Can subleases save the commercial real estate market?

By the time you read this, we will have exhausted two months of 2024.

Christmas lights will be appearing in home improvement retailers in no time. But I digress.

Last month, I wrote about subleases. You might believe this is déjà vu all over again. And, in some ways, it is. It’s just uncanny to me how our industrial market activity has gelled around these remnant sales.

In my associate’s and my practice, the majority of deals we are currently pursuing are subleases. Allow me to become a bit more granular and describe each situation.

Efficiency

We represent — and have since 2010 — an occupant whose business spans the western United States. They house operations in Ontario, Santa Fe Springs, San Diego and Valencia.

This company has increased their topline revenue organically and through acquisition. Hiring has been at a fever pitch — their appetite for space therefore unquenchable.

However, substantial investment has been made in the mothership hosting each submarket. We’ve found it more economical to add a building or two vs. uproot, move and consolidate. Until now, that is.

A desire to be under one roof and increase efficiency was the driver for their present relocation. One of the leave-behinds was the previous locations.

Akin to crossing a stream and having your feet split between two rocks, this group will stage its move and transition from three buildings into one by year’s end.

Meanwhile, term remains on the leave-behinds and must be addressed. We’re currently engaged to find a surrogate.

Once the move occurs and the buildings are vacated, very little time will remain on the leases. Careful coordination with the owner’s representatives has begun. It’s a work in progress. But one caused by growth – not caused by overzealous space consumption.

Aquisition

In 2022, we were hired by an estate. Tragedy had struck the year before as Covid claimed the life of a family member and patriarch of the company.

Owned were the enterprise and the real estate that housed it. Growth of the business over decades found the operation straddling three addresses.

Now the de facto owner — the executor — angled to sell the buildings and the company.

You see, none of the following generations had experience running the business, thus there was no desire to continue ownership.

The executor’s timing was impeccable as he maximized both real estate and company values at the top of the market.

Included in the real estate sale to an investor were three, five-year leases.

However, the business buyer had excess capacity at another location and didn’t need the three leased buildings.

Consequently, as frequently is the case, an acquisition caused a real estate requirement. In this case, the disposition of the three leases.

We advised the tenant to market the subleases aggressively and the market responded in kind.

With any luck, we’ll be done this week and all three will be subleased.

Market timing

We represent an e-commerce distributor. All manner of foot ware, wearable technology and beauty products are imported from China and sold locally through mass retailers.

This group, based on the East Coast, has been on a rampant kick to acquire competitors and grow its business.

Part of the inventory is stored in a building in the Inland Empire, and the overflow is stashed with a third-party logistics provider.

It’s now time to purchase premises to accommodate the growth. However, there is a problem.

This buyer’s idea of value is less than the going pricing. We’ve not found a seller willing to capitulate.

We believe there are more price declines coming, but the space needs are stressing the operation.

Subleasing a larger facility for two to three years seems to be the answer. If the purchase market responds, and we can acquire at our price point, we’re not hampered by a long term lease. But, if not, we simply renew with the owner and continue our operation in a leased address.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.