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August 2008 |
Bogue Miller, David Rubenstein
Julie Pollak & April Farner
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Economic conditions may benefit tenants
 When the weakening economic status of the nation creates
turbulence within our major MSAs, a business's typical first reaction is to alter expansion plans. For landlords, reduced corporate growth translates into an immediate need to secure the financial wherewithal of their buildings to ensure
safe passage through the downturn. And when landlords become anxious about their future income, tenants usually benefit.
In Manhattan, the first quarter of this year saw leases that included rent abatement for up to a year, and $25 to $50 per sq. ft. of tenant improvements. This was most likely in response to reduced leasing activity and a slight up-tick in
vacancy rates. Rental rates are holding steady, however.
In Atlanta, Southeast Real Estate Business reports, "... those landlords who see cash flow problems on the horizon are going to be the most vulnerable [to an increase in vacancy rates]." As a result, tenants are being approached
for renewals as early as two years ahead of their scheduled lease expiration.
In Richmond, the magazine states, "The overall vacancy rate will likely rise in 2008." And in San Jose, brokers report that tenants are thinking twice about significant expansions as the credit crisis continues its grip on commercial real
estate activity.
As more markets report a slowdown in office leasing, tenants can expect to see the pendulum swing in their direction.
Once the momentum has officially shifted, even the most simple deal points from around the market should become harder to find--as landlords stop talking about them in the press. In an industry rarely reticent when it comes to promoting
new deals, silence on the part the landlord community about leasing activity is a sure sign tenants are coming away with favorable terms. Therefore, always stay in touch with your tenant representative to keep a pulse on the market.
Experienced market insiders can track down deal points that may help you sketch a template for an impending relocation or renewal.
Should the country continue to roil in these vague economic conditions, expect to see more landlords offering concessions, despite how healthy a particular market may appear. Remember, landlords keep a close eye on each other, so if one
domino falls, the rest should not be far behind.
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Have to sublease space? Plan carefully.
 Part two in a two-month series on subleasing
Last month, we discussed issues with subleasing from the perspective of the subtenant. This month's newsletter discusses the complexities of being a sublandlord.
As a tenant trying to sublease unneeded space, make sure you completely understand the sublease and assignment clauses in your prime lease. Know your rights and respect those of the building owner. For example, landlords typically have to
approve a subtenant before you can formally agree to a sublease. This process can take time and may require a period of due diligence on your prospective subtenant's business and their financial strength. Cooperating with your landlord
typically strengthens your position and should yield you benefits.
Most landlords will have documentation, such as a consent form and/or sublease form that you are required to use when subleasing space to a potential subtenant. And, you may not be allowed to sublease to just any prospective subtenant.
Most leases prohibit tenants from subleasing space to existing building tenants. Many also prohibit subleasing to a prospect that is already in direct lease discussions with the landlord.
Remember, the agreement already in place with your landlord typically supersedes any sublease, so you typically remain accountable for the rent you owe your landlord, even if your subtenant pays late or happens to default.
Oversight of the subtenant's usage is critical, as the responsibility for maintaining the space is still yours. Use restrictions, employee density limits and parking regulations typically will not change after you sublease your space, and
you need to make sure your subtenant observes the rules you originally agreed to with your landlord.
Furthermore, remain in open communication with your landlord about issues pertaining to your subtenant. Your landlord has a direct contractual relationship with you, not your subtenant. So if something goes wrong or additional charges are
incurred, your landlord could come to you looking for payment. Your sublease should contain a variety of approval rights to protect you from unauthorized activities by your subtenant.
Should you be fortunate enough to sublease your space for an amount in excess of your rent obligation, you may have to share some or all of your "profit" with the landlord. However, you may be allowed to deduct your marketing and leasing
costs from profit calculations. Make sure you understand how your lease addresses this issue so you don't find your landlord staking a claim for profits that you had expected to keep for yourself.
Navigating the complexities of a sublease situation can be treacherous. So make sure you understand the rules and processes prescribed by your lease before marketing your space (and definitely before negotiating with a prospective
subtenant). Your tenant representative should be able to guide you through the process, making sure your sublease provides you with the arrangement you bargained for.
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Dark Green
 In the last couple of years, the green building movement has
gathered enough inertia to propel the concept of sustainable construction into the forefront of every developer's latest master plan. With little real regulation and only a smattering of standards by which to measure the "level of green" a
building can achieve, that momentum has the potential to propel the construction and real estate industries blindly over the ledge.
In San Francisco, new city laws are being discussed that if passed, will create the nation's most stringent environmentally-conscience requirements for new, private construction. The potential enactments appear so tough, that a push-back
from developers and real estate professionals has sparked debate about the future economic impact of enforcing such harsh regulations.
The city's own Office of Economic Analysis reported that the mandates have the potential to retard growth by $700 million per year as result of the additional costs of green building products and initiatives. The report went on to quote
the rules could cost 2,300 jobs annually. Compounding these numbers is the fear that developers will look to build in areas outside the city and that prospective corporate relocation targets will aim to establish business elsewhere.
These extra building costs can create a trickle down effect of massive proportions, very similar to how the cost of oil is impacting construction today. The added costs of meeting the demands are going to be felt by tenants, homeowners
(the regulations will extend to residential construction as well) and renters. In the end, one the most powerful drivers of a regional economy--new construction--would slow, and the financial ripples would crawl citywide.
San Francisco's efforts, to an extent, should be applauded. The pace at which its government wants to carry out these new regulations needs to be re-considered, however. The goal is for the rules to become their strongest within four
years, which would make developers completely alter projects already on paper.
California has long served as a model for the nation, especially in the green arena. State and city governments across the country should be careful not to jump with this lemming, not right now anyway. The green building supply industry is
merely infantile in its development, so market costs remain high because of a lack of competition and a consumer movement that rages unchecked.
Again, the country needs more sustainable buildings. Lest we forget, however, that haste makes waste. After all, isn't that what got us into this mess? It is time for green standards to be implemented carefully and realistically, not put
in place simply for the sake of an approval stamp.
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