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Entries Tagged as 'Office Space Negotiations'

Office Space Tenants Are In A Cost Cutting Mode

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"Cost cutting is still going to be the highest priority" for corporate real estate in 2010, Peter Riguardi, president of Jones Lang LaSalle’s New York region, said in a webcast on office occupier trends Wednesday afternoon. That’s because economizing remains a watchword for many companies, and reducing real estate expenses--whether through blend-and-extend leases or outright shedding of space--represents low-hanging fruit.

Blending and extending, which has come back into favor in the current leasing market, will remain a big trend for the foreseeable future, Riguardi said. It’s one of many opportunities for tenants in these days of reduced rents and greater landlord concessions. The current climate also offers plenty of chances for upgrading the location and the space, and for using market leverage to enhance non-economic lease provisions.

Full Article: For Tenants, It’s About Shaving Costs

Another contributor to the problems to come in the Commercial Real Estate market.

Commercial Real Estate , Lease Negotiations , New York Office Space , Office Rental , Office Space , Office Space Negotiations , Office Vacancy Rate , Tenant Representation

Loopnet Q4 Poll Results: When will the Market Recover?

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Loopnet's recent poll mirrors what most of the commercial real estate pundits are saying that we won't see much improvement in the commercial real estate market until 2011. Commercial real estate almost always lags behind employment numbers.

"More than 1,000 LoopNet members completed our poll on the Q4 commercial real estate market. Sentiment has turned more pessimistic since the Q3 survey, with 46% of respondents expecting a rebound in transactions to wait until 2011 or beyond, compared to 1/3 in our last survey. Still, the glass half full view notes that over half are still expecting a 2010 recovery. Get more detailed results, including expectations for pricing and the major obstacles that are standing in the way of a recovery on our blog."

Also from their blog:
"Nearly 1 in 5 are expecting to wait until 2012 to see a recovery."

More information from a previous post.

 

Commercial Real Estate , Office Relocation , Office Space Negotiations

Commercial Property Prices Continue to Decline

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According to Loopnet "Commercial property prices, as measured by the Moody's/Real Commercial Property Price Indices, or CPPI, are now 40.6% down from their October 2007 peaks.

The all property-type index fell 3% in August to 114.06, which is down 32.8% from a year ago.

The national office index value actually increased in the second quarter by 4.1% from the first quarter to 128.96. But it's down 27.4% from two years ago.

Each of the remaining property sectors - industrial, multifamily and retail - saw declines in the second quarter when compared to the first. Industrial values were down a whopping 20.4% from the first quarter to 131.3; multifamily was down 16.3% to 131.93, and retail was down 7.9% to 138.3."

What does all this mean to the office tenant? According to the report, Landlords have lost over 27% of the value of their buildings over the past 2 years.  As I mentioned in a previous post, it is imperative for the prospective tenant to know what the financial situation is for the building that they are considering occupying. An average loss in value of over 27% means that some have lost more while other less. This is a situation that can be compared to that of residential short sale, where the value of the building is less than the mortgage outstanding. Many owners just walk away in these situations and it can happen with office buildings as well.

The key for the prospective tenant is to make sure that they have a non-disturbance clause in their lease agreed to by the Lender, not just the Landlord. The last thing you want to have happen is to be evicted without notice. Tenants and prospective Tenants need to know what is going on with building financing.  It is not always easy to find out. This is another good reason to work with a tenant representaive who knows your market.

 

Buying Office Space , Lease Negotiations , Office Rental , Office Space , Office Space Negotiations

The Slow Recovery and Office Space Leasing

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According to Wells Fargo Economics Group "The Recovery Will Be Agonizingly Slow. So it indeed has been. As this short quote from the Executive Summary of our 2009 Annual Outlook (published in December 2008) neatly summarized, the economic recovery faces a number of secular challenges that will alter the pace and composition of growth. For many decision-makers, the outlook for 2010 suggests continued change and adjustment to an altered reality of more government/less private sector contributions to growth, greater caution/less leverage for consumer spending, greater prudence/less speculation in lending and the importance of exports in moving the U.S. economy."

This related to the glut Office Space for lease means that we have a long wait until the markets start to tighten up, probably in the neighborhood of 2012. Employment is the key to filling office space.  As long as the employment numbers are negative we will continue to see more office space become available. Even when the employment numbers begin to grow, office space for lease will still lag behind while companies fill the spaces they still have under lease, but have not been using, with their new employees.

This is bad news for Landlords, but good news for Tenants. Tenants will be able to call the shots, but will need to be careful. One of the big problems that arises in such a weak market is that of foreclosure by lenders on office properties in which the owners are unable to meet their obligations. Tenants and prospective Tenants need to know what is going on with building financing.  It is not always easy to find out. This is another good reason to work with a tenant representaive who knows your market.

Much attention is generally paid to subordination clauses in on office lease, but that is not enough. A key clause to make sure you are protected and not put out on the street in the event of a foreclosure is a non-disturbance clause. In these turbulent times you may even find that it is not enough to just have this in your lease, but also need to have it agreed upon by the Lender. A good tenant representative in conjunction with a good real estate attorney can make sure you are protected.  Dont' skimp on this. It could be a big problem.

More inforamtion on Tenant Representatives.

 

Lease Negotiations , Office Rental , Office Space , Office Space Negotiations , Tenant Representation

Opportunities in the Market

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In the last Tenant Tactics we discussed some of the many opportunities afforded by today’s topsy-turvy economy as it related to leasing commercial real estate. Landlords are more aggressive in many ways. They openly discuss and accept creative extensions to leases or reconfiguration of spaces. In addition, many are renegotiating renewals much sooner than the typical three to six months prior to termination and offering aggressive rents or additional concessions along the way.

Last month I was privileged to be asked to sit on a panel at the monthly NAIOP meeting. NAIOP is the leading organization for developers, owners and related professionals in office, industrial and mixed-use real estate. I sat on the panel with Perry Schoenfeld of LBA and moderated by David Wensley of the law firm of Allen Matkins et al. While in some ways I felt like a hen in a fox house, representing the tenants’ perspective in a room filled with landlords, it was most interesting hearing about lease restructuring from the landlords’ side. Interestingly, much of the rhetoric paralleled the framework outlined in our last Tenant Tactics.

On the other hand, I did observe one interesting point.  There was a level of frustration on the part of some landlords that the tenants “asked for the moon and didn’t understand the process.” Should they be surprised? For the most part, most all lease discussions landlords have with tenants are through their broker who interfaces with the tenant’s broker. Restructuring is much different.

In the case of renewals, tenants often try to negotiate on their own believing “we’ve been a good tenant so the landlord will give us a good deal.” The landlord starts by offering their view of fair market value. Tenants will usually at least make a call to a broker or surf the NET just to get an idea of market conditions so they have a base from which to negotiate. Unfortunately it remains the professional with all the tools against the weekend player.

That scenario has changed dramatically in the past ten years in that most professional landlords prefer to have brokers represent the tenant during renegotiations in that:

  • Negotiations tend to go smoother
  • Tenants feel they are getting a better deal by being represented
  • Landlords find paying the broker fees saves as much as 16% on their cash flow considering should the tenant move out they would not only have to pay a fee to a new broker but also have to assume the cost of down time and additional tenant improvement costs 

However, today’s economy creates a unique situation where negotiations are based not solely on fair market value for which most brokers are equipped to provide market information but rather complex negotiations which significantly include a mix of the tenants’ business planning, multifarious lease restructuring issues AND fair market value.

While landlords have no issue dealing with tenants directly on renewals if the tenant is not represented, they find it frustrating when addressing today’s more complicated issues. It was not surprising at the reaction I got when I raised the point at the panel discussion that tenants are not real estate people and therefore certainly do not understand completely the finer points of real estate. I noted a 1993 survey I had helped develop for the UCI Graduate School of Business which clearly concluded that while real estate is the second largest line item on the budget, most all companies often shift their real estate management (other than actually located premises) to individuals within the company who are not involved in real estate on a day to day and continual basis. These individuals are often good negotiators in their personal sphere of influence so they therefore believe whole heartedly that the skills are transferable. The reality is that for the most part they manage the real estate process particularly when it comes to acquisition of real estate but their brokers primarily do the negotiations with the landlord.

Conversely, in the case of creative restructuring it gets a bit more intricate. On the tenant’s side there too often is little help that is available to them. The choice is, other than moving forward on their own would be to engage an attorney or possibly the broker who initially represented them in the transaction. Typically there is no commission on such transactions. Most brokers and landlords look at commissions as a onetime fee for completing an initial lease or renewal.  Brokers may likely turn down this type of assignment unless an additional fee is paid. Few brokers have our philosophy that commissions are in actuality a retainer for future services provided throughout the term and that service should be continual through the leasehold or engagement.

The best of both worlds is to engage a broker to address the real estate issues and a good attorney to review the legal portion. About half of the transactions we have completed in the past 8-10 months involved some sort of a restructure. Different times call for different approaches. If you are considering restructuring you need to engage outside advisors. You and the landlord will appreciate the process and the result will be a win-win for all parties.

Guest Post by our Orange County, Ca Member
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Lease Negotiations , Office Relocation , Office Space Negotiations , Orange County Office Space , Tenant Representation