Happy Labor Day! It’s now September — that time in Southern California when Christmas decorations take the place of lawn furniture in Home Depot.

College football has just begun yet we’re expecting St. Nick to return the next kickoff.

Fall is my favorite time of year, however. Cooler temps, changing leaves, shorter days and all of the holidays that follow — Halloween, Thanksgiving, Christmas and New Year’s.

Travels for the summer are over, kids are back in school, and hopefully, no more hurricanes will mass in the Pacific.

Now, to the balance of the year. What the next four months have in store for commercial real estate owners and occupants is the subject of this column.

Watch interest rates

Borrowing for houses just eclipsed 7%. Historically average but so much higher than the sub-3 % rates we witnessed in 2021. What’s followed is a lack of available houses for sale as folks with cheap loans don’t want to sell, and new buyers can’t afford today’s prices financed at higher rates.

Commercial real estate borrowing is also affected, but another element evolves from high rates — small businesses’ ability to finance growth through acquiring competitors, buying equipment and leasing larger quarters.

Our Federal Reserve seems bent on taming inflation and causing unemployment to rise in the process. Higher interest rates — when business expansion is quelled — can create uncertainty among business owners.

Class A industrial absorption

Amid the resounding echoes of new construction, there’s a curious absence, a noticeable lack of tenants ready to move in and occupy these freshly minted spaces.

The question looms: why? Conditions that once fueled the previous industrial boom have evolved into a new breed of challenges. Gone are the days of localized manufacturers and logistics providers securing their own spaces with owner-occupied financing.

Instead, our market has produced spaces that align with the needs of large-scale tenants.

And therein lies a conundrum. The needs of these tenants hinge on a degree of certainty, and a stable backdrop before they commit, amplifying the vacancy issue.

We’ve overbuilt the high end of the market. Someone will have to concede to lower lease rates in order to attract a tenant. Once this happens, others will follow and a new paradigm will emerge.

Recession

I predicted in January that we’d avoid a recession as the resilience of the consumer would steer us past a downturn. So far, I’m correct. What lies ahead in the next four months of 2023 will be interesting to watch.

So far, unemployment is low, wages are higher, and folks are spending money on services such as travel. Most would agree the average consumer is racking up too much credit card debt in the process. As this debt is recalibrated into higher monthly payments because of higher rates, fewer dollars are available to throttle consumption.

Politics

We have a long list of Republican hopefuls, an indicted frontrunner and months before the primaries. On a global level, war still rages in Ukraine, China stealthily observes, and record heat, rain, and storms rage like no other time Incan remember.

The list of contenders will thin and we’ll be safely past storm season. The New Year will bring the promise of an election year.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at [email protected] or 714.564.7104.

Related Articles