Confessions of a Recovering Landlord

If they are correct, it's time to lock in the current low rental rates before landlords decide it's better to wait for higher rents than to do your deal. Here is a link to their article - http://www.costar.com/news/Article.aspx?id=195F06A0749794A8335951CD840A973E.

This article (http://www.globest.com/news/1600_1600/newyork/183576-1.html) is talking about the New York City office market, but you could just as easily substitute Dallas in place of New York. Yes, the market is bad for landlords. Yes, tenants have lots of choices and rents have fallen while concessions (free rent, etc.) have increased. But certain submarkets are doing pretty well. Certain buildings have pretty good occupancy. So in those cases, the deals don't look as good and tenants are left questioning why the landlord isn't more aggressive. So you should shop widely when looking for space. And if you really just want to renew where you are, be sure your landlord thinks you will seriously consider moving.

It's good to live in Texas.  Those jobs create demand for office & warehouse space. And it will eventually change the balance of power in negotiating leases if it becomes a trend. So you might want to consider renegotiating your lease now before landlords start feeling confident of a recovery with jobs. We recommend that anyone with a lease expiring in the next 2 years evaluate their situation with their corporate real estate advisor (tenant rep) to decide when is the right time to take advantage of this depressed market.  Read the article here -http://dallas.bizjournals.com/dallas/stories/2010/02/08/daily4.html?ed=2010-02-08&ana=e_du_pub.

DFW office leasing is doing much better than other US cities. But even within the DFW area, there are winner and loser submarkets. Northern suburbs like Plano and Frisco will always do better because they are close to where people want to live.  The key is to have this information when negotiating a new lease or renewal.  That is the kind of information that a corporate real estate advisor (tenant rep broker) follows and will use to effectively negotiate on behalf of companies.

A report from Cushman & Wakefield reported that DFW office occupancy fell by 2 million square feet in 2009 and total leasing activity was down 43 percent.  Not surprising given the current economic situation, I know.

But like in most cities, there are winners and losers within the greater metropolitan area.  Buildings along LBJ Freeway and downtown Dallas were hit hard with lots of tenants moving elsewhere or just closing their doors.  The big winners were Plano and Frisco because those submarkets are close to where people live.

Quoted rental rates didn't change much though.  This seems odd when demand is so low.  You would think rents would be lower.  Well they actually are, but landlords prefer to give free rent and higher concessions to "buy down" the rental rate than to reduce the face rate shown on the lease.  So the average effective rental rate is lower even though the number shown on the lease is higher.  This allows the landlord to get the pain of the current market out of the way and then have good rents in the future.  This also helps them if they decide to sell the building in the future because the buyer won't have to deal with the free rent which should have burned off by then.

So what does this mean for companies whose leases expire in 2010?  

First, there should be lots of options from which to choose.  So allow yourself plenty of time to look around and negotiate.  I recommend that you start the process 3 months prior to the date on which you have to exercise your renewal option.  If you don't have a renewal option, start 9-12 months early.  That may seem like a long time, but if you move to a space which requires construction, you can eat up 9 months in a hurry.

Second, you should shop the market to see what's out there before blindly agreeing to renew your lease with your current landlord.  You wouldn’t buy a $40,000 car without shopping around a little first.  So don’t sign a lease which totals $500,000 or more without shopping either.

Third, you might want to consider trading up to a higher-quality building if image is something that might increase sales or allow you to hire better employees.  Or you might be able to move to an area close to home or close to customers.  Who knows, the landlord may pay for some or all of your move.

Finally, hire a corporate real estate advisor (tenant rep).  When I was a landlord, I found that landlords could get a 10-20% better deal for themselves when tenants handled their renewal directly compared to those tenants who were represented by a tenant rep. Don't hire any broker though.  Only hire one who specializes in representing tenants exclusively.  If the broker also represents landlords, you might find yourself in a situation where the broker is trying to juggle his loyalties to you and the landlord.  You don’t want to have to question your broker’s motivations or recommendations.

Have a great 2010 and happy hunting.

The Dallas Business Journal published a commentary I wrote on the commercial real estate market.  The article discusses why residential real estate is a leading indicator of the economy while commercial real estate is a lagging indicator.  Here is a link to it - http://dallas.bizjournals.com/dallas/stories/2009/10/26/editorial1.html  Let me know your thoughts.

The Dean of the Cox School of Business at SMU, Albert Niemi, spoke at an economic summit the last week of February.  He focused on our current economic situation and how it compares to the Great Depression and other recessions.  So how does a REcession end up as a DEpression?  You might be surprised

First, the Great Depression was a uniquely American problem.  It did not extend around the world as our current problem does.

Second, our current recession has been going on for 15 months now. This compares to the recessions of 1973-75 (24 months), 1981 (16 months), 1991 (6 months) and 2000 (8 months).  Predictions are for the current recession to continue for 24-30 months total.

Third, the only reason that the Great Depression turned into what it was instead of just a recession was because of the response of the Presidents and Congress at the time.  Herbert Hoover and Franklin Roosevelt both decided to cut spending and raise taxes during the 1930's.  They couldn't conceive of operating in the red regardless of the advice of the famous economist John Maynard Keynes.  This is what sent the country into despair. 

So that brings us to today.  Our most recent and new presidents and Congress have all demonstrated that they aren't afraid to spend.  They are doing that at an unprecedented pace.  And Mr. Niemi supports that saying he would have voted for the stimulus packages had he been in Congress.

But his biggest fear is that President Obama now seems intent on repeating the same tax mistakes of the 1930's.  He plans to let the current tax breaks expire and increase taxes on the "rich."  Forget that the top 1% of Americans already pay 40% of the taxes and the top 50% pay 97% of taxes while the bottom 40% pay nothing at all.

The problem with taxing the rich is that they stop spending on luxuries and those luxuries are often provided by those at the bottom of the economy.  He gave the example of Jimmy Carter's luxury tax on boats.  The rich stopped buying boats opting to rent them instead which resulted in 200,000 unemployed New Englanders who no more reason to build boats.

Mr. Niemi had many more thoughts and the stats to back them up.  I'd be happy to hear your thoughts on this issue.  Please give me a call if you'd like to talk more.

I recently saw an email from a guy in Knoxville, Tennessee asking about how to market an office building for lease which hadn't been built yet.  He had received a lot of advice about how he should canvass all the businesses in the area, mail flyers to the businesses, and generally waste his time in other creative and wasteful ways.

Here is the advice I gave him:

"Knoxville is probably like most other cities in America where 90% of new tenants in office buildings are represented by a corporate real estate advisor (tenant rep broker).  Therefore, it makes much more sense to concentrate your marketing efforts on the tenant rep brokers in your city than on the tenants themselves.

Here is my logic.  There are dozens or hundreds of those tenant reps depending on the market whereas there are thousands or 100's of thousands of companies.  The tenant reps are beating the pavements every day trying to find companies which need to renew or relocate.  Your chances of finding a company directly that needs your space is incredibly small.

So here's what I recommend.  Call the top manager of each of the tenant rep companies in your market.  Ask if you can bring bagels or donuts or sandwiches to their next sales meeting and make a presentation on your project.  Do this for every tenant rep firm in the market.  There probably aren't more than 5-10 with more than 5 agents.  But by doing this, you will have reached the equivalent of 50-75% of the true prospects in your market.

Be sure to get a list of the agents in each company and follow up with email flyers of your property which include floor plans, pretty pictures, a map, rental rates, etc.  This will make it easy for them to forward the info to their prospects.

You also much keep your property info updated on all the listing services - Xceligent, LoopNet, CoStar, etc.  Tenant reps will often be online during the lunch hour, at night or on weekends or may be pressed for time putting together a tour package.  You don't want to be left out because you didn't take a few minutes to update your info online.

This last tip seems so simple you will think I'm crazy for even mentioning it, but it is possibly the most important.  Return phone calls and emails quickly.  I can't tell you how often I contact project leasing people and never get a reply. Or maybe I'll get it several days or even weeks later.  If the real owners of the buildings knew about this, they would flip.

Good luck with your project."

Reata Commercial Realty, Inc. is a corporate real estate advisory company which represents commercial tenants when leasing or buying buildings for their company use.  These include office, warehouse, medical and retail building.  Reata is based in Plano, Texas - a suburb of Dallas.

We have just added a new page to our website which features listings for the excess space which our clients no longer need.  These properties may be for sublease or sale.  The current inventory includes a 2,226 square foot office condo in Plano near Coit & Legacy, a 1,442 SF retail store in Plano at 15th & Custer and a 2,115 SF class B office space on The Tollway in Far North Dallas.

If you know of a company which needs inexpensive space, please go to our website at www.ReataCommercialRealty.com and click on the Properties menu option to see what's available. 

If you know of a company which has more space than they need, we'd like to talk with them about how we can sublease their space and save them money.