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.
“Because of the economic downturn and the challenges that are out there, this is frankly an excellent time to buy or even lease almost any kind of real estate,” says Pete Davisson, founding partner, Jackson Cross Partners LLC.
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.
“There’s not that many office buildings for sale, so I would say it’s a better opportunity to lease today,” Scott Mertz, vice president and principal of NAI Mertz says about the southern New Jersey market. “The reason I’d say that is again because owners want to keep their properties leased.
“You really can play one landlord off the other landlord to try to capture the best deal.”
One of the bigger challenges facing the market today is that the capital markets are at a standstill, leaving few lending opportunities for those looking to buy. 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.
“If you can buy, it’s a good time because the values are down a little bit,” says Tom Skiffington, president and CEO of RE/MAX 440. “Your interest rates are favorable while you still get the tax advantages.”
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?
“We believe it’s best if there’s two years or more left it works a little better for you because there’s enough period of time there for you to get a reduction in your current rent, which makes it worth while,” Davisson says.
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 tenant improvement dollars.
“There are two ingredients to make it work,” Davisson says about renegotiating. “It has to be something that is a win-win situation win for you the tenant and win for the landlord the owner of the building. But before you even get to that point, you must evaluate what you have and where you are, and you must like where you are.”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. Time and savings might also be found in the long run with contraction, addition and termination agreements for flexibility.
“A lot of the tenants have been asking to go into landlords that have multiple spaces in case they outgrow their space they have the ability to grow into another space,” Mertz says.
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.
“There’s a lot of things to look at before the fact, before you start making decisions on what building to go with and whether you should buy it or lease it,” Davisson says.