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 present.

“It’s a very good time to get out and move to a different building,” says Burt Follman, executive managing director, Solon Gershman Inc., an ONCOR International affiliate. “This is a very good time if you’re in a class C building to be able to move up to a class B building for little if no money, and the same is true for a class B to a class A.”

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.

“If you’re someone who’s going to buy a building to use it for your own company, I think you can find a very advantageous acquisition now because of the conditions in the market and because supply is exceeding demand,” Follman says. “As far as leasing office space, vacancies have increased.”

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.

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?

“The economic downturn has created much stress among landlords, which has created opportunities for tenants to restructure existing leases prior to their lease expiration in return for an extended lease term,” says Scott Bazoian, principal and senior vice president, Colliers Turley Martin Tucker. “In most cases, landlords are anxious to renegotiate a lease term, which may have two to three years remaining in order to secure and extend an existing loan that (may be) due to expire shortly.”

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 an 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.

“We’re seeing it all the time,” Follman says. “Companies who are tenants either independently or with a broker are going out to look at other choices in the market, and then using that market data to put leverage on the existing landlord.”

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.

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.

“Companies should focus more on the total occupancy cost associated with each building and not just the base rent,” Bazoian says. “There are many other factors which impact the total cost of occupancy, such as the efficiency of the space.”

Whether you’re planning to buy, lease, move or stay, make sure you give yourself ample time — at least a year — and consult a broker to ensure you’ve settled on the best choice for your company.

“I think having a licensed, quality professional represent a company for any requirement is something that companies should do because the experience and the knowledge of the market through trying times like this is going to be worth its weight in gold,” Follman says.