On the move | A guide to capitalizing on today's tenant-friendly commercial real estate market
In a typical commercial real estate downturn, there is often a lag between softening demand for space and reduced lease rates. In the early stages of a downturn, landlords sometimes resist reducing lease rates based on an expectation that the downturn will be short lived and landlords will “ride it out” until demand for space recovers. After months of minimal leasing activity and an increasing supply of vacant space, reality sets in. In many cases, landlords acknowledge the market has softened and are offering low rates and incentives, such as free rent and higher tenant improvement allowances.
To take advantage of today’s market, consider several factors:
Limited quality space. In a soft market, the good spaces tend to lease first, such as downtown Portland Class A office space with ocean views, high-end suburban buildings in parks and medical buildings with good access and parking. People who wait, thinking the market will get worse, often are left with attractive rates for subpar space. If you find a space you like with good incentives, don’t second guess yourself and wait for a better deal. Odds are, you will be looking at inferior space the next go around.
Know the market. To get the best deals, you need to create competition for your lease and know how to counter proposals based on the market. The best way to do this is to hire a good commercial real estate broker who will act as your tenant representative and will be paid a commission by your new landlord. The broker should have recent experience in your market, rather than be a generalist who dabbles in all kinds of different real estate. Ask the prospective broker to demonstrate recent experience in your marketplace.
Know your needs. Put a detailed description of your needs in a Request for Proposal. Your broker can help you with this. You want to receive “turn-key” proposals from potential landlords to truly quantify your future rent costs, which means construction of your layout has been priced into your lease rate. Vague build-out allowances often result in increases in your rent because the allowance was not sufficient to construct to your needs.
Allow reasonable time. Touring spaces, sending out RFPs, evaluating proposals and negotiating a letter of intent can take two months or more. Negotiating a lease can easily take a month. Construction of your layout can require two months. Relocating your telecommunications services requires lead time as well. Six months before your move date is an appropriate amount of time to start evaluating spaces.
Hire a real estate attorney. When negotiating a lease, use an attorney who specializes in commercial real estate. Attorneys who don’t have this experience tend to go through a learning curve that results in extra time and money due to a lack of comfort and unrealistic demands.
Commit to a longer term, if possible. Landlords are more apt to provide you with lower rent, better build-out allowances and free rent if you commit to five years or more. The concept is “deal with the pain now and keep the space full for an extended period of time.”
The market for purchasing a building currently is not as attractive as leasing. Many investors anticipated a strong buyer’s market would materialize by now, similar to the market in the late ‘80s and early ‘90s. This has not happened, and a big difference is the lenders. In the early ‘90s, due to banking regulations at the time, lenders were quick to default borrowers and flooded the market with discounted commercial buildings. This has not been the case in 2009 and 2010. Lenders have provided borrowers with a lot more flexibility, including interest-only loans and other vehicles to provide borrowers time to ride out the market, which should help the borrower and the lender in the long run.
This may change over time. If you’re looking to buy, keep an eye out for office buildings that have been vacant for an extended period of time, say one to two years. Even if the owners have the staying power to cover loan payments, real estate taxes and other operating expenses, they may reach a point where they decide that holding the asset and waiting for a lease simply doesn’t make sense any more. If they decide to sell, they will need to price their property within today’s market, which could result in attractive buying opportunities. Owner/occupants can particularly benefit from this because interest rates are at historic lows and owner/occupants can potentially qualify for down payments as low as 10% of the purchase price.
Charlie Craig is substituting for Frank O’Connor in this issue. Both are brokers with NAI The Dunham Group in Portland. They can be reached at editorial@mainebiz.biz.
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