Amid the rain clouds of today’s market, there may be a silver lining. With commercial real estate tanking, savvy CEOs can take advantage of the perfect storm and finally cash in on the soaked economy.
Second quarter national commercial real estate prices dropped 18.1 percent compared to the previous quarter, according to a study by the Massachusetts Institute of Technology Center for Real Estate. The plunge sunk the price index 39.2 percent below its peak in 2007. These falls add up to tremendous opportunity for space users.
“For the most part, the tenant or buyer is in the driver’s seat with declining values and higher vacancies,” says Alan Piker, managing principal of the Cincinnati office, CresaPartners LLC. “So, the opportunity for the user is significantly better than it’s been in recent years.”
Slashing real estate overhead often a company’s second-largest cost can provide a noticeable return on your bottom line. Whether you’re already pounding the pavement looking for a new pad or you haven’t yet evaluated your space, it’s worth exploring your prospects as the market continues to decline.Decide to buy or lease
Before you go running into the marketplace, take time to analyze your current needs and future projections. There are deals for buyers and tenants, and a seasoned real estate expert can help you weigh your options.
If your company is changing either growing or downsizing a lease offers valuable flexibility.
“It’s a tenant’s market,” says Andrew Kahn, senior office associate, NAI Bergman. “You can get very favorable lease terms right now if you have a good track record as an existing company that doesn’t late-pay, stays on top of their bills and is managing their business well.”
Conversely, if you are well established now may be the time to buy, provided you have a large amount of capital.
“If you have access to capital and cash on hand, there are great deals out there now for acquisition, and there are going to be for a while,” Kahn says. “I think the time to buy is now through the end of the year; you are going to see some great opportunities.”
Even if you aren’t sitting on a mattress stuffed with cash, you may still find a deal. Subleases are flooding the market, and they offer a unique opportunity for the right kind of operation. Subleasing may benefit a younger company or one with less-than-stellar credit. However, the perks aren’t without risks. Keep in mind that subleasing could mean taking on someone else’s problems, such as a shaky landlord or hidden costs.
If you find yourself with extra space that you’re thinking of subleasing for additional income, keep in mind that you will likely suffer the wrath of the market and may have to accept rates that are lower than your own rent. Still, in a pinch, many CEOs may decide that some rental income is better than none.
Every market is unique, and cost can vary significantly between downtown and suburban locations. You may find an urban steal, but be mindful of other aspects, such as parking and access to transportation.Renegotiate to save
If you are comfortable in your currently leased space, you may have one of the best advantages in today’s environment. Fearing empty buildings, many landlords are willing to renegotiate a lower rate in exchange for additional years on your term. The process, known as “blend and extend,” is best for renters with about two years left in their lease, but some owners will talk with more time remaining especially if the property has a mortgage coming due in the next few years. Having solid tenants in place makes the owner more attractive to lenders, and that can give you an upper hand in negotiations.
Even with the scales tipped to the tenant, it’s unlikely the proprietor will reduce rates without you first doing some legwork.
“One piece of advice is to be prepared when you go to the landlord,” says Jeffrey Bender, senior vice president and principal, Colliers Turley Martin Tucker. “Have your financial statements ready. Be willing to extend your term. Don’t ask the landlord to spend money on tenant improvements.”
Before you approach the owner, think about things from his or her perspective and be prepared to appeal to the owner’s needs, rather than pleading your own case for cheaper rent.
“Landlords are looking at it with an extreme commonsense approach of 50 percent of something is better than 100 percent of nothing,” Kahn says.
Your current occupancy gives you leverage for a contract that benefits both you and the titleholder. Still, should a landlord shoot down your proposal, you likely have options down the street.Consider more than cost
With the uncertainty of how long low rates will hang around, you may be tempted to commit to the offer with the lowest price tag. However, there are factors that can inflate your actual cost. Utility, maintenance and improvement fees can hide within a hastily signed document.
A careful review with a real estate professional can weed out deals that are too good to be true and help you bargain for favorable terms. For example, a clause that ties rent increases to tangible market figures can avoid exaggerated rate spikes. You can also work to include exit or expansion options.
“Rate is very important right now, but I feel like the flexibility in the lease, now more than ever, is something tenants really need to keep an eye on,” Kahn says.
Many property owners are struggling financially, so it is imperative that you research the stability of the landlord. If the building goes into foreclosure, you may be liable for additional costs or be shuffled around by a new owner.
Open layouts and flexible equipment can squeeze more productivity from fewer square feet, and utilizing new technology and energy-efficient fixtures can trim your overall expenses. Some companies are implementing strategies, such as hoteling, that don’t strap employees to a certain workspace.
“I suggest a company use flexible office furniture,” Bender says. “Workstations allow for more flexibility than an office that may be built out with hard walls.”
And don’t downplay the importance of location. Though you may be able to get deep discounts in a less desirable area, you need a place that employees and customers enjoy. Favorable factors, such as ample natural lighting, can increase productivity and add to your bottom line.
Also, consider the benefits of moving across city lines, as business-hungry municipalities may offer tax incentives. But before you pack up, calculate the total charge of such a venture. A low rate may be enticing, but the cost to resettle may outweigh the discount.
Overall, there are savings in real estate, as long as you take the time to evaluate your company’s long-term needs.
“You have to look at both sides of the coin,” Kahn says. “What if my company survives this downturn … or what if things don’t go well? My recommendation is to think about the future.”