As we prepare to close 2009, the prospect of the new year brings the hope that the worst is behind us and that better times are ahead.
In many ways, 2009 was an improvement over 2008, and there seems to be additional signs that the overall economic climate is improving. However, the news also makes us painfully aware that there are significant, unresolved issues that cloud the picture of what lies ahead.
“The very broad and deep economic downturn over the past few years has had a significant impact on commercial real estate,” says Bill Obregon, a senior vice president with the Global Corporate Services group of CB Richard Ellis.
“It has affected the commercial real estate industry in almost every way from the tenants’ core business models, the ownership of commercial property, and the value created in their partnerships. These are unsettling fundamental changes, however, they also provide some unique opportunities.”
Smart Business spoke with Obregon about the issues of today and what lies ahead as we prepare to turn the calendar to 2010.
Is commercial real estate the next big problem for the economy?
In many ways, commercial real estate is a reflection of the economy. In good times our industry can flourish as demand fosters new construction and increased value of assets. The opposite, as we are witnessing today, can mean a market where tenants are struggling in many cases to redefine their own business models, ownership is challenged with capital and operational shortfalls, and value has been materially impacted in many cases. There is no question that there are significant challenges ahead, however, we appear to have a few more answers today than we did a year ago. There will always be those who have the capacity to find opportunity in turmoil.
So how do tenants navigate in these uncertain waters?
After the chaos of 2008, the first three quarters of this year helped businesses slowly reshape their operational focuses and economic structures. Many now have a better picture of their projected top line revenue, have ratcheted back on expenses and now have some clarity on the bottom line as they prepare for 2010. That process now allows them to better address their facility needs. The ship may still be leaking, but the boat is still afloat.
That said, the next key question will be not only where the best economic lease deal can be made but also, and perhaps as importantly, with whom. We expect there will be significant changes in ownership over the next few years, more specifically by Real Estate Investment Trusts (REITs) and opportunity funds. Each ownership structure has its own needs and motivations and tenants should be well attuned in order to make informed and responsible decisions.
What should a tenant look for in a prospective landlord?
Stability seems to be the key operative. That is the baseline we seem to be searching for in this unsettling time. In short, the proper due diligence needs to be done to help ensure that the landlord can in fact deliver on the near promises and commitments made in structuring a lease, and perhaps more importantly, the financial strength of ownership to provide a stable operational environment over time.
The old adage that ‘if it sounds too good to be true, it probably is’ can certainly come back to haunt a tenant already busy trying to get its own business back on track. It’s not the time for surprises to derail the work ahead.
Are there common mistakes tenants make in negotiations?
I would prefer to say there are two areas tenants can generally improve on. First, understand the value that your lease provides for the landlord. In negotiations, there is an arbitrage-type event that can take place and should be recognized as such for both parties. Your lease provides not only cash flow to the landlord but is also a key component in the landlord’s ability to refinance its debt. Combined, this allows the landlord to protect the value of its asset should it elect to retain or sell the property.
Second is the assumption that it is too expensive to relocate. The reality is that landlords today are particularly motivated to attract new tenants. These possible inducements can have a material effect on both the near-term and long-term benefit of a tenant’s business. This is a unique time for tenants in the cycle of commercial real estate.
Bill Obregon is a senior vice president with the Global Corporate Services group of CB Richard Ellis. Reach him at (813) 273-8427 or firstname.lastname@example.org.