Space exploration Featured

8:00pm EDT September 25, 2009

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.

“There has never been, in my opinion, a better time to either lease space or buy space,” says Mike Zugsmith, chairman, NAI Capital.

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.

“Rental rates have come down across the board,” Zugsmith says. “With that in mind, you can cut your best deal now.”

Conversely, if you are well established now may be the time to buy — provided you have a large amount of capital.

“The opportunities for people with money or who can get money in the next 12 to 18 months will be the chances of a lifetime to buy,” says Whitley Collins, regional managing director of Los Angeles brokerage, Jones Lang LaSalle.

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.

“If you are looking to reduce your rate, a lot of landlords are going to ask for your financials and your business plan on the location,” says Chuck Hunt, executive managing director of the Los Angeles Metro area, Grubb & Ellis Co.

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.

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.

“The landlord is happy to get extensions and the tenant usually gets some kind of benefit that helps them relatively quickly in this economy,” Zugsmith 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.

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.

“You also want things that keep the employees happy,” Hunt says. “You want to be close to restaurants and have parking. There are a lot of things, in addition to cost, that a company needs to consider.”

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.

“If a city has a business tax and the city next door doesn’t have that, the savings can be quite dramatic,” Zugsmith says. “You have to take a hard look and say, ‘If I walk across the street, I might save thousands a year in business tax.’”

Overall, there are savings in real estate, as long as you take the time to evaluate your company’s long-term needs.

“Be patient,” Collins says. “Look at the options because prices seem to fall almost every day.”

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