IE commercial real estate: It's a buyer's market

SB Sun:

There's a bright side to the Inland Empire's depressed commercial real estate market: It's a great time to be a buyer.

That's only if your business has an A-plus financial track record.

Experts say local companies with the best earnings - and who've been renters for years - are naming their price when it comes to finally purchasing property to house their operations.

And for businesses looking to rent, their per-square-foot lease offers that landlords would've laughed at a few years ago are now dominating the market.

It's both a buyer's and renter's market, and business tenants will run into more alluring options going forward, according to one broker.

"I think `opportunity' will be the buzz word for 2010," said Matt Millett, senior associate at Coldwell Banker Commercial Lazar & Associates in Redlands, which brokers both office and industrial real estate.

There's so much space going vacant in San Bernardino and Riverside counties, rates are getting super competitive, and landlords are scrambling to retain tenants, whether they be furniture retailers, law firms, goods distributors or restaurateurs.

Sales prices have dropped so much that some landlords are breaking even or losing money when they sell off property.

It's going to take two to four years before the Inland Empire's oversupply of commercial space is sold or rented out, according to several brokers.

"Landlords are going to the tenants early on and saying, `What will it take to keep you here?'," said Thomas Galvin, research associate with Colliers International in Ontario, who studies industrial property trends. "But the tenant has no idea what a good deal is. They don't realize that if they poke around the market, they could save a lot of money by finding a different property."

Galvin's preliminary estimates show that the average purchase price for industrial space in east San Bernardino and Riverside counties will have plunged from a peak of $97 per square foot in second quarter 2007 to $61 in third quarter 2009 - a 37-percent drop.

So who's buying this real estate, anyway?

If they aren't local mom-and-pop manufacturers and retailers who've been nesting on a wad of cash, there's a good chance the buyers are Asian.

About 80 percent of commercial real estate purchases that Milo Lipson helped broker over the last year were deals where the buyer was headquartered in China, Taiwan, Japan or Korea, or they were Los Angeles-area based subsidiaries with parent companies in those countries.

"They've been using warehouses out here already, but now they're cutting the warehouse middle-man out," said the senior vice president of the industrial division at Grubb & Ellis's Ontario office. "They're buying these buildings at a discount and setting up their distribution hubs out here."

On the rental side, huge concessions are being made by landlords in the tug-of-war on lease rates.

Because square footage rates are so cheap, businesses are pushing for seven- to nine-year leases when their terms mature, Lipson said.

Instead, commercial real estate owners are rebutting those offers with proposals for two-, three- or five-year leases, where the landlords have the option of raising the rent to market value during the last year.

Lipson and Millett said they're seeing more deals secured over the last couple of months than they were in late 2008 and early 2009. The market was "dead" back then, they both said.
"It's picked up recently," Lipson said.

While it's not clear whether the market is hitting a bottom, "we've seen some positive signs lately," Millett said. "People are starting to peak out from under their rocks."

One fundamental change going forward: owner financing will continue gaining popularity, according to Rick Lazar, president of the Coldwell brokerage in Redlands.

It's tougher than it was a few years ago to secure credit lines from banks to buy office or industrial space.

But some of the same landlords willing to bend over backwards when it comes to price are also offering to lend businesses the money needed to secure a deal.

"There's no question it will play into the future when the opportunity presents itself," Lazar said. "It's going to get bigger and bigger."

By the numbers:

Preliminary third-quarter 2009 commercial real estate vacancy rates:

* West Inland Empire industrial market - 10.6 percent

* East Inland Empire industrial market - 23.3 percent

* Total Inland Empire office market - 23.7 percent

Source: Colliers International