Space exploration Featured

8:00pm EDT September 25, 2009

Savvy CEOs are taking advantage of the slumping commercial real estate market by evaluating whether their space meets their needs while the cost to buy or lease is low.

Commercial real estate prices fell again in the second quarter, showing an 18 percent national decrease compared to the previous quarter, according to Massachusetts Institute of Technology Center for Real Estate’s index. The drop placed the price index 39.2 percent below its 2007 second-quarter peak.

Clearly, the market is experiencing volatility, but opportunities are present.

“If you need to lease space, it’s a wonderful time to be a tenant; I think you can lock in long-term low rates,” says John Carter, executive vice president and principal, Carter. “If you’re a buyer, I think there’s an increasing number of distressed acquisition opportunities, which allow you to buy significantly below replacement cost at prices kind of pre-2000 levels.”

Whether you’re searching for a new property or hoping to reconfigure space for efficiency’s sake, cost savings can be yours. The first course of action is to connect with an experienced commercial real estate broker to weigh your options because there are plenty of them.

Debate to buy versus lease

The decision to buy or lease property has less to do with the current state of the market and more to do with each company’s individual circumstances.

Think about your industry, your strategic plan, your company culture and what those will look like five or 10 years from now; then add the amount of capital you have for discretionary spending. Most companies lease to stay adaptable.

One of the bigger challenges facing the market today is that the capital markets are at a standstill, leaving few lending opportunities. The loan-to-value ratio has changed dramatically. Once, you were putting 10 percent to 30 percent down for a loan; today, it might be as much as 50 percent.

“I think the biggest challenge out there right now is financing,” says John Burpee, chairman and lead apartment broker of NAI Tampa Bay. “Lenders have just crawled into a hole somewhere, and we can’t find them.”

It’s important to work with your broker to analyze your options and ensure the best deal, especially because prices and volatility vary by market and even within markets. Renting sublease space may even be the way to go because it’s cheap, but be sure to investigate the leaser’s financial standing before signing anything.

No matter what your decision, you’ll more than likely see savings because sales prices have fallen and landlords are becoming more and more creative with incentives to retain and attract tenants.

Renegotiate your lease

If your lease has been tucked away, dust it off and read the fine print. Renegotiating your lease can lead to immediate savings and even allow you to get better use out of your space. Again, the returns may vary based on your landlord’s willingness to bargain, but your market insight can be used as leverage.

Before you go to your landlord, there are a few questions to ask yourself. First, how much time do you have left on your lease?

“Five years is difficult; two years is easy,” Carter says. “What happens is if it’s five years away, landlords will think the market will turn before then, and it’s really kind of a long way away.”

Second, how much time do you commit? If you discuss the popular blend-and-extend deal, where you sign a lease extension in exchange for reduced rent, you have to think about whether the space will continue to meet your needs for that length of time.

Third, can you give back or add space? If you’re cash-strapped or your company has reconfigured its employee base, maybe you can work the renegotiation in a way that better uses your space, such as adding or subtracting square footage.

Fourth, use your broker to research your landlord’s financial position, such as insight on how large the mortgage is and whether your landlord has good credit.

“If I were a tenant, I would make sure I had good representation, not only legal but also real estate, and I would make sure that my real estate expert or the person I engaged is getting those answers for me,” Carter says.

Fifth, research your options in the marketplace. Even if staying makes the most sense, at least you can present your landlord with the possibilities that wait should you leave. Some landlord’s are offering free rent, moving allowances and increased tenant improvement dollars.

“If you’re a company that is leasing office space or leasing retail space, you should be renegotiating your lease today,” Burpee says. “We’re repositioning some Fortune 500 clients in today’s market that are saving themselves on average 25 (percent) to 30 percent in leasing costs, simply by going back to their landlord and saying we’re getting ready to move.”

Consider more than just costs

Before you sign next to the X, take into consideration more than just the monthly dollar amount you’ll be paying. The general checklist for picking property once emphasized location, employee driving time and amenities. Those concerns remain important, but the current state of the economy has also brought to light the need for efficiency, flexibility and sound deals.

Working with a broker will allow you to receive the best bang for your buck, meaning fair market value, tax breaks, relocation incentives, landlord concessions and operational costs, while making sure it’s a strong deal.

The real estate crisis has left landlords hurting. Work with your broker to determine whether your landlord is currently facing or could face financial distress and how that affects the tenant improvements or possible free rent he or she promised.

Nonetheless, you should take the time to work agreements into your lease that protect your rights as a tenant if your landlord forecloses on the property and the lender takes over.

“If you don’t have a good nondisturbance agreement in place and the landlord loses the building to the lender or gives it back, the lender has the right to rewrite your lease terms,” Carter says.

Time and savings might also be found in the long run with contraction, addition and termination agreements for flexibility.

Flexibility is key for surviving this economy — and that includes your real estate. Your broker will have a space planner who can help you efficiently design the space you’re in or determine which space best suits your company. Companies are saving money by going to open floor plans, narrowing cubical sizes and hoteling, which supports employees working outside the office and sharing desk space.

“We’re seeing people shorten up their cubical sizes,” Burpee says. “Where it use to be an 8- to 10-foot-wide cubical was pretty normal, we’re now seeing companies drop back to 6- and 8-foot-wide cubical space, so maximizing the amount of people they can put in a given amount of square feet and shutting down outlying operations and centralizing their operations.”

Whether you’re planning to buy, lease, move or stay, make sure you give yourself ample time — at least a year but probably longer depending on size — to ensure you’ve settled on the best choice for your company.