Why are investors buying empty buildings?
As an owner of commercial real estate, you fall into one of two categories. You either are entirely divorced from the occupant. In other words, you have no ownership in the resident company or you do. We refer to the latter as an owner-occupant and the former as an arms length investor. If we then dissect the genres of arms length investors  those who rely upon a tenant to pay rent  myriad classes unfold. The folks next door might own a small strip center housing a nail salon, fast food joint and an animal hospital. Wed call them a mom and pop. As their holdings grow over time and more properties are acquired, so does their class. Now, they fall into the heading of a private investor. Private investors generally use as seed capital money made from other sources such as a business, inherited wealth or savings. Thus, a private investor uses its own money to buy buildings. Sure, a bank loan might assist, but the down payment is from a personal account. Now, contrast the use of your own money to other peoples money and a capital market investor is identified. Capital market investors rely upon Wall Street dollars (real estate investment trusts, pension funds (California Teachers, CalPERS, State of Washington), or in some cases insurance company premiums (John Hancock, Aetna) to complete buys. OK, with that preamble, lets talk about a trend weve seen since the beginning of 2020. Investors of all types are buying empty buildings! Remember, they require rent to survive. Theyre not occupying a location with their business. Indulge me as I proffer a few opinions. Origination costs: Every leased parcel acquired comes at a price. Included are time on market, rent concessions, improvements and professional fees. From all these expenditures eventually comes an income stream. Currently, because available buildings are in short supply for those who need them to operate, all four categories of costs have been compressed. Its quite common to commence construction on a new project and have the entire square footage leased prior to completion. Time on the market evaporates! With more groups looking for space and fewer places to consider, concessions and offered improvements are slim. Consequently, its fairly easy these days to compute the cost of new occupancy. Plus, captured is the current market rent vs waiting on a below-market rent to catch up. Lack of quality: A brand new and vacant building comes equipped with all the goodies  tall warehouse ceilings, ample truck loading and is in pristine condition. Those operations targeted benefit operationally with more efficiency. This appeals more to potential tenants. Musical chairs: Akin to seven players and six chairs, competition for fully leased assets is fierce. Its quite common for a new offering to generate multiple interested parties. Therefore prices get bid up and returns suffer. Faced with the need to deploy dollars into real estate, vacant buildings have now gained favor. Cost and time to produce: We concluded several meetings this week with some of the largest developers of real estate in Southern California: Birtcher, Hillwood, REDA, IDIL and Blackcreek. They build em, then lease or sell the finished buildings to occupants or investors. You see, a buyer we represent was in town from the East Coast. We are trying quite diligently to find a building for our client to purchase. Good luck! We heard over and over that land prices, government overreach, environmental impact studies and increasing construction costs ALL are pinching the supply of new inventory. Therefore, if an investor can avoid the hassle of construction and simply buy existing  even vacant  it makes good sense to do so. 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.