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 30,000 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 4-5 workers and generates about $4.4 million annually.

    • The nonresidential lessor industry consists of about 30,000 firms that employ 146,800 workers and generate $132 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
                                    Source: Vertical IQ and Inforum

                                    Recent Developments

                                    Nov 21, 2022 - Office Leases Drop
                                    • The long-term impact of the pandemic on office demand is becoming clearer, according to reporting by Biznow. The number of new office leases in the third quarter of 2022 was down 18% compared to Q3 2021 and was off 15% from Q3 2019, according to commercial real estate data firm CoStar. The square footage of office leases is also dropping. In the first three quarters of 2019, the average office lease was about 4,500 square feet. In the first nine months of 2022, the average lease fell to 3,800 square feet, according to CoStar. In Q3 2022, the average office lease term fell to 6.2 years after rising for the previous 12 months to 9.1 years, according to real estate firm JLL’s Q3 Office Outlook report.
                                    • Warehouse operators are enjoying strong demand as industrial vacancies keep shrinking, rents keep rising, and new capacity is slow to come online, according to an October report by CommercialEdge. The average national in-place rent for industrial property was up 5.8% in September compared to a year earlier. The national vacancy rate remained at 4.1%. At the end of September, more than 700 million square feet of new industrial space were under construction. Warehouse rent growth is strongest near busy ports. The Phoenix area has seen explosive growth due to spillover from the coastal region of Southern California.
                                    • Fitch Ratings’ US CMBS delinquency rate fell six basis points to 1.89% in October 2022 from 1.95% in September 2022, driven by few new delinquencies and stronger resolution volume. 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 October and September were: Hotel: 4.86% (from 5.36% in September); Retail: 5.68% (from 5.88%); Mixed Use: 2.15% (from 2.15%); Office: 1.23% (from 1.19%); Multifamily: 0.33% (from 0.33%); Industrial: 0.4% (from 0.13%); Other: 0.55% (from 0.56%).
                                    • Some real estate developers are holding off on new office projects as remote work has eroded demand for new office space, and rising interest rates make projects more expensive, according to The Wall Street Journal. Office occupancy is only about half of what it was before the pandemic, which has prompted some major real estate firms, including Varnado Realty Trust; Hines, Kilroy Realty Corp.; and Brookfield Asset Management, to tap the breaks on new office development projects. The national office vacancy rate is 12.5%, up from 9.6% in 2019, according to commercial real estate data firm CoStar Group. About 37% of the office space currently under development remains available, double what it was in 2019, according to CoStar.
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