We’ve been around long enough to see the pendulum of opportunity swing from tenants to landlords and from buyers to sellers, and back again, more than once.
But, in all our years in the commercial brokerage saddle, we never saw tenants get beaten up like they did in the decade ending in 2022. But the ol’ pendulum is now swinging back in their favor and new opportunities are on offer. Let’s take a quick look at recent history for context.
The industrial sector, driven by loose monetary policy that sent interest rates to historic lows and the money supply to record highs, took off like a spooked horse in 2011-2012. Industrial vacancy fell to almost zero in just a few years and lease rates rose consistently by double-digits year-over-year. Tenants lined up five to ten deep for the chance to offer a landlord more than his asking price for aging, functionally obsolete space. They judged the success of their negotiations simply by being the winning bidder, no matter what the price and terms were. It was a tough time to be a tenant.
That made it a good time to be a landlord and sales prices rose to reflect the rent windfall. Cap rates fell through the floor as eager buyers lined up to get on the rent growth train. And why not? With mortgage rates as low as the mid-2% range, a 4.5% cap rate sounded like a bargain to both institutional and private investors. Prospects for further price appreciation went up with rising rents and the market maintained a full head of steam until reality final caught up to sloppy monetary policy and profligate government spending. The result was inflation that ignited like an EV battery fire in 2022.
The reversal of fortunes since then has been significant. Rent growth came to a screeching halt and tenant demand fell precipitously by the beginning of 2023. Properties that went off market in hours back in 2019 sat empty for months in 2024. By the end of last year, Orange County asking rents were down by almost 15% year-over-year, and vacancy exceeded 5% for the first time in many years. Add in the return of tenant concessions like free rent and tenant improvements that were absent for a decade, and the pendulum had clearly swung back in favor of tenants.
And, that’s where we are today. The tenants finally have some cards to play with again, along with a growing pile of chips to bargain with. Though lease rates are still well above the previous peak of 2008, tenants now have more buildings of higher quality to choose from. Gone are the days of fierce competition and back are the days of landlords sweetening the pot to get deals. We have even seen the return of the broker open house, which is good for us brokers because we love free food. Simply put, a sense of balance has returned to the supply/demand equation.
That all said, there’s still a way for everyone to win.
While tenants get their concessions, they still have to agree to rents that remain elevated after such a prolific run-up. So, landlords who own their properties free and clear or have mortgages originated during the days of cheap money, can still enjoy healthy cash flow from qualified tenants who pay on time. In other words, it’s still good to be a landlord provided you are realistic and flexible. The old ‘my way or the highway’ approach doesn’t work anymore.
With more inventory to choose from, tenants don’t have the same sense of urgency to take whatever space comes up on the radar. They can take the time they need to get that particular space that supports the efficiency and profitability of their businesses, and still get some help from landlords in the way of free rent, moving allowances and specialized tenant improvements.
The sale market is a whole other can of worms for 2025. We’ll get to that next week. Stay tuned.
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