Is the Income Property Business Model Outdated?
Office
If the trend of the first two months of the year holds, U.S. office markets will see their first quarter of contraction since beginning a remarkable period of expansion during the economic recovery that followed the bursting of the Internet bubble at the start of the century.
According to CoStar Group analysis, the amount of office space listed for sublease has gone up more than 2 million square feet since the start of the year. That would be the largest quarterly increase in six years. The contraction of office space is widespread across the country and the market has not seen negative net absorption since the second quarter of 2003. Of 62 office markets analyzed, CoStar is showing that more than half (35) were showing negative net absorption.
Colliers International has announced the third quarter in a row of increased vacancies based on its midyear national office research report. Total negative absorption for the year now stands at about 5.1 million square feet. In the second quarter, Class A vacancy rates have grown half a percentage point to 12.69 percent, and both B and C class rates have risen to 13.71 percent.
Conclusion
Given everything that you’ve just read, continuing to buy and manage income property with a business as usual philosophy is going to cause considerable financial pain. The old modus operandi – buy it, hold it, watch it go up, and sell it – is out the window. The new lessee habits are not discretionary changes. They are an integral part of a changing life style and require changing business strategies and methodologies for income property investors.
The new habits being acquired by lessees require a whole series of new questions (see below) that need to be asked prior to buying income property. It is the answers to these questions that will define the business model for the subject income property. Additionally, these same questions need to be asked periodically by every owner and asset manager of income property.
- Does the location work given the new lessee habits?
- Do the current lessee profile needs match up to the real estate.
- If not, can the current real estate be changed to accommodate the current lessee profile needs?
- If not, can the current lessee profile be changed?
If you don’t ask and answer these questions, rest assured your competition is!
Good news for i-net retailers, not so good for the rest. With regard to the store closings, it would be enormously more meaningful to know not just the number of planned closings, but what percentage of total stores the closings represent. But perhaps your source Affair’s Brief” did not contain that information.
September 10th, 2008 at 7:00 pmI don’t know if a simple economic downturn, a normal part of the economic cycle, is a reason to abandon, for instance, the acquisition of retail property. I do think that prudent due diligence is critical, and that there is a tremendous amount of distress among retailers — distress that will only grow exponentially after what is likely to be a very tepid holiday shopping season. It is a time to be patient and to buy investment property prudently and with an eye to value creation opportunities.
September 28th, 2008 at 6:22 am