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 presenting themselves.

“With a stalled or slowing economy, demand is way off, and that has increased vacancies and caused a lot of challenges for business owners,” says Samuel F. Smith II, principal and CEO, Resource Commercial Real Estate LLC. “However, that’s created some real opportunities on the flipside for tenants to get a great deal and prime space at big savings that they couldn’t get before this recession.”

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.

“My recommendation today is the same as it would be two years ago,” says Brian Zurawski, COO, Summit Realty Group. “You look at both buy and lease options and analyze what’s the best bottom-line solution for the customer, and that’s not only going to be dependent on real estate costs.”

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.

“Despite all the even trillions being spent to get our economy back on track, it has not yet been resolved in the commercial real estate and the credit markets; there is still a challenge to get credit these days,” Smith says.

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?

“Probably the ideal would be in the one- to two-year range,” Zurawski says. “If you get out beyond that, that’s when you get landlords saying that they’re willing to just let the lease lie and take the position that three years down the road the economy is going to be better and things will be back on track.”

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. The information can be insight on how your landlord is weathering the economy.

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 landlords are offering free rent, moving allowances and increased improvement dollars to attract new tenants.

“Knowledge of the circumstances of that owner and your other options out in the market, that’s your leverage,” Zurawski says.

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.

“As far as what’s different today versus a couple years ago, I think it’s increasingly important to analyze the financial strength of both the lender and landlord involved,” Zurawski says.

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. 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.

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.

“The best opportunity is (for companies) to look at their options in the market,” says Smith, who recently saw companies save anywhere from 5 percent to 40 percent on transactions.

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