While the marketplace is more competitive right now, there are still deals out there, and building owners are making them. In fact, says Mark Preston, the senior vice president of owner representation for Moody Rambin Interests, the market is stabilizing.
“This time around, in 2009, we are not oversupplying the market with space, and we are not seeing anything out of proportion with sublease space. We are also not seeing the massive layoffs that would cause the slackened demand that occurred in the ’80s,” Preston says. “There is uncertainty right now, but we’re moving in the right direction.”
Smart Business spoke with Preston about commercial real estate ownership, today’s office market and how you, as an owner, can leverage market conditions to your advantage.
How do frequent changes in ownership affect commercial property tenants?
It’s a mixed bag; there are pros and cons to changes in ownership. Often, it leads to an improvement. In a declining market like today, many owners have faced difficulties, and when they became strapped for cash and/or were unable to refinance, tenant services tended to fall off. Perhaps the landlord cut back on 24-7 security or got rid of the porter who cleaned up around the properties during the day. In these cases, if the new owner has stronger financials and better access to cash, this can work to the advantage of the tenants and the building itself.
A change in ownership can have an adverse effect when the tenant/landlord relationship has to be re-established and new lines of communication have to be opened. Whatever rapport was there before is gone when a new owner comes in. And, that’s a big negative. That rapport, that sense of stability, is what tenants are looking for. If the tenants see a lot of change, then they’re going to be wary about receiving quality service.
Will new developments have an impact on the office market?
In Houston, you’re looking at a 200-million-square-foot market. The deliverables amount to 10 to 12 million square feet, so that’s only a 5 to 8 percent increase in overall market inventory. That is very manageable from both an owner standpoint and a tenant/user standpoint. A lot of those deliverables are being erased, so the marketplace is not being upset, it’s being stabilized.
This is not going to soften the marketplace, no matter what. Even if everything were delivered on the same day, at the same time, and were delivered at spec and vacant — which is the worst possible outcome you could have — the market would only be softened by 5 to 8 percent. With current levels of occupancy being at 82 percent overall, that is not unmanageable.
How can skilled real estate consultants help owners leverage the changes?
Experience is the key element. You want to partner with a senior leasing agent who has been through soft markets similar or worse than the one we’re in today. A quality agent will bring insight to the table with respect to when and where to make concessions and when and where to lower rates in a declining market. Most astute owners learned a long time ago that it’s better to both lead a market up and to lead a market down. If you try to resist the downward turn, you’ll find yourself in more trouble.
Don’t think you can wait for the market to recover. If you resist the market shift, you’ll tend to lose more money, earn less money, see higher vacancies and lose more renewals. This is the key factor you want in your real estate consultants — a good owner rep won’t be afraid to offend the owner and recommend change. Usually, if you resist change, it’ll end up costing you more.
What are some of the challenges facing owners in today’s office market?
Clearly, this is a market with a high degree of fluidity and uncertainty, so there is every reason to shift your emphasis to gathering occupancy rather than forcing rates up. It’s a given that rates will suffer. That’s the biggest challenge. Make concessions, agree to flexible lease terms — do whatever it takes to hold on to your tenant base. Losing your tenants is the absolute worst thing you can do.
How does today’s office market compare to past soft markets?
Today’s market is nothing like the disasters of the 1980s in Houston. From 1980 to 1990, Houston built 60 percent of the city’s current inventory. The deliverables were massive and that had a huge impact on rates. Vacancy rates in the city skyrocketed, caused by the combination of overbuilding and slackened demand (due to single digit barrel prices and sub $2 per MCF natural gas). We are dealing with slackened demand today, but not oversupply as a coincident occurrence.
It’s interesting to note that no one came to Houston’s aid with federal money back then. There were no bailouts. At the time, Houston was going through a depression while the rest of the country was booming. Since gas prices and airfares were so low, nobody cared about the Houston economy. But, if what happened then happened today, it would be a loss comparable to GM.
Mark Preston is the senior vice president of owner representation for Moody Rambin Interests. Reach him at (713) 773-5590 or email@example.com.