By Bill Lichwalla
August 5, 2010
In recent months, there have been many positive market indicators that signal an imminent economic turnaround. Yet, as history shows, one sector that often suffers longer-term affects of a recession is the commercial real estate market. Just as the residential real estate crisis shaped the 2009 credit market, the massive projected commercial real estate defaults will greatly impact our economy’s recovery through 2010 and beyond.
The short-term nature of commercial real estate financing has led to $1.4 trillion in commercial loans coming due between 2010 and 2014. According to the Congressional Oversight Panel monitoring this situation, $700 million in loans need to be refinanced in 2010 alone. Of this figure, nearly half of the buildings involved are under water, as most commercial real estate properties have lost close to 40 percent of their previous value. Tight credit markets, increased vacancy and declining property values will force many large commercial properties into default, and others will change ownership hands as a result.
However, the current state of the commercial real estate market can also provide businesses with the opportunity to further align real estate strategies with business objectives. By becoming more aware of the current real estate landscape, companies are in an excellent position to create favorable partnerships with landlords, which could include receiving premium tenant benefits and more favorable lease rates and terms, among other opportunities.
Below are just a few initiatives business owners should consider to benefit their company’s long- and short-term success.
Start the discussion with your real estate partner and landlord
Companies looking to align their strategic goals with real estate assets and investments will find that increased landlord flexibility, created by reduced market competition, will allow tenants to ask for more out of their leasing agreements.
Likewise, landlords are becoming more willing to negotiate lease terms to become more fiscally stable, so establishing lower-cost, long-term agreements will become more attractive business opportunities. Additional incentives created by current market conditions include, flexibility in future facility use and the ability to expand office space if a business is expecting significant future growth.
The first step to identifying these future opportunities is to discuss with a trusted real estate partner your future plans, and then talk with your landlord about the state of the building, current and projected tenant population and how this may affect your lease in upcoming years. Whether you are a long- or short-term lease holder, starting this discussion now will provide an informational baseline that can be used by your real estate partner to identify strategic opportunities.
Upgrade your real estate
Would moving your company to another community boost business? What about next to your biggest client? How does location play a role in your growth strategy?
Current market conditions have enabled some tenants to upgrade their building and location. Tenants may have the opportunity to move to ‘Class A’ buildings in premier cities that had previously been cost prohibitive. This may not only create increased accessibility to essential business channels, but improvements in facility quality may also yield additional business benefits.
Structure your lease to allow for right-sizing
With substantially lower debt to equity levels required to purchase a building than in previous years, many commercial real estate investors are still on the sidelines. Historically, 80 to 90 percent of a building could be financed,, but today that number has dropped to just 50 to 65 percent.
Strong and stable businesses can leverage this situation to ensure their lease is both protecting their current real estate investments and properly setting them up for future right-sizing needs. As the company footprint grows or shrinks, the best lease terms will be structured to be of continual benefit to the business. Working with a real estate partner will ensure that a company is making the right decisions according to their specific needs and unique situation.
The time to act is now
By considering all factors that may be putting the company at risk, weighing the opportunities created by leasing versus owning and aligning location with business growth strategies, companies that plan aggressively now to remain competitive in the future will stand to gain the most. And, while it may seem that now is the time to simply wait to see what deals come along, it is imperative that businesses at least explore the opportunities available to ensure that the best decision is being made.
Bill Lichwalla is president and CEO of Plante Moran CRESA.