Right or wrong – tenants may not have as much leverage as they think

Writer debut

Justin Bedecarré is an Associate at Cushman & Wakefield one of the most well known commercial real estate firms, working in downtown San Francisco in one of the top producing offices in Northern California. Justin has an impressive roll of tenants he has represented including Citigroup, Sony Music, Wells Fargo, Bank of America, and Hearst Corporation to name a few.

Justin is respected for breaking the boundaries of traditional commercial real estate and was awarded “Rookie of the Year” for C&W. He studied economics and political science at the University of California, Berkeley and previously worked with the Home Builders Association of Northern California. Justin is an up and comer in the industry and is one to watch. We proudly welcome him to Agent Genius and ask you to welcome him in comments!

Leasing makes the world go ’round

Leasing makes the world go ’round (at least the commercial real estate world). Especially in a severe downturn, owners (whether institutional or otherwise) are going “back to the basics.” This means investing in leasing. In this time honored tradition, the battle of tenants versus landlords rages on.  Each side tries to gain the upper hand in every negotiation. Leverage can be obfuscated as the economy emerges from a great recession.

Most people presume leverage has shifted to tenants in today’s market. Unemployment is 9+% nationally, and by some estimates will remain at this levels through 2011. Approximately $350 million in commercial loans will mature annually for the next 3-5 years. The commercial real estate business lags the bottom of the stock market and overall economy by several quarters historically. There seems to be a lot more ammunition for tenants to continue suppressing rents and demanding concessions.

However, this isn’t the case everywhere. There are a lot of mixed messages for companies. Frankly, there is a lot of confusion in the brokerage community as well. I am going to wear my tenant broker hat and show why that is and how to overcome it.

How to overcome

Some sectors of commercial real estate markets are tightening up. There has been a flight to quality as rents dropped, so companies capitalized on the opportunity to upgrade their image with higher quality space. Companies have shrunk and start-ups have been created, so the spaces for under 15,000 sf have become more competitive than before. Technology companies including social media and cloud computing are emerging with velocity and the larger tech firms are getting larger.

These trends create competition among a specific type of office space. Surprisingly in this market, for some tenants, it will be hard to find space and Landlords will be obstinate on pricing. When a Landlord says they have the only space in town like it, tell them that your client doesn’t need it. The point is to not throw your arms in the air and give in to the high rates or gripe about their irrational rent expectations. Rather, be more flexible to look at alternatives. Companies are more amenable to change than you think.

It is pivotal to understand the complexities of leasing and how the macro economic factors affect the cre market. Companies see that unemployment is high, buildings are being foreclosed, the market is at the bottom. They do not see vacancy rates in Class A vs Class B, view space analysis, or sub-market differentials.

You can explain why a 5,000 square foot creative user cannot find space that they originally envisioned, or why a large law firm may need $150 in tenant improvements and the Landlord just can’t fund it. The major factors that have both saved the commercial real estate market and also kept the Landlords optimistic was the supply constraint (in most markets across the US). Granted, the sublease space that is perpetually coming to the market adds supply and dilutes demand, but the space has to be a specific fit for a company to absorb it.

Brokers are over promising

Too many brokers are over promising, and we have to recognize that companies rely on us for education as much as negotiation. The major markets are mounting a comeback in some sectors but still reeling in others. Whether you represent an international, institutional client or a small local company, the specific market expertise of the cre market play an equally crucial role in the successful management of a real estate portfolio or a one-time transaction. I represent both sides of the spectrum of tenants, and market assumptions need to be met abruptly with real estate expertise and some empathy.

Capricious claims of higher rents and strong market conditions should not be supported with capitulation, unless they are justified by exhausting all alternatives. Companies need to be more creative or better apprised of what to expect, and willing to do something different. Maybe then the once highly demanded feature of a building will become less desirable and more affordable, or maybe the next group will swoop right in and pay the higher rents. All the while, you save your client $100,000 annually on a 10,000 square foot space and they get to invest in more human capital. Now you have played a part in growing the economy while helping your client with their bottom-line and keeping their brand intact.

CC Licensed image courtesy of The Truth About via Flickr.com.