The Importance of Good Recon

The past two years have been quite the challenge. The rebirth of high inflation and the resulting rise in interest rates imposed to stop it put the broomstick in the economic spokes back in the middle of 2022.

Throw in a couple of wars, political turmoil at home and a contentious election cycle, and it’s no surprise that reading the economic tea leaves became even more impossible. But, here we are, the election is behind us, there’s a new sheriff in town and, even with the inauguration more than a month away, the international scene is showing signs of increased clarity in a good way. Make sure you have plenty of popcorn ready, as 2025 is sure to be an interesting year for all of us, regardless of where you call home. 

As we pointed out in our last post, many of the people we talk to each day are more optimistic about the near future and interested in learning more about opportunities that may be created by a positive shift in economic momentum. They are asking us more about the future and focusing less on dealing with the immediate frustrations of current circumstances. That’s a great sign from our point of view and it has us in reconnaissance mode. Figuratively speaking, we have our drones in the air and binoculars in position in our effort to assess the market for potential opportunity, as a squadron of Marines might survey the battlefield for potential danger or enemy weakness to exploit. Put another way, our clients seem less deterred by current circumstances and more interested in what change will bring in terms of opportunity.

Over the next couple of posts, we’ll take a look at the potential impact on both sides of lease and sale transactions, but we’ll start with some things to think about for you tenants out there:

If you have delayed a move due to uncertain market conditions, things could be looking up. You finally have some choice again after a decade of scarcity. Vacancy has risen sharply since the middle of 2022 and most of the available space coming onto the market is disproportionately for lease only. Gone are days of short supply that made it near impossible to secure quality space. Now, in almost all size ranges, tenants have more choices, more negotiating leverage and more time to make their decisions. Time-on-market for buildings offered for lease is back to being measured in months rather than weeks or days, and landlords are more forthcoming with concessions like free rent, tenant improvements and other incentives because they are keenly aware of the impact of lost rental income on their investments. In other words, the playing field is now leveling after being on tilt for more than a decade. 

All that said, leasing is still expensive and the market is not in full correction mode as many industry professionals, including us, predicted. Asking lease rates are still near the 2022 peak, though concessions have lowered effective rates. Vacancy, though much higher than it was, is still within historical parameters of a balanced market. The big difference is your choice of facilities has expanded, so you’ll have a better chance of finding something that truly fits your needs, rather being forced to take what you can get even if it is functionally obsolete. You will also have more time to make an informed decision because it is unlikely that other tenants will be lined up to compete for your top choice.

If your company is in the distribution sector, you’ll even have the opportunity to have landlords of first generation space compete for your business, as the last surge of new developments in Orange County are either completed or will be soon, and were not pre-leased during construction. This is even truer in the Inland Empire, which has experienced massive amounts on new deliveries over the past several years in response to high demand for state-of-the-art distribution facilities. Though the construction boom is over for now, there are still millions of square feet of first generation space, especially in the 100,000 to 500,000-square-foot range, completed and waiting for tenants throughout the region.

So, if you are a tenant who may be looking for space in the next two years, whether you’re looking for 5,000 square feet or 500,000 square feet, this is the time to do your forward reconnaissance. What you find may just change your timeline for action. At minimum, you’ll put yourself in better position to make an informed choice when the time is right.

More on this topic for landlords, buyers and sellers next time.