The term time is of the essence is incorporated into nearly all real estate leases and sales contracts…
According to the Cornell University Law School website, it is defined as a statement that may be included in the language of the provisions of a contract to emphasize that the parties must complete their obligations on time. As professionals who work with these contracts every day, our activities are focused on helping our clients get things done in a timely manner to avoid unnecessary problems or risk losing a deal.
But we think of the term differently when it comes to the marketing and negotiating phases of real estate transactions.
We think of time, unnecessarily spent, as an enemy that always works against us and each party to the transaction. The longer it takes to get something done, the more chance there is for something to go wrong. That doesn’t mean it is okay for us to rush through anything, as that can also mean trouble. Rather, we endeavor to get things done as quickly as possible without making unforced errors that negatively impact the desired result. So, we try to move through the process with a sense of urgency tempered with a keen attention to the details and unique circumstances that come with every transaction.
Current market conditions and verifiable trend lines set the stage for any negotiation. Having a good understanding of the forces of supply and demand, as manifested in market statistics like vacancy, absorption, sale & lease activity and pricing, is critical to the closing of a successful commercial real estate lease or sale transaction. That fact is even more important when market conditions are changing as quickly as they are today.
From 2011 through the middle of 2022, the metrics of the sale and lease market for industrial space in Southern California were easy to sort out. Demand was through the roof, supply dwindled to near nothing, sales prices and lease rates soared. It was the most one-sided market anyone in our industry has ever seen. Tenants and buyers were lined up 5 to 10 deep just to get a shot at being the winning bidder. First offers were above asking prices and the final terms of pretty much every transaction set a new market high point.
However, by the end of 2022 the sound of screeching brakes filled the air. Demand from buyers and tenants fell sharply due to rampant inflation, higher mortgage interest rates and an overall sense that the market had topped out. Institutional investors started walking away from big deposits and owner-users became disinclined to pay premium prices on top of monthly debt service that doubled in less than a year. Put another way, the psychology shifted and the bull mentality shifted to bear in short order.
Now that we are approaching mid-year, that shift has shown up in the numbers.
Vacancy, while still very low, is moving up, sale & lease activity (deal count) has declined, the pricing trajectory has flattened out and there are fewer active requirements in the sale and lease queue. Price reductions are showing up in the listing hot sheets for space offered for lease and time-on-market has increased, which means available supply is continuing to accumulate. The availability of buildings offered for sale is still very thin and that has kept prices from falling, at least for now. But, it only takes a few sales at lower price points for buyers to connect those dots and start playing harder to get.
This is where time being of the essence comes into play. The numbers tell us that the market has lost enough thrust to make a correction more likely. The downside risk for landlords and sellers is now measurable, and, in our opinion, should be taken seriously. Our advice to our clients is simply this: make it your objective to be the next building to sell or lease in your competitive set. If that means easing off on your lease rate or sales price, or offering some free rent to secure a signed lease, make it so.
Demand for both sale and lease product has markedly declined. Now it’s the property owners who are in competition with one another. Chances are greater that the market will move lower in the near term than higher. So, the sooner you complete your sale or lease, the better off you are likely to be. If you fail in your negotiations to secure a tenant or buyer, there may not be another one to step up right away. Given the indications of market direction, chances are the next potential tenant will offer an even lower lease rate and demand even more in concessions, and time will have also worked against you via lost rental income from the lease you passed on. Likewise, passing on a buyer who won’t pay those last few dollars per square foot you are holding out for, could be a costly mistake, as the increase in borrowing cost has already dampened demand and is not likely to decrease anytime soon. If this proves true, downward pricing pressure is inevitable.
No one can say with certainty which way things will go. The tea leaves only tell us so much, and market forces are complex to say the least. But, when we put what we know empirically together with what we are experiencing day-to-day, we see the risk to owners moving up. Whether or not you respond to that by taking action is dependent on your unique circumstances. Landlords who signed a five year lease in the past two years to a strong credit tenant, are in little danger. But those whose buildings are empty or soon to become empty, are in a very different set of circumstances.
Likewise, owner/users who took advantage of 3% fixed rate financing 5 years ago and are happy with the operational efficiency of their property, have little to be concerned about. But, a business owner looking to fund his retirement with the equity in his property is much more at risk.
Bottom line: don’t let time work against you. Get out in front of your next decision no matter what it turns out to be. Consider your risk relative to where you are in your life and be prepared to take action because time is and will always be of the essence.