The view outside my window today is much like it was yesterday, and the day before that. I survey the horizon for proof that the sky is falling, I am not seeing any. In publications, podcasts and posts in my feed, well-known pundits prognosticate Commercial Real Estate’s impending doom. I agree with some of what they say: there are areas of our market are being brutally decimated by this pandemic (think downtown office buildings, shopping centers, retail strips). Just as certainly, other areas are doing quite well (industrial, multi-family, NNN Properties occupied by essential service providers). Investors and their debt and equity sources are underwriting much more conservatively in this environment, if they are underwriting at all. And rightfully so.
But one niche of buyers seems undeterred by our current circumstance: business owners purchasing property that address their business’s operational needs. Although disruptions rule the day, the advantages of property ownership remain unchanged: interest and depreciation tax benefits, building equity, capital appreciation, diversifying revenue streams by partially leasing unused space, building wealth to pass on to the next generation, and, most influential to an entrepreneur’s daily toil, complete control of the physical space their businesses operate from.
Notwithstanding these obvious benefits, we might expect buyers’ activity and outlook to parallel overall economic uncertainty, lower consumer confidence and investor sentiment skewing negative. Some entrepreneurs will struggle to appreciate, much less pursue, the long-term benefits of ownership with cash flow (payroll, lease obligations and A/R collections) demanding their immediate attention. Difficult times indeed, but hardly unprecedented. We, and by “we” I refer to humanity, have been here before and survived. We will do so again.
Contrary to what we are being told, over these past six months InSite’s brokers have experienced a robust pipeline of new listings, properties going under contract and transactions closing. What accounts for our success? We are discovering that business owners buying property are as active as they have ever been, and the high ratio of Contracts to Closings shows this transaction to be remarkably resilient.
WHY ARE BUSINESS OWNERS SO CONFIDENT?
Two factors account for this vigorous level of activity in the face of a catastrophe: business owners’ tolerance for risk and their longer-term perspective. Entrepreneurs look for opportunity where others see risk. They accept risk as a part of their planning, deploy creativity and resources to mitigate those risks and move towards their desired outcomes.
Additionally, a business owner invests and re-invests in their enterprise, often with 10-, 20- or 30-year time horizons in mind. Yes, there will be challenges and unknowns to consider in the next twelve months as the waves of disruption begin to settle into a new rhythm. But business owners devour a daily diet of challenges and unknowns as a part of a business plan spanning decades instead of months.
Entrepreneurs have a distinct advantage over investors in this cycle. Investors buy cash flow, their underwriting predicated on tenants’ creditworthiness, financial strength and business prospects. Entrepreneurs position their companies for the future and make decisions consistent with their vision. Unlike investors, who are subject to the uncontrollable vagaries of their tenants’ businesses and market, a business owner only must assess the inherent risk of a single organization they have full and intimate knowledge of – their own business.
Assisting business owners is delivering great success to us; not a single contract that we have facilitated over the past six months has fallen through. This is pleasantly surprising since we were unsure how this was going to play out earlier in the year.
WHAT ARE THEY LOOKING FOR?
Our clients have specific space and logistical needs that we seek first to understand, then to satisfy. Good brokers facilitate a transaction on a listed property. And that may be enough for some people. However, we believe a GREAT broker takes the time to fully understand what their clients’ business, personal and financial goals are, and then seeks opportunities among their contacts and resources to create a successful outcome (whether the target property is listed or not). In our business, as in most, the difference between good and great is the difference between being an order taker and a market maker.
InSite’s typical clients in this niche are manufacturers, distributors and professional service providers with revenues between $1MM and $20MM. For these clients we operate within the industrial sector, working with warehouses, distribution centers and flex warehouse/office properties of up to 30,000 square feet in size.
RESILIENCE 101
During the current disruption in our markets, we have found it helpful to understand and appreciate a Buyer’s psychology and lengthy time horizons. When business owners and their management teams determine that acquiring a property is the right strategy for their growth, they are investing for the long-term, building their business far beyond the current economic cycle. We applaud and respect their confidence and support them in our daily interactions with the market.
Every day we witness the drama of business taking place on multiple stages. From our front-row seats, we embrace the opportunity and great responsibility to observe and facilitate successful transactions with this active, resilient niche. All of this enjoyed from seats firmly planted in the ground and well below a stable sky.
Learn more about Ross Goldstein.