No matter what industry you are in, you’re most likely feeling the effects of the coronavirus pandemic. Real estate is no different. The uncertainty is making a lot of buyers think twice before signing on the dotted line for their new office, retail location, warehouse, etc. However, local commercial real estate firm LevRose is advising its clients to consider the risks and the market. They might be surprised to find that, in many cases, moving forward with their deal is the best course of action.
“To think, less than two months ago, firms around the Valley were dealing with a surplus of lease and sales transactions,” said Mike Baumgardner, sales director at Levrose Commercial Real Estate. How quickly things change. However, if you are in the process of leasing or purchasing, the question to be asking is, “will the current situation change the overall fundamentals of the property?” The short answer is, “it depends.”
As an owner/user buyer, you are looking for a building primarily to house your business. Furthermore, as any buyer of this type of property knows, it takes a while to find the property that truly works for them.
“We have some buyers that we will work with for up to a year or more before finding the right property,” said Zak Kottler, partner at Levrose. “So when we finally find that ‘perfect fit,’ it usually doesn’t make sense to start over and hope that the next great property is waiting in the wings. It’s more likely to be the beginning of another long and challenging search.”
Other considerations include rising interest rates for commercial loans and the slower process of getting the loans approved and completed. Thus, a buyer who is locked into a good interest rate must consider not only the potential additional cost of a new loan but also the extra time of starting fresh.
Of course, some buyers see this as an opportunity to ask for a price reduction or wait to see if a windfall of less expensive properties will enter the market due to the pandemic. However, based on the strength and tightness of the metro Phoenix market heading into this, many sellers are not feeling the need to push the panic button. Ironically, some have pulled their properties off the market, creating a possible shortage in supply over the next few months. If you have found the right property and feel it will still be the right property in the future, it’s a smart decision to keep moving forward.
For a tenant, there needs to be a similar expectation that the property they are considering will still work for them following the COVID-19 crisis. Again, if the overall requirements are not expected to change from just a few months ago, the right space should still be the right space. However, the type of space may determine whether there will be more supply, thus a potential reduction in pricing. For example, smaller retail centers that lose tenants during this time will have some potentially prime locations for lease within the center. Still, they may need to offer some initial price reductions to fill the sudden vacancies quickly. Of course, this will not be the case for all centers and may not be the case for many offices or industrial properties.
According to Danielle Davis, a partner and retail leasing specialist at Levrose, “we are expecting to see some opportunities for certain tenants after everything shakes out. Generally speaking, we recommend that clients stay focused on searching for and finding the right space, as this market uncertainty may end sooner than we realize.”
Ultimately, the decision for a buyer or tenant to move forward should come down to one simple question — “is this still the right location and fit for my business?”