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April 2010 |
Miller, Rubenstein,
Hoffman & Hawkinson
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Mixed Signals on Commercial Real Estate Recovery
 The recovery of the commercial real estate industry is a hot
topic on Wall Street. However, despite recent stats showing slight increases in activity, any concrete evidence of stability remains hard to uncover.
According to The Wall Street Journal, signs of stability are seen in the decline of first quarter rent reductions. Nationally, average net rental rates continue to fall but at a slower rate than in the last quarter of 2009.
Reis, an industry tracker, published a report that showed office rent has stabilized in 23 markets, whereas rents were falling in 70 of the 79 measured markets during the same time last year.
Reis' director of research, Victor Calanog, issued a statement about the report that demands further clarification. "As labor markets stabilize, we expect occupancies and rents to require another 12 to 18 months before showing signs of
improvement, given typical lags in commercial real estate."
Labor markets, in this case, simply means "unemployment." To be sure, no federal statistic has more inherent vagueness than unemployment.
Jobs were added in the first quarter but in large part because the government hired 50,000 temporary census workers.
The "underemployment" rate, which measures those who can't find enough work or have given up looking, climbed in the last three months, as has the number of long-term unemployed Americans.
Combine those reports with the continually increasing rate of personal bankruptcies and "the labor markets" look as if they may need a lot longer than 12-18 months to recover.
The Reis report also neglects to point out that landlords are not able to increase rent given market conditions and consequently will be further challenged to cover debt service and operating costs, which could lead to more defaults and
bank-owned properties.
In this market, tenants are best advised to focus inward and consider space options with a hyper-local perspective. Your tenant representative can provide specific insight on how to drill-down to the best locations and properties that are
financially stable and good for business. At this point, national trends are still too ambiguous to be factored into long-term occupancy decisions.
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Ownership Opportunities in Today's Environment
 Like an outgoing tide, the recession has revealed an array
of incentives for commercial office tenants.
Beyond rent abatements and other common concessions, current market conditions are opening up real estate ownership opportunities for tenants as more landlords struggle to stay above water and property values remain in a downslide.
According to the Mortgage Bankers Association report for last quarter 2009, commercial mortgage performance continues to lag amongst investor groups. Also, the delinquency rate of such loans within commercial-mortgage backed securities
jumped 1.63 points to 5.96 percent, meaning that 2010 will most likely be a very challenging year for many property owners.
Deloitte Financial Advisory Services surveyed 327 real estate professionals and office tenants and determined that the market is poised to favor tenants looking to transition into property owners. Almost half of those who responded believe
the diminished values are making owning more attractive than leasing, and close to 40 percent reported that they are currently considering ownership options.
While some lenders have remained reluctant to sell properties at steep discounts if they have even a somewhat promising rent roll, office properties with high vacancy and little ability to remain competitive will slowly be fed to the
market.
Landlords are also growing concerned with reports from the industry that a recovery will not become evident until at least the end of 2010. The Deloitte survey indicated confidence in a rebound within the next two to three years. In short,
the recovery timeline remains vague, increasing the pressure on property owners.
Even as the federal government tries to encourage lending activity, Wall Street remains skeptical that commercial real estate has returned as a credible investment, making it difficult for refinancing options to help ailing office property
owners.
Companies with pending relocation considerations would be wise to discuss with their tenant representative how ownership might overlap with long-term real estate strategies.
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Down Market Brings Tenants More Than Affordable Space
 With the national office vacancy rate at a 16-year high and
building owners still struggling to fill in their stacking plans, the furniture systems left in place by tenants that had to suddenly close or downsize have become yet another amenity for landlords to offer in an already concession-rich
market.
One reason the current recession has earned the reputation as one of the worst on record is because of the speed at which so many companies have had to cease operations, leaving business leaders little time for exit strategies. Thus,
landlords are often left with floor plans full of office furniture and other business assets as their only recourse against a defaulting tenant.
In some cases, defaulting tenants will negotiate with landlords to leave the furniture in exchange for forgiveness on the remainder of the lease term. The landlord's incentive to do so lies in the fact that furnished space can be leased
quickly, which can be a tremendous advantage during a down market.
Even if a tenant leaves upon lease expiration, a depressed office furniture market can make it fiscally fruitless to spend money on its breakdown, moving and storage. It may be more worthwhile for the exiting tenant to sell it cheaply to
the landlord or agree to lease it at a discount to a new tenant.
Beyond the obvious costs savings, offices with intact furniture allow tenants to be fully operational in much less time than during most relocations. While furniture companies are set up to deliver and install at the pace of business,
there are often delays and setbacks related to missing items, delivery errors and miscommunications. Provided the in-place furniture is a proper match, many employees can simply sit down, plug in and get to work.
Tenants should carefully consider what is being offered; especially if the furnishings are older and would require ongoing maintenance or create other productivity drains. Additionally, if a tenant has already made a significant investment
in its current furniture systems, accepting furniture in a new space may not be financially worthwhile.
So if business is demanding a rapid relocation or, like many office tenants, you are looking for creative ways to reduce real estate costs, talk to your tenant representative about market opportunities advertising furnished space.
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