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November 3, 2008 From the Ground Up

Smart moves | Why it's wise to capitalize now on the hidden silver lining to this economic cloud cover

By Drew Sigfridson

Many a smart investor has said, “You make money when you buy.” These words of wisdom are appropriate in our current economic cycle. Property values have stabilized (and in some areas have plummeted) and the tightening credit market has brought cap rates and asking prices back to a reasonable range. Over the past few years, margins became so razor thin and prices were so high for property it was clear the ever-escalating values were not sustainable. Now, as prices return to a level that passes the straight-face test, buyers are starting to look at properties again. Well capitalized investors and owner-users will be in prime positions to purchase properties at a good value as struggling businesses and over-leveraged owners seek to sell.

Sellers, meanwhile, should not ignore their own opportunities. Interest rates are still at historic lows and properties continue to sell at strong prices. These prices may be five to 15% less than they were a few years ago, but people who have owned real estate for more than 10 years still have experienced tremendous appreciation. If you were thinking of selling at some point, now is the time to put your property on the market as we ease out of the credit crunch. You will have missed the boat once interest rates go back up.

Lease lures

More tenants are using alternatives in the marketplace to renegotiate at their current location, meaning lease renewals can involve as much back and forth as relocating to a new building. In many cases, the landlord desperately wants the tenant to stay and, as long as the space still works for the tenant, they want to remain in place as well. Given this scenario, a lease renewal can often be a win-win for both parties. I recently had a client call me looking for advice on his company’s current lease. The company leases a significant office space and they have one year remaining on their base term. They have an option to renew at market rate and the lease rate escalates slightly each year. But the landlord suggested an alternative: If the company renewed early, its rent would remain flat for three years. This is a smart landlord. He is proactively approaching his tenants, keeping the dialogue open and working to stabilize his building during the tough economic times that may lie ahead. The tenant also welcomes the opportunity to fix his costs and secure his budget for the next three years. As long as everyone negotiates reasonably, this renewal has the potential to benefit both parties.

Obviously, some businesses are unable to renew and need to move for a variety of factors. There’s opportunity here as well: I am currently working with several companies requiring between 4,000 sq. ft. and 40,000 sq. ft of space that have surveyed the market and requested proposals from the top two or three options in their area. The landlords who responded to these requests put forward aggressive proposals to land these solid, long-term tenants, proving not only that there is certainly strong competition among landlords to secure good tenants but that smart tenants are planning for the future now and making long-term commitments of five to 15 years while they know the landlord they have negotiating leverage.

Use your leverage

Recently, we had a landlord express interest in waiving up to six months of base rent for new tenants. This decision did not come lightly and it is an enormous financial concession. However, the space could sit vacant for that long. The landlord’s rationale was quite simple: Good businesses may be struggling right now, so he could give them some breathing room and secure them as a long-term tenant so that when business rebounds, the building is full and the tenants are all paying market rents.

Are you thinking about moving your business because the interior is tired and needs cosmetic improvements? Well, now is the time to convince your landlord to make those improvements. Construction has slowed, material costs have leveled and builders are looking for work. Making improvements now will be less expensive while demand for new construction projects is low. In the end, improvements to a building can help you find tenants and improve long-term property values. Interior upgrades for a tenant can also prove less expensive than experiencing a vacancy.

With creative solutions like these, landlords and tenants will weather the current economic climate and lay the groundwork to thrive when business is good again. There are many different approaches for how to conduct business when times are tough, but we all know that the best companies, and the best landlords, take some calculated risks during these times to thrive over the long term. One of my favorite Warren Buffett quotes is, “Be fearful when others are greedy. Be greedy when others are fearful.” Now is the time to be greedy. Go out and make those smart real estate moves and take advantage of the downturn.

Drew Sigfridson is a commercial real estate broker with CB Richard Ellis/The Boulos Co. in Portland. He can be reached at editorial@mainebiz.biz.

 

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