Lessors of Nonresidential Buildings
Industry Profile Report
Dive Deep into the industry with a 25+ page industry report (pdf format) including the following chapters
Industry Overview Current Conditions, Industry Structure, How Firms Operate, Industry Trends, Credit Underwriting & Risks, and Industry Forecast.
Call Preparation Call Prep Questions, Industry Terms, and Weblinks.
Financial Insights Working Capital, Capital Financing, Business Valuation, and Financial Benchmarks.
Industry Profile Excerpts
Industry Overview
The 31,200 firms in the US act as lessors of nonresidential buildings, such as office buildings, shopping centers, and retail stores. The industry includes owner-lessors and firms that rent real estate and subsequently sublet property to others. Professional and office buildings account for about 36% of sales; commercial property, which includes shopping centers and retail stores, account for about 36%; and manufacturing and industrial buildings 8%. Firms may manage properties or outsource management to a third party.
Competition for Desirable Locations
The location of properties is a primary factor that determines rental rates, and properties in sought-after areas are priced at a premium.
Capital-Intensive, Debt Heavy
The nonresidential lessor industry is capital intensive, and firms typically have sizeable investments in real estate holdings.
Industry size & Structure
The average nonresidential lessor operates out of a single location, employs about 5 workers and generates about $5 million annually.
- The nonresidential lessor industry consists of about 31,200 firms that employ 157,000 workers and generate $155 billion annually.
- The industry is concentrated at the top and fragmented at the bottom. The 50 largest firms account for 42% of industry sales. Large firms may operate as real estate investment trusts (REIT) and have properties in foreign countries.
- While commercial space is concentrated in large buildings, large buildings account for a relatively small number of the overall stock of commercial buildings, according to the National Association of Realtors (NAR). The majority of buildings are relatively small.
- Large firms with nonresidential lessor business include Prologis, Simon Property Group, LaSalle Investment Management, and Brookfield Property Partners. The largest firms are fully integrated, own and develop land and buildings, and provide leasing, management, and construction services.
Industry Forecast
Lessors of Nonresidential Buildings Industry Growth
Recent Developments
Oct 22, 2024 - Tight Market for Retail Space Squeezes Smaller Stores
- A lack of retail real estate construction in recent years and rising demand for space by expanding large retail chains is putting the squeeze on some small businesses, according to The Wall Street Journal. The tight retail space market advantages larger chain stores that can afford higher rents and have more access to credit. According to a recent survey by Alignable - a social media outlet for small business owners - nearly 60% of small businesses reported their rent had gone up in the last six months and more than half of independent retailers said they were unable to pay their full rent in September.
- While the Federal Reserve’s half-point rate cut in September was welcome news to many commercial property owners, lower rates may not be enough to save building owners who are highly leveraged, according to The Wall Street Journal. Some property owners took on high levels of debt when rates were low just a few years ago. However, when rates began climbing in 2022, some building owners missed payments, betting their creditors would extend loan deadlines. In some cases, banks have lost patience with highly leveraged owners and have opted to take control of properties instead of allowing borrowers to continue missing payments. Commercial real estate observers expect most borrowers and their lenders will be able to weather the current market then refinance once rates drop further.
- Fitch Ratings’ US CMBS delinquency rate rose by 35 basis points to 2.89% in September 2024 from 2.54% in August. The September rise was driven by a spate of office, regional mall, and multifamily defaults which offset strong new issuance activity. Commercial mortgage-backed securities (CMBS) are fixed-income investment products backed by mortgages on commercial properties rather than residential real estate. The delinquency rate is the percentage of commercial real estate loans that were 30 or more days past due or in foreclosure. A rising delinquency rate indicates that an increasing number of commercial property owners cannot pay the mortgages on those properties. Current and prior-month delinquency rates for September and August were: Office: 5.85% (from 5.31% in August); Retail: 5.03% (from 4.15%); Hotel: 3.35% (from 3.34%); Multifamily: 0.85% (from 0.47%); Industrial: 0.41% (from 0.55%); Mixed Use: 4.23% (from 3.85%); Self-storage: 0.01% (from 0.01%); and Other: 1.05% (from 1.68%).
- Building owners and operators are facing a period of cyclical elevator replacement, according to Bisnow. Elevator equipment manufacturers estimate that of the 23 million elevators in service globally, 7 million are 20 years old or older. The useful life of an elevator is between 20 and 25 years. The number of elevators that are ripe for replacement is expected to accelerate in the coming years. In 2023, Otis Elevator saw replacement demand rise 17%. Hybrid work has also contributed to demand for elevator replacement amid the so-called flight to quality in the office market. Demand for office space has shifted to the highest quality properties, which has forced lower tier buildings to modernize to attract and keep tenants. Similar trends are boosting demand for elevator replacements in the multifamily market.
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