Commercial Realty Specialists Newsletter

February 24, 2021 

Your monthly news & updates 

Vist Our Website 

MHN 

Industrial Real Estate Clear Leader in Moody’s Report 

The true impact of the pandemic on commercial real estate will likely transpire this year, the firm’s latest report predicts. 

MHN 

Top 10 Markets for Office Transactions in 2020 

These markets accounted for more than 80 percent of the nation’s sales volume for office assets last year. 

Bisnow 

NAR's Advocacy Work Towards COVID-19 Relief 

NAR’s Federal Advocacy team has been working closely with Congress and the Administration to ensure the interests of REALTORS®, their families, consumers, and the entire real estate industry are protected in any federal action in response to COVID-19. 

Other Stories:

How has the Covid-19 pandemic affected the use of office space? 

Many tenants are realizing that they are able to “somewhat successfully” work remotely and as such, are doing so. What I am seeing is the fact that they may be able to work remotely, yet there are a certain percentage of the employees that would prefer to be back in office in order to continue the office camaraderie and office culture. 

I'm hearing that they don't think it is 100% ideal to work remotely, and would prefer some type of schedule where they are in the office two or three days and working remotely the other days of the week. 

Employees generally like to interact and collaborate with their fellow employees and doing this via Zoom, while practical, it is not always their desired mode of interaction. 

I'm seeing companies that I'm representing downsize when their lease comes up for expiration. I just represented a law firm that determined many of the staff can fairly effectively work remotely and as such they cut their rental expense by 32%. 

The technology firm I just finalized a transaction with decreased their footprint by approximately 47%. They ended up giving one of the suites that they were occupying back to the landlord and expanded a bit in their other suite. The landlord was able to keep an excellent tenant, and the tenant saved loads on their rental expenses. 

Regarding lease rates, at the moment landlords are not decreasing the face rate; what they would rather do is provide more in the way of a tenant improvement allowance, free rent, parking concessions, etc. 

I suspect, when more sublease space begins to comes to market, landlords will have to adjust their thinking in order to compete with this additional inventory. 

These are interesting times! If your office lease is expiring in 2021 to 2022, now is the time to begin your planning. 

-Randolph T. Mason, CCIM, SIOR

Youtube    Instagram    Linkedin

How Tenants Are Surviving These Tough Economic Times

HOW TENANTS ARE SURVIVING THESE TOUGH ECONOMIC TIMES
By Randolph T. Mason, CCIM, SIOR

As we all realize, tough economic times require tough decisions. In talking with many tenants and other advisors, the below is a summary of how tenants are surviving these challenging economic times.

If one needs to cut to the chase, the reality is most tenants are doing what they can to cut costs. This includes selective layoffs of non-key or essential employees, while at the same time, asking the rest of the team to handle the extra load, if there is any. I know of one company who has a total clerical and managerial staff of eight staff members, not including the twenty-five plus sales reps. While it was a very difficult decision, one of the clerical staff needed to be let go. The other staff members have had to increase their individual responsibilities in order to cover the downsized employee’s work load.

I recently spoke with another company that had a total staff of 35 people, occupied over 26,000 square feet in an office building and was required, due to funding sources, to reduce their operating costs by 50%. The subsequently have 15 employees and are attempting to sublease half of their space. Which brings me to the next strategy tenants are employing, subleases.

Subleasing is never the ideal situation if you plan on occupying a portion of your space and subleasing the remainder. Most tenants would prefer not to share space with another tenant if they have the choice. Security, privacy, pilferage issues, and many other concerns need to be addressed prior to making the decision to sublease a portion of the space. Unfortunately, it is often not practical to sublease a portion of the space as it cannot be easily reconfigured to provide adequate ingress and egress, individual control of the HVAC and other systems, including telephone and computer networks. It is also extremely important for the Sublessor (Tenant who is subleasing the space to another tenant) to react sooner than later. A very valued client of mine saw their business decrease dramatically and realized early on that they were going to need to sublease some space. I advised the client to go back to their Master Lessor to see if they would be willing to take the space back. My thought was, you never know unless you ask. It was determined that the Master Lessor did not want the space back, but would cooperate with the tenant in their hunt for a sublessee. The tenant chose not to actively market the space through a real estate professional, but to attempt to sublease space on their own. The problem with that philosophy is that in the event the tenant’s respective subtenant bailed, much valuable time was lost in the marketing of this space. As luck would have it, the sublessor’s perspective sublessee did go away. The space is now on the market for sublease to the general public. When there is such a glut of available space on the market and the activity level has diminished, it is prudent to offer prospective tenants and their representatives increased motivation to lease the space. Concessions that are common during these economic times include rental abatement or free rent, lower market lease rates, fixed operating expense pass throughs or none at all, leasing incentives for procuring brokers, fees to be spent on tenant improvements within the space, and other leasing incentives.

Other areas that tenants are using to survive this market include shorter term leases. We are finding that tenants desiring to renew their existing lease are opting for a shorter period of time. There are benefits and detriments to this philosophy. The benefits include a lower long term risk for a lease obligation should the market conditions continue to worsen and subsequently force them out of business. This is extremely important to consider should one have a personal guaranty for the lease. Personal guaranties can often be avoided if the tenant submits a large security deposit or letter of credit. This gives the landlord some security that in the event the tenant defaults, the landlord has some months to re-tenant the space. It would not necessarily be considered an ideal situation for a landlord in that they are signing the long term lease for the long term cash flow and would prefer not to go through the re-tenanting expense. Other tenants are dramatically scrutinizing their expenses line item by line item. I have one client that reviewed its income statement and more specifically the expenses literally, line item by line item. The goal was to reduce expenses in each and every area by 20%. The client talked about saving money on copies, by limiting the number of copies people need to make. He also talked about eliminating one of the copiers which in effect forced employees to walk a little further in order to make a copy. They eliminated the bagels and donut expense with a healthier option of apples and oranges. This was primarily done as a morale builder. In an effort to reduce the number of employees being laid off, they took a survey to find out which employees would enjoy part-time work. They were able to scale back some full-time employees to part-time employees which saved the company money along with giving the employees their desired work schedule. Another way this company saved money was by bundling the telephone, computer, fax and other telecommunication services with one vender. They shopped around and found the best alternative for their particular business. They were about to cancel their 401K plan, but instead implemented a matching funds idea, which helped encourage the employees to save more money.

The reality of today’s marketplace is that employers, employees, and vendors need to work together to survive through these tough times. When everyone understands that we are all on the same team this economic downturn will be minimized.

Tenant Reps Say Sluggish Economy Means Changes in How They Handle Clients

August 25, 2008
Tenant Reps Say Sluggish Economy Means Changes in How They Handle Clients

By Gail Kalinoski, Contributing Editor

Faced with a sluggish economy, tight credit environment and softening office leasing market, tenant representation brokers say their roles have been changing in recent months. Several brokers on both coasts told CPN they are increasingly taking on advisory roles as they help clients manage their space needs and expenses. "There has been a significant amount of what I would call hand-holding and advisory services in guiding our tenants on the choices available should they need to make a decision," said Marc Miller, executive vice president at Winoker Realty Company, a privately-held, mid-size commercial real estate management and leasing firm in M Mhaving some very interesting conversations with clients in terms of whether they should be expanding in place and renew or relocate to a side street or go south a bit and try to save money," he said. He said some clients are being more flexible and taking risks in deciding on where to rent and saving money by doing so. Miller cited a law firm client that needed space in Midtown. Miller said Winoker brokers showed the firm a prewar loft building on a side street across from the New York Times building at 620 Eighth Ave. "They took two floors, got two terraces and saved $18 a foot," he said. "You have to take a risk that the tenant might not like it. This turned out to be a home run." Miller said one trend he has noticed has been increasing opportunities in the sublease market. "When recessionary language starts to buzz, sublet space becomes more than a trickle on the market," he said, adding that he arranged a $65 per square foot sublease in the U.S. Trust Building at 114 W. 47th St., for a client that had relocated from a Midtown building where the firm was paying over $100 a foot. The Grubb & Ellis Inc. second quarter "Office Market Trends" report for New York City noted that tenants had placed more than 1.5 million square feet of sublease space back on the market since the beginning of the year. Grubb & Ellis said the overall vacancy rate in Manhattan rose 70 basis points from Q1 to Q2, the largest one-quarter jump since just after 9/11. In Manhattan, second-quarter vacancy rates ranged from 4.9 percent in Midtown to 7.2 percent in Downtown Manhattan. Rents are expected to remain flat for the rest of the year. In California, brokers said they are also offering more advisory services to their clients – often that means helping the tenant decide between free rent and improvements being offered by more landlords. "We’re starting to see free rent in the picture. We haven’t seen that phenomenon in six or seven years," Steve Holland, first vice president with the tenant representation group for CB Richard Ellis Inc. in the San Diego region, told CPN. Holland
anhattan. iller said all firms, even those that are expanding, are trying to mitigate expenses. "We’re
said he’s seen landlords offering 10-year deals with up to one year of free rent. When the office leasing market was hot and landlords were in the driver’s seat, tenants typically had to absorb turnkey improvements when moving to new space or taking additional square footage. Now landlords are offering to pay for improvements and giving free rent. "The landlords are being a lot=2 0more aggressive, a lot easier to deal with," Holland said.

Further north in Orange County, Randolph Mason, senior vice president with Lee & Associates Commercial Real Estate Services in Irvine, Calif., has seen the same trend and has been busy helping tenants get the best concession deals possible. "Three years ago, a landlord would say ‘we’re not doing anything other than carpet and paint. If you want anything else, you will have to pay for it.’ Free rent was non-existent. It’s changing," he said. In hard economic times, the brokers said tenants are watching their bottom lines very closely and are now more interested in building expenses and how that affects them. Brokers like Mason are educating them about the costs of electricity, maintenance and janitorial services, which is particularly important to triple net paying tenants. "As brokers, we’re trying to help them understand the expenses specifically of the buildings, trying to negotiate the expense pass-throughs or get a cap on those pass-throughs," he said. The office leasing market is particularly challenging now in Orange County, where many of the subprime mortgage lenders and other housing and financial services companies had offices. Higher energy costs and new office inventory hitting the market just as the housing sector was imploding and the credit market was tightening have exacerbated the market in Orange, Mason said. The second-quarter Office Market Trends report from Lee & Associates noted that the overall vacancy rate had climbed to 13 percent by the middle of the year compared to 8.4 percent at the same time in 2008. The Class A vacancy rate was 19 percent vacancy rate for Q2 2008 up from 9.8 percent the previous year and Class B came in at 13 percent, versus 8.8 percent in the second quarter of 2007. Approximately 4 million square feet came back on the market from newly completed projects and give-back space from downsizing tenants, according to the report. Mason said he is also seeing more short-term leasing deals being done as both tenants and landlords want to see if the economy improves before they lock into a long-term lease. That’s different than in past years when not only would a client sign a long-term lease, the client would lease up for 20 to 30 percent more space than they needed at that time because they knew they would need to expand before the lease ran out. In San Diego, 3 million square feet of new office construction hit the market last year and another 1.3 million is under currently construction, Holland said. "Our research group projected the vacancy rate will increase to 18 percent by the end of the year from16 percent," he noted, adding that the overall availability was at 23 percent. Adding to San Diego’s problems is an unemployment rate of 5.9 percent, the highest the region has seen in 12 years, Holland said. The glut of office space has led landlords to focus on keeping tenants by beginning lease renewal negotiations two to three years before the end of the current lease, he said. "Part of the challenge I have with my clients is is now a good time to do an early lease renewal or wait awhile to see if the market deteriorates. That’s the kind of conversation I’m having with my clients. Companies are really looking for advice. They want to know what is your strategy. What’s going to happen two to three years down the line?" Holland said some of his clients think the market has hit bottom, but he doesn’t. Still for those companies who are looking for space, this is the time to do it. In addition to incentives like free rent and tenant improvement concessions, some average asking rents are dropping for Class A properties providing opportunities for companies in Class B space to move up, he said. "If you have a need now, this is the time to get out into the markets," Holland said.

A global perspective...

Very worth reading for the perspective – a characteristic that our media fail to incorporate in their broadcasts. Gary Linneman, the economist for GE Real Estate recently presented this speech (summarized) at ICSC in Las Vegas.

Linneman: Growth Can Still Occur in Downturn
By Debra Hazel

LAS VEGAS-The current real estate downturn is the result of a series of events, including misperceptions, politics and timing, according to economist Peter Linneman, speaking at the ICSC RECon meeting here. Yet opportunities still exist.
The US economy grew “nicely” in 2007, and certain areas continue to do well, said Linneman, the Albert Sussman professor of real estate, finance and public policy at the Wharton School of Business at the University of Pennsylvania. Growth will be weak in 2008, with the possibility of recession late this year or early next, he said.
“The economy is growing, but very selectively and very slowly,” he said. “This is as much a politically-created slowdown as a capital-markets slowdown.”
The longest US presidential campaign in history has also been the most open, with no incumbent in the race, and Republicans looking to distance themselves from the current administration, Linneman said. No one is speaking positively.
“No one is telling you ‘Life is great, life is good,’ from a political context,” Linneman said. “They’re all saying, ‘You need me to save you.’”
Yet some areas are seeing tremendous growth. “Houston is like Abu Dhabi. Houstonians will tell you that this is the greatest time since the mid 1970s,” Linneman said. “Health care, education and accounting services are doing great. And with the exception of Wall Street, we took very little action to reduce the work force.”
Capital market disruptions happen regularly, he noted. The current cycle comes at the end of a six-year economic upswing, he said, and most recoveries don’t last much longer than six years. In addition, the Federal Reserve increasing interest rates from 1% to 5¼%, while inflation was just 2%, helped ease the way for the markets to “go on strike.”
The Fed could take several actions to help the situation, including cutting interest rates to 1% for one year, than raising the rate to 4%, he added. Such a move would recharge the financial system while fighting inflation. The Fed also needs one central voice, rather than allowing all nine members of the board of governors to speak about the economy.
“It’s unseemly and unproductive,” Linneman said. The real key is to get back to basics, with diligence and real estate skills once again regaining their importance, he says.
“Great wealth has never been created at the peak,” Linneman said. “It’s lost at the peak. The real challenge of this and any business is to take advantage of this with equity, hard work and patience.”

How to get the deal done

When Times are Tough the Tough Keep Negotiating

or, How to Get the Deal Done

History has proven that there are good and bad times. It’s also been proven opportunities exist during those times. Experience has taught me that if there are motivated principals, most times the transaction can be consummated if the parties keep negotiating in a civilized and professional manner.

When personal emotions get involved in a transaction, opportunity that was available is lost. Later on the parties look back and wonder, “How did I let that happen?”


It is extremely important during challenging times to keep a positive mental attitude, be creative, flexible, understanding and intelligent.


It is very helpful to understand the motivation of both parties in order to help facilitate a win-win transaction for all sides. When I speak about creativity, I’m thinking about going outside of the traditional box. What areas are important for both sides?


In a recent transaction, a client was moving into a building that could possibly pose a potential parking problem if the business grew substantially. A simple yet effective method was to negotiate a certain number of parking stalls that would be designated and marked for my client’s use. By doing this, the occupant was assured that they would have a minimum number of stalls in order to accommodate their employees. We then had another area identified as a potential location for future parking stalls. On the surface it seemed like this building would not work, however by being creative we made it happen.


Another transaction included a landlord that wanted to sell their building. I had negotiated an
aggressive lease package and at the 11th hour the landlord came back and wanted to increase the lease rate. They wanted to do this to maximize the value of the building for financing purposes on the increased sales price. We were agreeable to increasing the lease rate provided the overall effective rent stayed the same over the lease term. We negotiated an equal amount of free rent which was provided to the tenant up front; this helped the tenant with cash flow and we also created a cap on the operating expense increases due to a sale. The parties were both creative and flexible which provided a win-win solution.


Sometimes just staying in business is important for the respective parties during tough times.
Negotiating the transaction which allows consistent cash flow for the owner and also provides the tenant with an aggressive rent may motivate them to stay. This creates a win-win transaction during challenging times in the market. An example of diligently negotiating a transaction includes the renegotiation of a client’s lease where the space was approximately 25% larger than they needed. The tenant was prepared to move in order to reduce its occupancy costs by that 25%. The owner of the project did not want to lose the tenant, especially during these tough times, so through a series of negotiation we were able to structure a transaction that worked for both parties. The tenant received rental abatement on a portion of the space for a period time, did not need to relocate, and was provided an adequate amount of tenant improvement dollars to refurbish the space. The landlord kept a quality tenant in their project and limited their down time and cost exposure, another win-win transaction. By keeping a positive, professional and flexible attitude, tough negotiations can get the deal done.

ARE YOU USING THE CORRECT COMMERCIAL OFFICE LEASE

BY RANDOLPH T. MASON, CCIM, SIOR

SENIOR VICE PRESIDENT PARTNER

LEE & ASSOCIATES COMMERCIAL REAL ESTATE SERVICES

So, you have done everything correct, you have started the process of looking for a new location well ahead of time - eighteen (18) months in advance. That amount of time would allow you to comfortably locate, select, space plan, negotiate and schedule a relocation without a gun to your head. Everything is moving smoothly and you are focused on three good alternatives and moving forward week by week with space planning, proposal discussions and negotiations while at the same time, determining the pros and cons of each individual location. The time had come when you needed to focus on one specific location in order to begin the lease preparation and negotiation process. You easily could have gone to leases on three of the properties; however, you did not want to spend good money negotiating three separate leases.
The basic letter of intent was provided to the landlord’s attorney as well as the tenant’s attorney. The landlord’s attorney drafted the lease, forwarded it to the tenant’s attorney for their review and did not copy the tenant’s broker as expeditiously as they should have. After six pages of lease comments came back from the tenant’s attorney, I determined that there was a better lease for this particular property. The landlord used a standard AIR Industrial/Commercial Gross Lease when in actuality an AIR Office Gross Lease would have been more appropriate for this transaction. It’s important for the parties to know which lease is the most appropriate for each individual transaction. Now, I agree with the landlord’s representative that while the lease they provided the three other tenants in the project were adequate (provided many changes were made in the Addendum), there was a more appropriate lease for this transaction - the one I had suggested.

Let's set up a meeting...

A client just had his building customized which included some unique power requirements. Apparently the contractor, the electrician and the unique piece of machinery vendor| installer did not talk in depth prior to the electrical work being done, which is causing some heartache for the building owner.

The lesson here is to have a specific and detailed meeting between the unique trades and get it documented! That was my suggestion but they were on a fast track and didn't have the time. I think they will make the time, the next time.