Posts Tagged ‘landlord’
« Older Entries |Where did I put that lease? Finding your best real estate strategy
Wednesday, January 4th, 2012
By Ralph Benzakein, Vice President
Here’s the scenario: You just realized that your lease will be expiring in a few months and you start to think about what that will mean. For the most part, your current space works for you. You might need more open space or a couple of additional offices; the carpet is starting to show some wear; the walls have been marked up a bit. But, it’s close to home and you have a comfort level there (the car practically drives itself to the office). You also remember the nightmare of moving and the disruption to your business.
So…now what? You didn’t get into business to have to worry about this stuff, but now you need to. You decide there is plenty of time to address this and go about doing “more important” things.
At the same time, you begin to notice all of the “Available Space” signs on your way to and from your office. You call one or two of them and discover that although there is a sign in front of the building, there isn’t necessarily any space that would suite your operation, but the broker representing the building would be happy to show you other buildings. It then occurs to you that those signs never really come down and that they are really just a lead generation system for the broker.
More time goes by and brokers are calling you every other day to pitch you new space or tell you how much free rent they can get you. Nobody has taken the time to evaluate what your business needs are and how they can be aligned with your real estate needs.
It all becomes a little overwhelming and with about 30 days left on your lease, you contact you current landlord and “ask” him if you can renew your lease. He says, “Sure, I’ll send you a renewal letter, just sign it and you’ll be good for the next five years.”
Wow, talk about the path of least resistance. You think to yourself, done deal. You read the lease renewal, notice the part about continued escalations (seems reasonable), sign it, and it goes back in the drawer for another four and a half years.
You, my friend, are a landlord’s dream come true!
You may have saved some time, but it came at a very high price. Here are just a few of the items that a tenant rep would have negotiated for you:
- Lower rent (those continued escalations in the renewal have committed you to rent that is well above the market)
- Rent abatement (free rent)
- Refurbishment allowance (new carpets, paint, move partition walls, etc.)
- New base year for real estate taxes
- Reduce or enlarge space, per your needs
- Lower escalations
Your rationale that your landlord would not want a broker involved is accurate. I’ve just shown you why. It’s not because he doesn’t want to pay a broker’s fee, though he probably doesn’t. It’s because many of the countless clauses you are not equipped to negotiate are his profit centers.
And by the way, some landlords are more than willing to pay a broker’s fee, even on the renewal. Some even insist on it to ensure that the broker is not motivated to move the tenant out of their current space.
Bottom line: give yourself plenty of time to determine the best real estate strategy for your business. That usually means at least one year, if not more, depending on the size of your space.
Tags: corporate real estate, cost savings, landlord, lease, tenant
Posted in Transaction Management | Comments Off
Split Incentives Key to Energy Efficiency
Thursday, November 10th, 2011
By Mike Tobin, Director of Sustainability
Every tenant wants to pay less in operating expenses, and every landlord is challenged with how to maintain or improve their property to provide competitive operating costs. When it comes to capital investments in building systems, the conversation between the two can become frosty as neither one wants to be burdened with the expense.
In order to improve the energy efficiency of our national and international building stock, it is imperative that we identify a framework for addressing split incentives in both a working and legal relationship. To that end, CresaPartners participated in a workshop hosted by BOMA and the Rocky Mountain Institute to attempt to build just such a framework. BOMA and several of the other participants approached the issue from a landlord’s or owner’s perspective, and CresaPartners brought the tenant’s perspective to balance the table during the discussions. The result of this workshop will be a guidebook that outlines the issues and creates a road map for possible win-win solutions. The goal is to release this to the market by the end of the year.
I’ll outline a few of the key items that were addressed to hopefully spur some further discussion. One discussion point is whether or not the lease or another side agreement should be used to outline split incentive agreements. One on side, the lease is the central legal document to the relationship between landlord and tenant. It is the place to outline any split incentives such as allowing the landlord to pass through to the tenant the cost to upgrade the HVAC system. On the other side, the landlord in a multi-tenant building will have many different leases or forms, and it will be very time consuming and expensive to amend each lease for the split incentive. As a result, a side agreement may conceivably be more efficient to simply focus on the split incentive while not opening up the lease.
Another issue arises out of the multi-tenant buildings—how does a landlord move forward with an energy efficiency project if not all of the tenants agree to the split incentive agreement? A simple answer is that the landlord would just have to decide whether or not it was in their best interest to maintain that asset and thus make the capital investment themselves. But the landlord can also do more to try to be a better salesman. In a lot of instances, the tenants feel as if the landlord is trying to pull something over on them. By engaging the tenants earlier in an open dialogue and providing transparency into the capital planning, energy costs, etc., then the landlord may be able to do a better job of selling the building improvements.
This discussion of improved salesmanship brings up the area of financing the improvement. A new area of financing has arisen for landlords that will provide the upfront capital in return for the cost difference due to improvement in operating efficiency. If the new system is really efficient, then the financing entity gets a nice return. If the system is inefficient, then the financing entity may lose money. The tenants do not realize the cost benefit from the more efficient system during the term of the contract, but they are guaranteed a steady cost of energy that is no more than their current rate. The challenge is that the financing entity will not provide financing if not all of the tenants are in agreement. If not all tenants are in agreement, then there may be other financing agreements that can be structured to meet those needs. By openly discussing these options, the landlord may encourage non-committed tenants to commit.
Sales also takes a certain amount of trust that is sometimes hard to find in a tenant/landlord relationship. In order to build trust, landlords can improve the transparency of the building operations by doing something like publicly proclaiming the energy star rating or the energy use per square foot of the building. There is a lot of debate in the market today about whether or not landlords should be required to give energy star ratings or other national building labels. As tenants and brokers, let’s ask every landlord for their energy star rating (and/or energy use per square foot) until it becomes abnormal not to provide that level of transparency. In that way, we establish a basic level of shared understanding about the building and can build upon that to find common ground and win-win improvement scenarios.
This is just a sampling of some of the issues that were discussed surrounding split incentives, and there are many more issues and ideas around this topic. If you have any good examples or other ideas, please feel free to write me and help us promote better building efficiency through split incentives.
Tags: BOMA, corporate real estate, energy efficiency, energy star, landlord, sustainable, tenant
Posted in Sustainability | 2 Comments »
Modest Job Growth Helps Recovery in Select Markets, Q3 2011
Wednesday, October 19th, 2011
By Bill Goade, CEO
As Q3 2011 comes to a close, the recovery has not picked up any momentum and in fact has slowed. The few markets that showed recovery in the first half of the year (Silicon Valley, the Bay Area, Cambridge, Mass., and high-rise midtown New York) continued to show strength. However, in most office markets, job growth has remained modest, and demand has been relatively flat. It will be another year before national vacancy begins to fall significantly and average rental rents rise. A full market recovery does not seem likely for some time unless job growth accelerates dramatically.
The national availability rate of 17.3% is slightly down from Q3 2010, the high point since 1993. Meanwhile, average rents are still well below the highs by more than 25% in 2008 in most markets.
In most places it remains a tenant’s market and an especially good time for credit-worthy tenants to exercise their leverage in negotiations with landlords. While some landlords are becoming more bullish, most are focusing on tenant retention at almost all costs as demand remains sluggish in markets nationwide.
Along with modest job growth is the phenomenon of unused “shadow space.” Companies will backfill that space as they hire rather than expand. At the same time, over 70% of transactions continue to be renewals rather than relocations.
Bright Signs
Positive indicators include the following: The amount of occupied space increased slightly for the third straight quarter, and average office rents also rose slightly, their first spike since Q2 2008. In addition, investment activity rallied last year, recording $168 billion in sales, up 60% from 2009.
Opportunities for Tenants
The window is still open for tenants in most markets, and we continue to encourage companies to be proactive in negotiations before their leverage begins to slip. In some instances, one- or two-year extensions are available as landlords anticipate a better market in 2013 and beyond. Because of the likely tightening in availability, we rarely recommend the short-term extension strategy at this time, unless the business plan simply cannot support a longer commitment. However, tenants need to weigh flexibility versus likely rent hikes in two or three years. In other instances, tenants, especially those with strong business plans, have an opportunity to lock into leases of eight years or more. Finally, given low interest rates and impending changes in lease accounting, this may be an excellent time for some tenants to buy real estate.
Click here to read about your local market.
Tags: corporate real estate, job growth, landlord, recession, tenant, unemployment
Posted in Tenant's Guides | Comments Off
Valuations Still Uneven, Vary by Product Type
Wednesday, July 27th, 2011
By Jim Leslie, Principal
Valuations of commercial real estate product continue to vary by product type. Primarily due to the housing crash and the continued fallout of the mortgage debacle, most multifamily rental communities are showing signs of stability as well as rent increases. The industry is welcoming back individuals who had become home owners with the relaxed mortgage underwriting but now find themselves renting again. The experiment of making everyone a homeowner has shown to be unsustainable, recharging demand for apartments. Investors are rushing to purchase this product type at very competitive cap rates as they feel rent will continue to increase in the foreseeable future.
Office product has not been embraced by these same capital sources, and it is still difficult to find money (debt or equity) to fund new construction. Other than 100% fully leased build-to-suit opportunities, very little new construction is occurring in most areas of the country. In addition, landlords are still working to modify their capital stack to reduce leverage and extend terms. As a result, many landlords are finding liquidity to be a challenge and that is creating problems for them in negotiating renewals as well as limiting their ability to close new leases. Tenants should be looking at their current portfolio of leased properties to identify those landlords with liquidity issues and approach the landlord now to probe options which will be beneficial to the tenant and may also be helpful to the landlord. For example, a recent transaction allowed for the tenant to pay for tenant improvements in exchange for a reduction in rent, giving the tenant a 15% annual return on the capital it invested in the improvements. That is a 10 year investment return of 15% compared to a 10 year treasury rate of 3%. How many Chief Financial Officers would love to get a 15% return on their own operations and not worry about the investment? These kinds of returns are more the norm than the exception and can have a meaningful impact on the stated rent in the lease agreement. It also allows the tenant to effectively gain long-term occupancy at below market rates regardless of who eventually owns the building. Other opportunities exist for tenants to purchase the buildings they occupy at below replacement cost values. They will eventually be able to take the building back to market in a sale leaseback transaction utilizing the credit of their balance sheet to maximize value. We are seeing some developers beginning to sell some of their owned portfolio to free up liquidity for their remaining assets. They recognize this is not a strategy that maximizes value, but they are going through a unique time and are looking to keep what they can. It seems all of them are repeating the mantra: “it is what it is.” This is an ideal time for a tenant to approach their landlord to see if a transaction can be accomplished. There is no harm in pursuing those assets which you feel are quality and strategic to your core business.
This opportunity will exist throughout 2011 but it is beginning to appear that all “troubled” real estate investment portfolios will be either recapitalized or sold by 2012, creating a much more stable and patient landlord for the future. Now is the time for tenants to aggressively review their own portfolio to see if opportunities exist within their markets.
Tags: corporate real estate, landlord, tenant, valuations
Posted in Capital Markets | Comments Off
Modest Job Growth Helps Recovery in Select Markets
Wednesday, July 20th, 2011
By Bill Goade, CEO
In mid-2010, economists declared that the recession was over, and the recent unemployment rate of 9.5% seems to confirm modest job recovery. But as Q2 2011 comes to a close, the recovery has not picked up any momentum and in fact seems to have slowed. The few markets that showed recovery in Q1 (Silicon Valley, the Bay Area, Cambridge, Mass., and high-rise midtown New York) continued to show strength. However, in most office markets, job growth has remained modest, and demand has been relatively flat. It will probably be another year before national vacancy begins to fall significantly and average rental rents rise. A full market recovery will probably not occur until 2013, when we likely will reach pre-recession employment levels, and that will occur only if the job growth picks up. For the most part, there is little velocity for class B space, and suburban areas are generally suffering more than CBDs.
The national availability rate of 17.3% is slightly down from Q3 2010, the high point since 1993. Meanwhile, average rents are still well below the highs by more than 25% in 2008 in most markets.
In most places it remains a tenant’s market and an especially good time for credit-worthy tenants to exercise their leverage in negotiations with landlords. While some landlords are becoming more bullish, most are focusing on tenant retention at almost all costs as demand remains sluggish in markets nationwide.
Along with modest job growth is the phenomenon of unused “shadow space.” Companies will backfill that space as they hire rather than expand. At the same time, over 70% of transactions continue to be renewals rather than relocations.
Bright Signs
Positive indicators include the following: The amount of occupied space increased slightly for the third straight quarter, and average office rents also rose slightly, their first spike since Q2 2008. In addition, investment activity rallied last year, recording $168 billion in sales, up 60% from 2009.
Opportunities for Tenants
The window is still open for tenants in most markets, and we continue to encourage companies to be proactive in negotiations before their leverage begins to slip. In some instances, one- or two-year extensions are available as landlords anticipate a better market in 2013 and beyond. Because of the likely tightening in availability, we rarely recommend the short-term extension strategy at this time, unless the business plan simply cannot support a longer commitment. However, tenants need to weigh flexibility versus likely rent hikes in two or three years. In other instances, tenants, especially those with strong business plans, have an opportunity to lock into leases of eight years or more. Finally, given low interest rates and impending changes in lease accounting, this may be an excellent time for some tenants to buy real estate.
Click here to read about your local market.
Tags: corporate real estate, job growth, landlord, recession, tenant, unemployment
Posted in Tenant's Guides | Comments Off
Tenants Firmly in the Driver’s Seat
Thursday, July 7th, 2011
By Terry Quinn, Principal
As is often the case, there seems to be a public air of optimism, but behind the scenes, most participants acknowledge a continued lack of certainty and visibility related to the overall economy and the commercial real estate markets. This uncertainty is largely driven by the market manipulation of the Fed in terms of QE2 (scheduled to end this summer), negative real interest rates, weak overall recovery, and commodity inflation as a result of the overheated dollar printing press.
Dallas-Fort Worth (DFW) has certainly outpaced most other major markets throughout the country in terms of job creation. As such, it seems that many CRE players are lined up to prepare for the next upward part of the cycle. In the context of the office market, we think it’s a bit early for most landlords and investors to assume that the risks of loss of valuation are in the past. It’s only the sixth inning, and therefore, despite the fact that the Fed has been successful in rebuilding bank balance sheets thereby allowing a delay for many owners facing refinancing, troubled waters potentially remain on the horizon.
The $64 billion dollar question is what happens if interest rates move significantly upward over the next 18-24 months. We recently asked the COO of a major bank here in town about his thoughts regarding the future of interest rates. His response: “The window is between 6 and 18 months, but when the upward movement begins, we think it will move higher and much more swiftly than most expect. The 10 year could easily hit 6% or go higher.”
We recently reviewed the $3.9B of CMBS mortgage loans currently outstanding in the DFW metroplex. 38% of the total CMBS loans in DFW are on the watchlist. This ranks Dallas 3rd behind only San Diego and Riverside/Ontario in terms of the highest percentage of loans on the watchlist. In addition, 84% or $3.3B of the CMBS mortgages mature over the next 60 months.
We also looked at the 4 largest CMBS office loans in DFW scheduled to mature in 2012 (approximately $250MM in aggregate). We then stress tested these loans considering the current net operating income (NOI) and mortgage principal balance. We then applied current underwriting standards and current loan pricing/spreads against a 10 year treasury at 6%. On this basis, only 1 of those properties would have a Debt Coverage Ratio in excess of 1.0 and none would have adequate cash flow to be refinanced without re-capitalization through new equity.
We are not pessimists but realists. Other than a few exceptions, we see the uncertainty and weak economic growth placing tenants firmly in the driver seat. Landlords will continue to aggressively pursue renewals and new tenants to firm up and secure NOI now in order to achieve a refinance or sale before the interest rates move upward to reflect the real inflation pressures in the pipeline.
Tags: corporate real estate, Dallas-Fort Worth, landlord, tenant
Posted in Transaction Management | Comments Off
Audit or Administration? Providing Value to Smaller Spaces
Wednesday, June 8th, 2011
By Jeff Tosello, Principal
Choosing a boutique firm to audit your company’s largest leases at the lowest possible contingency fee you can negotiate—isn’t that all you need to do to ensure that your portfolio is protected?
In a word: no. You may be missing one of the greatest potential sources of cost reduction in the real estate department and passing up an opportunity to be a hero not only to the business unit with the largest amount of space, but to the smaller space users as well.
Often, lease audit is a phrase used to raise questions and entice tenants into discussions about representation. It can also mean many different things—a desktop review, an exhaustive desktop analysis, an onsite review of the landlord’s books and/or extended discussion with the landlord over any number of gray areas open to interpretation in the lease where expenses are involved. Many times, what a tenant thinks they’re going to get is not what the contingency firms actually do, and as a result, they end up paying too much to have the work done. Understanding the nuances of this business and considering a more specific approach to expense review may influence how a company proceeds with this type of program.
Used properly, lease audit is an effective means of resolving past issues and, more importantly, of ensuring compliant lease payments in the future. But the type of audits employed and how they are applied to the portfolio of locations is a big part of the equation. Further, implementing procedural changes in the payment process after audits are performed can increase the benefit of such a review exponentially.
Looking at a real-life example, let us suppose that we are considering a company with 50 locations in the US making up 1,000,000 SF and having an average size of 20,000 SF. A closer look at this portfolio reveals the following (using the old 80/20 rule):
Assumptions:
-1,000,000 SF portfolio (average = 20,000), 50 locations
-80% of the portfolio averages 8,750 SF
-20% of the portfolio averages 65,000 SF
-Of the 10 locations that make up the 65,000 SF average, only 3 are above 40,000 SF
-Average cost per square foot = $30 (base rent plus OPEX and taxes)
-Ratio of basic errors to complex errors = 1% vs. 2.5%
| Factors | Conventional Approach | Our Approach | Net Difference |
| # of Leases to Audit | 3 for 195,000 SF | 50 for 1M SF | 47 |
| Basic Errors Found on All Leases (1%) | $58,500 | $300,000 | $241,500 |
| Complex Errors on Big Leases (2.5%) | $146,250 | $146,250 | $0 |
| Total Savings = | $204,750 | $446,250 | $241,500 |
| Cost of Auditing Just 3 = | $71,663 | Flat fees of $900 + % of $51,188 = $52,087 | ($19,575) |
| Cost of Auditing the Balance | $0 | $14,100 | $14,100 |
| Net Savings to Client = | $133,087 | $380,063 | $246,975 |
As you can see from this example, avoiding review of the small locations leaves $250,000 on the table even assuming a 1% error rate! Pure audit firms won’t touch these because a 1% savings at a 2,500 SF location means saving about $750, netting them only $263 which is less than their cost of doing the work.
The bottom line: Higher value, more savings, better results – Isn’t that what wins business?
Tags: corporate real estate, cost savings, landlord, lease, lease audit, tenant
Posted in Lease Administration | Comments Off
Modest Job Growth Helps Recovery in Select Markets
Wednesday, April 20th, 2011
By Bill Goade, CEO
In mid-2010, economists declared that the recession was over, and the recent unemployment rate drop to 8.8% seems to confirm modest job recovery. Real estate is a lagging economic indicator which generally trails other economic indicators by 9-12 months, so it is little surprise that in a few select markets real estate has shown signs of recovery. In most office markets, job growth has remained modest, and demand has been relatively flat, but in Silicon Valley, the real estate recovery is already happening. High-profile tenants, including Google, Facebook, and Yahoo, have all taken significant blocks of space there. In addition to Silicon Valley, the exceptions include high-rise view space in New York City, the Bay Area, Cambridge, MA, and Pittsburgh. But it will still probably be another year before national vacancy begins to fall significantly and average rental rents rise. A full market recovery will probably not occur until 2013, when we likely will reach pre-recession employment levels. For the most part, there is little velocity for class B space, and suburban areas are generally suffering more than CBDs.
The national availability rate of 17.3% is slightly down from Q3 2010, the high point since 1993. Meanwhile, average rents are still more than 25% below the highs in 2008 in most markets.
In most places, it remains a tenant’s market and an especially good time for credit-worthy tenants to exercise their leverage in negotiations with landlords. While some landlords are becoming more bullish, most are focusing on tenant retention at almost all costs as demand remains sluggish in most markets nationwide.
Along with modest job growth is the phenomenon of unused “shadow space.” Companies will backfill that space as they hire rather than expand. At the same time, over 70% of transactions continue to be renewals rather than relocations.
Bright Signs
Positive indicators include the following: The amount of occupied space increased slightly for the second straight quarter, and average office rents also rose slightly, their first spike since Q2 2008. In addition, investment activity rallied last year, recording $168 billion in sales, up 60% from 2009.
Opportunities for Tenants
The window is still open for tenants in most markets, and we continue to encourage companies to be proactive in negotiations before their leverage begins to slip. In some instances, one or two-year extensions are available as landlords anticipate a better market in 2013 and beyond. Because of the likely tightening in availability, we rarely recommend the short-term extension strategy at this time, unless the business plan simply cannot support a longer commitment. However, tenants need to weigh flexibility versus likely rent hikes in two or three years. In other instances, tenants, especially those with strong business plans, have an opportunity to lock into leases of eight years or more. Finally, given low interest rates and impending changes in lease accounting, this may be an excellent time for some tenants to buy real estate.
To learn more about your local market, check out our Tenant’s Guides here.
Tags: corporate real estate, job growth, landlord, recession, tenant, unemployment
Posted in Tenant's Guides | Comments Off
The Incredible Shrinking Office
Wednesday, March 30th, 2011
Technology Hinders Real Estate Recovery But Gives Office Tenants Added Leverage
By Joe Sciolla, Managing Principal
It’s a case of the incredibly shrinking office, and technology is a prime culprit.
Here’s how it works: As technology increases productivity at the workplace, it also leads to a decreasing need for space. Thanks to automation, we need fewer employees, we use less space per employee, and we outsource more jobs overseas. As a result, with new job growth still limited, class A and B office vacancy rates in most markets continue to be high, and rents continue to be flat.
Indeed, technology, while it generally boosts efficiency and cuts costs, also compromises the commercial real estate recovery. This is bad news for landlords. At the same time, however, it’s good news for tenants since they have added leverage as they look to renew their leases or relocate in a “flight to quality.”
Fewer Bodies
With laptops, smart phones, and iPads becoming more sophisticated and more ubiquitous, fewer employees are needed at the office. Today, seven employees can do the work that required ten before the dot-com boom. Moreover, wireless technology has created an environment in which anyone can work practically anywhere at any time.
Today’s virtual office can be a home studio, a car, a plane, or a hotel. While this is clearly not the best set-up for everyone, it has proved to be effective for mobile salespersons, consultants, etc. If a dedicated area in the employee’s home allows for telecommuting, corporations may invest in off-site furniture, phones, faxes, and computers.
Another intriguing arrangement is hotelling, in which companies reserve office space on a “check-in, check-out” basis for employees who are typically on the road. These fully equipped, shared workstations are effective in certain situations, but they may not work when workers are involved with team projects or need face-to-face supervision.
Fewer SF
In the last 10 years, we have seen a significant reduction in the average office space per employee. In 1995, it was approximately 300 SF; in 2000, it was 250 SF to 275 SF; and today, it is about 225 SF or less. A continuing trend is to place more employees in workstations rather than private offices. Today, as much as 70% to 90% of staff members are assigned to workstations, some as small as 36 SF. Almost half of employees today occupy less than 250 SF.
Another trend is the use of collaborative space outside and inside the office. Conference rooms are getting more use, and there’s also greater use of collaborative technology such as videoconferencing, which brings people together at the workplace. Videoconferencing as well as virtual meetings further reduces the need for everyone to work on site. In the office, wireless technology means less hardware, and flat screen computers and TVs consume less space. And while the paperless office is not quite a reality, less paperwork means less space needed to store these supplies.
There’s also the related environmental benefit: fewer trips to the office helps to conserve energy, and less paper helps to conserve trees.
Fewer Jobs
Slow job growth continues to hinder net absorption. Meanwhile, corporate mergers and acquisitions contribute to job losses and excess space. Further exacerbating job growth is the continued flow of jobs to India and other locations overseas.
Reports show that engineers from India perform similar tasks to their counterparts in the States for about one-fourth the salary. In this light, it gives tech companies an efficiency edge when they offshore jobs and operate 24 hours a day.
More Opportunities for Tenants
How can tenants capitalize on these soft market conditions? Clearly, they can use their leverage in many ways as they negotiate with landlords anxious to limit their liability.
First, companies should consider partnering with a corporate real estate advisor that puts their interests first and can save them thousands of dollars. In selecting a real estate service provider, companies should factor in the value of start-to-finish services, including strategic planning and project management.
For companies with fewer than two years remaining on their lease, we recommend they look into early lease renewals. Chances are they will be able to negotiate better terms as well as concessions like free rent and tenant improvement allowances. For companies thinking about relocating, they should, if appropriate, look into trading up into higher quality space.
During contract negotiations, tenants should strive for lease flexibility. This is particularly important for high-tech firms that operate in a volatile market. They should negotiate for expansion as well as contraction and termination options.
Also important during upfront negotiations is space planning and construction management. For example, if a company has downsized, it might consider reconfiguring its space to maximize efficiencies. Here, a project manager can be a huge help.
In the final analysis, technology naturally helps us become more productive. But as technology giveth, it also taketh away. If you’re a landlord, you must deal with our shrinking offices and high vacancies. If you’re a tenant, you should study the market and then crunch some numbers on your laptop. Do your homework—whether at the corporate office or in your home office—and make the numbers work for you.
Tags: corporate real estate, landlord, office space, technology, tenant
Posted in Transaction Management | Comments Off
A Glimmer of Hope?: Q&A with Houston Tenant Advisors
Wednesday, March 9th, 2011
Participants:
Sue Rogers, Principal
Steven Heal, Vice President
John Mason, Project Manager
Perry Reese, Senior Associate
Brett Ganz, Senior Associate
Erik Prejean, Senior Associate
What differences are you seeing from the landlords in the deals you are currently working compared to those of the past year?
E.P. - A year ago, I was seeing more free rent offered; now not as much. Fortunately, I am seeing quicker turnaround on commission payments lately.
S.H. – I am actually seeing more free rent being offered and better Tenant Improvement Allowances now as well. However, there isn’t much change in the rental rates.
P.R. – In the industrial industry, I am still seeing free rent being offered. The only difference is that now I am encountering landlords who are “sprinkling” free rent throughout the term rather than all at once at the beginning of the term.
B.G. – Well, it seems to really depend on who you ask and what landlords they are dealing with. Right now, I am not seeing a lot of free rent offered, but I am getting some through negotiations. A year ago, landlords used concessions to entice prospective tenants, but now there is more movement, and landlords are significantly cutting back on what they offer.
S.R. – Landlords, buoyed by the recent activity, will be more aggressive in their efforts to protect face rates, and they will, most likely, decrease free rent and other incentives toward the fourth quarter.
What are your clients expecting right now from you and/or their leases?
E.P. – In particular, I am representing a residential real estate company and an energy company that are pursuing options to provide more flexibility.
S.H. – Tenants that did five-year terms back in 2005 and 2006 are under the misconception that they should be able to find outstanding deals due to the down market and recession, but due to the large rate increases that happened in 2007 and 2008, their renewal rates are typically much higher than their expiring deal.
P.R. – I am actually finding some great deals in the market – however, for the most part, they are all in functionally obsolete buildings. The rate will be great, but the space isn’t user-friendly at all.
J.M. – I am seeing tenants waiting until crunch time to make major decisions about construction. They seem to have the misconception that in the down market, construction companies will jump through hoops for them. In actuality, I am seeing tenants being charged construction premiums, and construction deadlines slipping for lack of manpower.
B.G. – Tenants want to believe they can get a steal, and in certain submarkets, they can. Overall, they are much more difficult to find, though. Last year, it was easier to get class A space at class B rates; this year not as much.
S.R. – As compared to last year, tenants should be even more wary of owners and their ability to fund any capital expenses such as Tenant Improvement Allowances and other economic incentives.
Are there any trends in particular that you are seeing with tenants?
P.R. – I am seeing a lot of tenants attempting to consolidate and sublease space. Budgets are tight, and the outlook is very short term. Tenants are unsure of what is to come with the market and are trying to realistically predict the future.
B.G. – The oil & gas industry and its ancillaries are very strong. I recently picked up two start-up oil & gas companies. Insurance seems to be struggling, and as a result, medical companies are struggling as well due to insecurities about what healthcare reform will bring. Big companies seem to be excelling and focused on future growth, while small companies seem to be drowning in the down market.
So it seems like the market is still in a trough. Is there any glimmer of hope in the near future?
E.P. – Well, the government job growth is still going strong. Here in Houston, consulates are steadily expanding.
S.H. – I am seeing tenants in the oil & gas and energy fields continuing to expand.
P.R. – I think there is a light at the end of the tunnel for tenants due to some active bidding and new contracts, but I believe we still have some time left before we are out in the clear.
J.M. – If tenants are thinking about expanding, now is still a good time. Contractors are eager to work, so it is a very competitive market – a big benefit for the client.
S.R. – The safest move for tenant rep brokers is to work with reliable landlords to avoid an unhappy outcome for your client. Pent-up demand and continued expansion in the oil industry is good news for landlords but could create a shortage of “deals” in preferred submarkets.
How does the Houston market compare to your market? Would you respond differently to any of these questions based on your market’s conditions?
Tags: corporate real estate, free rent, landlord, tenant, tenant improvement allowance
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