For those who have been wondering when the price of North Orange County industrial properties would return to its previous peak, take note: that time has come and gone in the blink of an eye.
The sale of a brand new, state-of-the-art 63,744-square foot building at 3325 E. La Palma Avenue in the Anaheim Concourse by the Zehner/Davenport Industrial Group is significant in several ways…
Record Price
First, the sales price exceeded that of a comparable building at the top of the last real estate cycle in 2007.
The continuing shortage of properties offered for sale has been a key driver of double-digit increases in property values for several years running. For decades, the owner/user scenario has been popular with business owners who see building ownership as a key component of a healthy and diversified investment portfolio, and a way of providing a good home for their business at the same time.
When it comes to analyzing price, it is important to adopt an “apples-to-apples” approach. The quality and functionality of properties offered for sale today varies tremendously. Using average price per square foot as a guide can be misleading. Buildings need to be compared component by component, including location, age, land area, clear height, parking and power, among other considerations.
When compared carefully, today’s price point is higher than it was in 2007.
A Premium for Quality
Second, it clearly demonstrates the willingness of local business owners to pay a premium for high quality, functional buildings.
Development has been at a near standstill for more than 8 years, and the shortage of remaining land sites suitable for industrial development is now a permanent barrier to inventory growth. That means that the average age of industrial properties is on the rise, and with that comes the difficulties associated with functional obsolescence.
Add the fact that the vacancy rate for the region is under 3% and it is easy to predict that quality property is only going to get more difficult to acquire, whether it be for sale or lease. Price, while an important component to property acquisition, is becoming less of a factor as the market tightens further. This particular building in Phase 3 of the Anaheim Concourse is all about functionality.
The buyer recognized the value of high beam clearance, superior truck access, modern fire/life safety features and high image, all in the heart of North Orange County’s best industrial submarket.
The Role of Cheap Money
Third, this property sale is a prime example of the role that low-cost financing still plays in the sale of industrial property.
Trumping price as the top consideration when acquiring owner/user properties is the control of occupancy cost.
The Fed’s desire to stimulate economic growth by lower borrowing costs has been and remains a boon for the commercial real estate industry, especially owner/users who can access SBA financing with fixed payments for up to 25 years at rates in the low 4% range.
For some, it is simply too good a deal to pass up when they consider the alternative of paying high lease rates with annual increases of 3% or more. “Why pay off my landlord’s mortgage with my rent check, when I can pay off own mortgage for the same price,” they ask themselves.
The Right Time For Action?
Whether you have a property sell or you are looking for one to buy, this may still be the right time to act.
The unique synergy created by combining low supply and demand for quality with low-cost financing has and will continue to impact the industrial property market going forward. For potential sellers, there is profit there for taking along with an opportunity to reposition equity into alternate assets.
Some owner/users are reluctant to sell even at today’s prices because they are averse to exchanging into other assets they must pay the same premium for. Instead, they hold on to properties that no longer offer the efficiency they once did, jeopardizing business profitability in the process, rather than exchanging into properties that fit current needs. Selling just before major capital expenditures are required is another consideration.
Roof, HVAC and other building systems are expensive. Some owners decide to sell rather than make significant additional investment in existing facilities. Buyers of those properties can finance up to 90% of those costs with their SBA loans at the point of acquisition with nominal impact on monthly occupancy expense. For buyers, there is the certainty of fixing one of the biggest expenses for up to 25 years and reaping the tax benefits of owning real estate.
No matter where the economy is in its inevitable cycle, controlling quality property at today’s cost of capital offers a competitive advantage to those with the foresight to acquire properties, even at today’s price levels.
While it is true that when the cost of capital does finally move up, there is the real possibility of a pricing correction. Understandably, that gives pause to potential buyers who don’t relish the idea of buying right at the top of a real estate cycle. However, it’s not all about price, and when proper weight is placed on fixing long term occupancy costs at today’s metrics, owning versus leasing is still compelling. Buying at the top can still make good sense, especially when the investment strategy is long term.
Give us a call. We can help you decide if the time is right, whether you have something to sell or you are looking for a building to buy.
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