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 151,700 workers and generate $134 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
Apr 19, 2024 - Industry to Return to Steady but Flat Growth
- The commercial property management industry is expected to see weaker sales growth this year, but demand is projected to improve in the following four years. The industry’s year-over-year sales increased by 15% in 2022 before dropping to 4.5% in 2023, according to Inforum and the Interindustry Economic Research Fund, Inc. Sales growth is projected to moderate further to about 2.8% in 2024, then rise to 4.6% in 2025. The industry will then see steady but mostly flat average annual growth of about 4.5% through 2028, according to Inforum and the Interindustry Economic Research Fund, Inc.
- In a late March report, Moody said commercial real estate (CRE) values will likely drop by 10% over the next 18 months. The office subsector will suffer the most, with a 26% decline in values by the end of 2025, as hybrid work models prompt businesses to downsize to smaller spaces or move to less expensive properties. By the end of 2025, multifamily CRE value will drop by 5% amid a robust influx of new supply. Over the next six quarters, oversupply will also reduce industrial CRE value by 5.7, and warehousing by 6.6%. As shopping continues to move online, retail CRE prices are expected to decline 8% by the end of next year. A higher-than-usual amount of CRE will mature by the end of 2025, and many loans will have large balloon payments in need of refinancing. Cash flow will be at greater risk if property owners refinance when interest rates are higher than they’ve been in more than 20 years.
- Despite record levels of office vacancies, rents are unchanged or, in some cases, even going up, according to The Wall Street Journal. The average asking rent for office space is $35.24, up from $34.92 in the fourth quarter of 2019, according to property data firm CoStar. Office rents have remained high due to a peculiar function of the commercial real estate market. Rents are a key metric used to measure property value, so owners are reluctant to reduce rents, which would lead to lower building value. In some cases, office owners would rather space stay empty than reduce the rent. A reduction in value also makes it more difficult for landlords to refinance. Industry watchers suggest office rents will eventually fall back to Earth when owners are forced to restructure their mortgages or sell off distressed properties.
- Contractors have cooled on starting new industrial construction projects after a period of red-hot demand during the pandemic, according to Globe St. Nearly 1.2 billion square feet of industrial space was added over the past two years, according to CBRE. The health crisis drove up demand for warehousing and logistics space amid the boom in ecommerce, but high interest rates, weaker demand, and overcapacity have slowed industrial construction starts. According to CBRE, in the fourth quarter of 2023, industrial starts fell to 46.3 million square feet compared to a quarterly average of 102.5 million square feet in 2022. However, CBRE believes industrial starts will bounce back once the fresh round of new supply is absorbed and additional space is needed as demand increases.
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