rates may be moderate.

Industrial Properties: The industrial market has been a standout performer in recent years, driven by the growth of e-commerce and logistics. The North Bay Area, with its proximity to major transportation hubs and favorable business environment, has seen strong demand for industrial properties from companies looking to expand their supply chain operations.

Looking ahead, the industrial market is expected to continue its upward trajectory, with the capitalization rate for industrial properties in the North Bay Area projected to remain relatively stable or even decline slightly over the next 5 years. The ongoing growth of e-commerce, the need for last-mile distribution facilities, and limited supply of industrial properties are expected to support continued investor interest in this property type, potentially leading to compressed cap rates in prime locations.

Retail Properties: The retail market has faced challenges in recent years, with the rise of online shopping and changing consumer preferences impacting brick-and-mortar retail. The North Bay Area, with its unique mix of urban and suburban environments, has experienced varying trends in the retail sector.

Forecasting the capitalization rate for retail properties in the North Bay Area is challenging due to the changing dynamics of the retail market. While some well-located retail properties with strong anchor tenants may continue to perform well, others may face higher vacancies and increased risks. As such, the capitalization rate for retail properties in the North Bay Area is expected to be mixed, with potential variations depending on the location, tenant mix, and property condition. Overall, the retail market is likely to face some headwinds in the coming years, which may result in slightly higher capitalization rates for certain properties.

In conclusion, the North Bay Area real estate market is expected to face some challenges and opportunities in the next 5 years. While the industrial market is projected to remain strong, with stable or even declining capitalization rates for industrial properties, the office and retail markets may experience some upward pressure on cap rates due to changing demand dynamics and increased risks.

As with any investment, it is crucial for investors to conduct thorough research, analysis, and due diligence before making any business decisions.

affordable housing act
affordable housing act

Affordable Housing Act Repeal; California has a severe housing crisis that needs a solution.

It’s no secret that California has a severe housing crisis. It is no more evident than in the Bay Area and all of the surrounding neighborhoods devastated by the “unending” Wild Fires.

Finding a solution; solutions to this crisis calls for a myriad of co-ordinate efforts that involve not just owners, developers and builders but our cities, our towns, our counties, and all the municipalities that actually dictate and control the permits and regulatory restrictions that govern new housing and drive new construction.

Candidly; let’s acknowledge the complexity of the crisis, and (because of that) the fever to chase a simplistic solution such as rent control is understandable. However; Rent control and the repeal of Costa-Hawkins is “jumping from the frying pan into the fire”.  The underlying core issues of an inadequate housing supply are not only not addressed, but the new barriers that will require enforcement are a punitive drain on the very government agencies that should focus on new ideas and innovations that create more inventory.

Proposition 10 – Affordable Housing Act

The current initiative Proposition 10; the Affordable Housing Act does not create affordable housing. Instead it reaches out to restrict the options of private property owners by the repeal of Costa-Hawkins. It is a genuine misuse of our tax dollars and misuse the precious time and energy available from the sectors that can lead and orchestrate new development.

Restricting the rights of privately-owned property owners; while well meaning; will not create new housing and does nothing to garner all the necessary resources needed to join forces and create viable pathways to real solutions. Some of the effects of rent control include inhibition of new housing, deterioration of existing units, reduced property tax revenues, and bureaucratic distraction.

Municipal Efforts must be focused on building metrics between those who have the talent and the resources to actually build new units.

Things that could be considered immediately:

  1. Zoning Codes for Residential Development could be updated to allow for prudent density, and the City could immediately annex County areas where the City’s General Plan calls for Medium density housing in the County controlled properties. Currently, the City waits for the developer to apply for annexation. That is time consuming and can delay a project at least 6 to 12 months with no guarantee that the annexation will be approved. Many developers and home builders will not even consider a new project in these unincorporated areas slated for residential development.
  2. Encourage granny units and in-law conversions in single family neighborhoods with adequate land available
  3. Streamline the approval process to keep reasonable pace with the building process.
  4. Fees! Here a fee, there a fee, everywhere a fee fee! Fees must be in line with the eventual product that will be coming to the marketplace. For instance: the City has highlighted Southwest Santa Rosa as a target for new development, yet the fees there are higher than they are on the eastside where property values are higher. This may be a City strategy to offset the expense of the off-site work that will eventually be required, but the current fee structure has created a negative fiscal equation that is not sustainable to the actual marketplace.

The answer to the problem of scarce housing and rising rents is increased housing supply, and removal of inappropriate regulatory barriers to new construction.

“Doing the same thing over and over again and expecting a different result is the definition of Insanity”. That adage has never been truer then when evaluating the merits of repealing Costa-Hawkins; the Affordable Housing Act.

Commercial Investment Valuations are typically presented as cap rate driven: the lower the cap rates, the higher the price. Investors have the challenge of balancing asset security and safety vs. an acceptable Cap Rate return.

Security and safety include a matrix of attributes: Extended Lease Term, Quality Tenant with good credit history (and track record of business acumen), LOCATION (both the immediate demographics and street/area positioning), a favorable NNN lease, long term appreciation aspects, and financing desirability.  However; how low can you go? Cap rates in desirable urban settings wafting in under 4% need a compelling story to convince me.

REMEMBER the OLD Adage: “It’s not what you make; it’s how much you keep.”

Evaluating your cash on cash return is as important, if not more important than a cap rate. If your investment is predicated on a 4% cap rate but the cost of the funds is above that, you are going backwards. It can make sense if you are going into a Value-Added Property, or compelling project that offers an opportunity to increase the income to the current market conditions. No one size fits all but sometimes “all that glitters isn’t gold.”

When looking to understand a property’s allowable land uses and zoning we look to the City or County zoning code and zoning map.  These give us an idea of what uses are currently permitted at a property, which uses are not permitted, and which uses require a minor or conditional use permit.  It provides a snapshot of the current state of the property, but it doesn’t give any insight to the future of the property.  This is where the “general plan” comes in to help give the public an idea of the direction of a specific property or neighborhood.  The general plan will have both maps and text available to help show what the goals are for an area and it serves as a blueprint for location, type, density, quality, and rate of development.  Having knowledge of the future development of a community is very important for real estate professionals so that we can advise our clients in their real estate activity.  Understanding the goals and needs of specific areas including infrastructure, demographics, resources, and overall economic growth can help determine if a property is suitable for a client’s needs.  Determining the highest and best use of a property must take into consideration the current zoning as well as the general plan.

A GASp at CASp

Oh where, oh where, do we begin in attempting to evaluate the recent California ADA Access requirements that may have created one of the most murky and predatory law environments for commercial property owners’ in California today?
Before I begin, let me state that the quest to create access to the disabled sector of our communities is noble and needs to be supported. This article in no way is intended to imply that no efforts need to be made to eliminate access barriers in the marketplace.

But in the spirit of the “Law of Unintended Consequences”, the current ADA Compliance requirements that have been identified in the “New CASp Legislation” will have you scratching your head in utter amazement at the lack of foresight.
ADA Requirements came into law in 1991 and those requirements have been updated in both 2010 and in 2013. In efforts to be fair to existing property owners, language was added to the new regulations that attempted to call for reasonability that said, ” Readily Achievable to do so”, and further providing a “Safe Harbor Provision” to property owners who’s improvements were already completed prior to the approval of the new legislation. Compliance issues have been further complicated by the fact that ADA REQUIREMENTS are a Federal Mandate; although the actual enforcement of the Rules have been historically relegated to the local municipalities,thus creating a vast area for yet more ambiguity.

But Wait!! That’s not all! There’s more.

Further complications have developed by a California Supreme Court decision opining that any non-compliance with ADA STANDARDS IS AUTOMATICALLY a violation of California disabled access laws. You don’t have to show proof of damages, and now California leads the nation in the number of access lawsuits. The fertile ground for predatory frivolous lawsuits was born.
Enter the new CASp survey. This program was developed as a hedge to protect property owners against the slew of vicious lawsuits littering our judicious system, but it too appears to have backfired.

The “Updated” Requirements suggested in the CASp inspections can be expensive to implement because, (of course), most buildings have been constructed under the previous approved standards, thus creating yet another quagmire for commercial property owners.

For instance, in making a determination as to the updated requirements for CASp Compliance, has the owner been put on constructive notice that existing improvements MUST be modified? THAT IS A RHETORICAL QUESTION. What if the changes between the approved Compliance Regulations from 2010 to 2013 to the New CASp Requirements that amount to like an existing improvement now being 2 inches off, or a ramp slope that needs to be repaved (even though it passed inspections in the past and was certified) because the slope requirement has been modified? Is that reasonable?

I honestly don’t know where the lunacy ends, but one thing to consider if you are planning a CASp survey is to have your attorney order it for you, thus citing attorney /client privilege. You may want to Google ADA Defense Law, and read what their opinions are regarding protecting yourself as property owners from this legislation (run amok) phenomena that is leaking into our investment environment here in California and creating havoc for Commercial Property Owners.

During the so-called Great Recession there were a lot of strategic moves within the North Bay market.  EOP let go of their huge holdings at the beginning and then we were all surprised when RNM sold their holdings to PB&J and Investcorp.  Basin Street picked up most of the EOP properties and PB&J started aggressively marketing their properties.  All kinds of broker incentives floated around, but the deals are not driven by the brokers.  They are driven by the market, which is to say they are driven by psychology and emotion.  Sit down and analyze spread sheets.  Project cash flow scenarios.  Make it a good deal on paper.  But I’ve had more deals over the course of my career die because a principal doesn’t “feel” the deal is right than those which didn’t consummate due to logistics.  It can be a no-brainer on paper, but it has to feel right in order to make it happen.

A case in point is a recent transaction I completed for a close to ten million dollar property.  This is a property I’ve spent over twenty years working on.  I listed the asset in March of 2013 for sale.  Two days before the end of the year (and my sale listing) we signed a Letter of Intent with a purchaser.  The purchaser and the seller had done a deal some fifteen years earlier, so they were known quantities to each other.  I had presented previous LOI’s which were flat out rejected, yet this one stuck.  The only reason it stuck, and this is a quote from the seller, was that “(He felt) good about the Buyer”.  The deal had all the ups and downs of any large dollar transaction.  Voices were raised.  Promises were made.  Back and forth it went.  The problems were static, but emotions ran high.  Economic trends were both valued and cursed in the same conversation.   A broker cannot get involved in these emotional areas.  Our job is to make it happen as directed by our client and to keep away from the murky waters of emotional highs and lows.  We advise on the deal.  We pay attention to the paper trail.  We report our marketing efforts to our clients.  We play Pocahontas when these emotions run high.

At the end of the day, the old cycles hold true.  People start feeling better about the economy.  People start feeling more secure about their endeavors.  And properties start to lease and sell.  Sometimes it is a slow process, but the curve can still be sharp.

As we round the corner midway through the first quarter of 2014 I find myself going from busy to busier.  Everything from 200 SF office leases up to negotiation on 8-digit acquisitions is heating up.  This brings about a new problem, or at least one I haven’t faced in quite a while: Inventory.  Or a lack of it.  Our retail specialist in the Petaluma office is having trouble finding space.  I’m shoe-horning long dormant office spaces.  Behind-the-closed-door deals are being struck.  Inventory is dwindling.  While office still has a long way to go, I’m going to focus my energy on picking up more office inventory.  Why?  Again, because the curve can be sharp.  I’m also focusing energy on picking up industrial inventory, as that sector is almost non-existent in Petaluma and the surrounding areas.

Here we go (again)…