ant ICI pation

BY MELANIE ROBITAILLE SR. STAFF WRITER & GRAPHIC DESIGNER

Commercial real estate has always been known for its long game with lucrative gains. Then came stay-at-home orders, interest rate hikes, and the loss of lenders but many in the business know and insist it’s still a sure bet.

In hindsight, it’s easy to see why many industry watchers questioned the future of commercial, a niche that Franchisee, Kris Klair of EXIT Realty Consultants in California has always dealt in. After the U.S. suffered “one of the swiftest economic declines in history” according to a 2021 REALTOR® Magazine article, retail and commercial office space took a huge hit as caution increased around leasing. But Kris, and like-minded investors saw opportunity.

“[People] are seeing that the commercial business is here to stay whether there’s a pandemic or not. The smart ones took advantage of the temporary downturn,” he explained. “We’re seeing more of the lending side of the commercial real estate vacate due to high interest rates, however overall, we’re seeing a demand in commercial needs. We’re seeing more people taking up office space and retail space lately, and I think that’s due to people getting back to work after the pandemic and getting tired of hiding behind a digital screen. There’s nothing better than shaking hands and making business happen.”

EXIT Realty Upper Midwest Regional Owner, Bill Pankonin sees a different outlook in his Minnesota marketplace saying, “Currently higher interest rates along with lending institutions tightening their standards have required investors to sharpen their pencils and sellers to reconsider pricing options… The demand for office space in many areas waned dramatically and has continued. Many large office buildings are now being retrofitted into apartments, condos, and other uses. Food and hospitality were also hit hard. The hotel industry has since rebounded but the restaurant industry is still wavering. Investors continue to look for value and they have to consider many factors with the ongoing interest rate environment.”

Commercial is only a part of the greater ICI, or Industrial, Commercial, Investment real estate sector. So, while some areas remain in a state of rebounding and reconfiguration, savvy professionals set their sights on the industrial and investment portions, because well, owning any real estate is considered a safe hedge against inflation. In fact, investors were blamed for “contributing to the inventory shortage in 31 of the top 50 U.S. markets” according to another Markets Most Affected by Investors REALTOR® Magazine article.

The stark reality is, when push comes to shove, pivoting happens. That’s why more creative commercial financing options are being seen, mixed used residential is now booming, and real estate investment trusts or REIT’s are making it easier for residential agents to get into the commercial side of things. ICI is a very different beast than residential though according to Kris, who owns a nine-office operation. He says experience, timing, and liability are the top three major differentiators when asked about the good, the bad and the ugly of servicing this niche. While having an in-house ICI division in his offices has brought major benefits, he also issued a caution to owners thinking about the same.

“[It] creates more of a one-stop shop...But the must-have when doing this is the experience in commercial. The liability can come back and haunt an agent if they don’t know what they’re doing.” These liabilities can encompass everything from a client’s debts and outstanding business loans to a building’s structural integrity, and because there are often several stakeholders from owners to subtenants, Bill agrees that knowledge and professionalism is tantamount saying, “Having the ability for a residential agent to refer to a commercial agent in house is a big plus. Let the professional ensure all will be handled right, increasing your chances to get paid via a referral. It’s a smart business.”

For agents, Kris and Bill recommend obtaining the Certified Commercial Investment Member designation, however both are also big proponents of learning on your feet, fully engaging in commercial or investment training and seminars, as well as finding a mentor in office where possible. Bill sees many agents make the mistake of “dabbling” in ICI and warns those thinking about making the transition to keep a good residential pipeline going while training and shadowing. Because despite all the market has been through, he says, “Like all sectors of the real estate industry, there are market shifts. Having a good database of investors and clients is a must.”

According to NAR's® October 2023 Commercial Real Estate Market Insights Report industrial and warehouse spaces are the leader in ICI markets, followed by the trending multifamily sector, and a consistently rebounding hotel and motel sector. Shifts in business operations and buyer tendencies have left office and retail space dealing with record high vacancy rates, although AI firms in need of space along with strong public spending and rent growth rate easing show possible signs of promise for both.

This pause in the residential side of the industry may offer the perfect time for agents considering making a move into ICI, a space that although is still experiencing some uncertainty, anticipates many more lucrative opportunities in the future.

There are still many small investors and business owners who would like to invest but need the help and education from a trained real estate professional. That’s an underserved part of the market.

—Bill Pankonin, Regional Owner