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
                                    Source: Vertical IQ and Inforum

                                    Recent Developments

                                    Jun 21, 2024 - Office Vacancies Hit Record High
                                    • Hybrid work models continue to put downward pressure on demand for office space. In April 2024, the national office vacancy rate rose to 13.8%, according to the National Association of Realtors (NAR). The second-quarter 2024 12-month net absorption rate in the office sector was -54 million square feet, as more office tenants continue to move out than move in. Cities with some of the highest office vacancy rates include San Francisco (22.6%), Houston (18.6%), Dallas/Fort Worth (17.6%), Denver (17%), and Washington DC (16.9%).
                                    • Amid a recent uptick in retail bankruptcies, retail space landlords don’t expect their properties to stay vacant for long, according to The Wall Street Journal. In 2023, 26 large retailers declared bankruptcy, marking the highest number since 2020. So far this year, more than a dozen other retailers have announced store closures as part of their bankruptcy restructurings. However, some building owners see opportunity in financially distressed tenants breaking leases. Some industry insiders suggest that recently vacated spaces can often be leased at higher rents to higher-quality tenants. Despite increased economic uncertainty and signs of weaker consumer spending, demand for retail space remains steady, primarily due to a chronic lack of new retail construction. Investments in retail construction have been weak since the recession of the late 2000s, and conditions were made worse by the pandemic. In the first quarter of 2008, before the financial crisis, contractors built 80 million square feet of new retail space, according to data firm CoStar Group and JLL research. In the first quarter of 2024, only 9.5 million square feet of retail construction was completed.
                                    • Once considered a risky bet by some commercial property landlords, restaurants have become one of the fastest-rising segments of the retail real estate market, according to The Wall Street Journal. Several factors are helping to drive the trend, including wage growth, low unemployment, the popularity of foodie culture, and Millennials’ tendency to marry later and eat out more. In 2023, food service establishments accounted for 19% of total retail leases, the largest share held by any single retail category, according to data firm CoStar. Landlords have traditionally been suspicious of restaurants because they are costly to build out and have a high business failure rate. However, property owners are warming up to credit-worthy restaurant chains because they can help attract foot traffic to other businesses nearby.
                                    • Weakness in the office sector has led to some buying up of distressed properties at deep discounts, but so far, the number of troubled buildings for sale has been small, according to The New York Times. According to data firm CoStar, 2024 and 2025 will be the worst years on record for tenants walking away from office floor space. As building owners lose tenants, it’s harder for them to pay their mortgages. To prevent big losses, investors and lenders have tended to try to wait out the downturn, hoping building owners can attract new tenants and resume mortgage payments. That strategy has helped keep a wave of distressed sales at bay. So far in 2024, mortgages for 16 office properties packaged into commercial real estate bonds were either foreclosed or extinguished, leaving investors with $500 million in losses, according to data research firm Trepp. While that’s only a small fraction of the $171 billion of office building mortgages currently packaged into bonds, Trepp has put more than 25% of them on a watch list for possible trouble down the road.
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