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

                                    Mar 17, 2023 - Banking Woes Weigh on Commercial Real Estate
                                    • The collapse of Silicon Valley Bank and Signature Bank is expected to put downward pressure on commercial real estate values and stifle dealmaking activity as credit tightens, according to Biznow. Even before the banking crisis, commercial property values were down 15% in February 2023 from their high point in March 2022, according to Green Street. By mid-March, the FTSE NAREIT Equity Index, which includes all US REITS, had fallen about 4.6% since the news of the crisis, while the S&P 500 was only off 3% over the same period. Some industry watchers expect the office market to be hit especially hard as it has still not recovered from the pandemic-related drop in occupancies. CBRE Global chief economist Richard Barkham said, “Real estate capital values, which had already been falling, will be further pressured by an even more tightly constrained credit market."
                                    • Even before turmoil emerged in the US banking sector, The Wall Street Journal reported on several high-profile office landlords that had defaulted on their loans, suggesting the pandemic’s effect on office occupancy may be permanent. In late February, The Wall Street Journal cited data firm Trepp Inc, reporting that five to 10 office properties per month are at risk of defaulting due to low occupancy rates, maturing debt, or expiring leases. While there is still demand for high-quality office space in desirable locations, overall occupancy rates have stalled around 50% of pre-pandemic levels.
                                    • The rising frequency of natural disasters due to climate change is pushing up insurance costs for commercial property owners, according to Yardi Matrix. While the issue is most pronounced in states that are experiencing extreme weather events – such as wildfires, hurricanes, and severe winter storms – insurance rates are rising nationwide. In states with high climate-related risks, including Florida and Texas, insurance rates are rising by 50% or more and threaten to stifle property sales and new development. Property insurers that use reinsurance policies to assuage some of their risk are finding reinsurance rates rising by 45-100%, and some reinsurance firms are ceasing to offer services in high-risk states.
                                    • Retail, particularly shopping centers anchored by grocery stores, is proving to be a resilient segment of the commercial real estate sector, according to The Wall Street Journal. Grocery stores are attractive investments as consumers continue to flock back to in-person retail as the pandemic has subsided. Among specific real estate segments, retail is the only one that saw sales increase in 2022 over 2021, according to data firm MSCI. However, retail-based real estate sales of $85.7 billion were mainly in the first half of 2022 before rising interest rates began to slow the market.
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