According to a recent article in the North Bay Business Journal, now is the time to act to take advantage of the bottom of the market:

"The title of the recent Sonoma State University economic outlook conference “The Time is Now” couldn't have more meaning than it does with the current office real estate market. We are at the bottom of the market, and now is the time to take advantage of the current opportunities before it’s too late."

I wish it were true, but as far as I can tell we have a ways to go before the actual bottom is reached in the North Bay or anywhere else. Now, that does not mean that now is not a good time to negotiate a great office deal.  Landlords are hungry and hurting and some fabulous lease of purchase deals are available to those willing to dive in. Until the unemploymet rate starts to drop, the bottom is still in the future, probably within a year or maybe even two.

Get help finding a great office deal

With all of the available office space available throughout the country And the economy still in the dumpster, many business are looking towards subleasing as a way to save money on their office rent. In almost every case a tenant can save anywhere between 10% and 50% off the current market rents through a sublease. It sounds like a good deal and in many cases it is, but as in all investments the return (savings) is related to risk. Subleasing space is a risky proposition.  One in which it is very important to have a qualified expert assisting you to make sure you avoid costly mistakes or even worse, potentially cause your business to go under.

What are the risks?

First and foremost, what happens if the former tenant sub-landlord goes bankrupt? Most leases have a clause in them cancelling the lease or giving the landlord the right to cancel the lease if the tenant declares bankruptcy. If this happens and you do not have any protections, you will either be out on the street or paying higher rents.

What happens if you are paying rent to the former tenant sub-landlord, but they are not paying the landlord the full amount of the rent due? They are in default of the lease and therefore you are too.  What happens if the landlord decides to give them the boot? Will you be able to stay in the space at the same rate you are currently paying?  There is no guarantee that your sub-landlord will fulfill their obligation to pay the remainder of the rent or even the rent you pay to them to the landlord.

Although rare, hazardous waste can be another issue, especially if there is land involved. If your sub-landlord caused any hazardous waste, you could find yourself liable to clean it up. Cleaning up hazardous waste is not cheap.

There are ways to protect yourself when you are subleasing office space, but each sublease brings on different nuances that will need to be handled uniquely. A good real estate professional, such as the ones we have with OfficeFinder, will be able to mitigate the risks for you through a number of different means. The most important one would be a no-disturbance agreement signed by the Landlord and notarized. Not all landlords will agree to one, so other means of protection will need to be developed.

If you decide to sublease office space, make sure you protect yourself by partnering with a qualified real estate professional. You will be glad you did.

According to new projections released Tuesday, top Federal Reserve officials expect unemployment to remain elevated for years to come, suggesting that the economic recovery will be too gradual to create rapid improvement in the job market.

The forecast of 17 top Fed officials anticipates that unemployment rate will still be in the 6.8 to 7.5 percent range at the end of 2012. With a 10.2 percent rate in October, it is an improvement, but a slow one to get down to a healthy level of around 5%.  They stated that they "anticipated that about five or six years would be needed for the economy to converge fully to a longer run path."

As we have discussed in previous posts, the office space recovery is linked with employment.  If there are no new jobs or a slow growth in jobs, office space vacancy will remain high. What this message tells us, if it turns out to be accurate, is that the office space recovery will take at least five to six years going hand in hand with employment growth.

So what does this mean to businesses looking for office space for lease? It means that it will be a tenants market for the next five to six years with rates perhaps dropping a little in the short term and remaining stable for at least the next few years.

Businesses can make sure to take advantage of this opportunity by obtaining the services, at no cost, of a qualified tenant representative.

More info

Loopnet's recent poll mirrors what most of the commercial real estate pundits are saying that we won't see much improvement in the commercial real estate market until 2011. Commercial real estate almost always lags behind employment numbers.

"More than 1,000 LoopNet members completed our poll on the Q4 commercial real estate market. Sentiment has turned more pessimistic since the Q3 survey, with 46% of respondents expecting a rebound in transactions to wait until 2011 or beyond, compared to 1/3 in our last survey. Still, the glass half full view notes that over half are still expecting a 2010 recovery. Get more detailed results, including expectations for pricing and the major obstacles that are standing in the way of a recovery on our blog."

Also from their blog:
"Nearly 1 in 5 are expecting to wait until 2012 to see a recovery."

More information from a previous post.

In the last Tenant Tactics we discussed some of the many opportunities afforded by today’s topsy-turvy economy as it related to leasing commercial real estate. Landlords are more aggressive in many ways. They openly discuss and accept creative extensions to leases or reconfiguration of spaces. In addition, many are renegotiating renewals much sooner than the typical three to six months prior to termination and offering aggressive rents or additional concessions along the way.

Last month I was privileged to be asked to sit on a panel at the monthly NAIOP meeting. NAIOP is the leading organization for developers, owners and related professionals in office, industrial and mixed-use real estate. I sat on the panel with Perry Schoenfeld of LBA and moderated by David Wensley of the law firm of Allen Matkins et al. While in some ways I felt like a hen in a fox house, representing the tenants’ perspective in a room filled with landlords, it was most interesting hearing about lease restructuring from the landlords’ side. Interestingly, much of the rhetoric paralleled the framework outlined in our last Tenant Tactics.

On the other hand, I did observe one interesting point.  There was a level of frustration on the part of some landlords that the tenants “asked for the moon and didn’t understand the process.” Should they be surprised? For the most part, most all lease discussions landlords have with tenants are through their broker who interfaces with the tenant’s broker. Restructuring is much different.

In the case of renewals, tenants often try to negotiate on their own believing “we’ve been a good tenant so the landlord will give us a good deal.” The landlord starts by offering their view of fair market value. Tenants will usually at least make a call to a broker or surf the NET just to get an idea of market conditions so they have a base from which to negotiate. Unfortunately it remains the professional with all the tools against the weekend player.

That scenario has changed dramatically in the past ten years in that most professional landlords prefer to have brokers represent the tenant during renegotiations in that:

• Negotiations tend to go smoother
• Tenants feel they are getting a better deal by being represented
• Landlords find paying the broker fees saves as much as 16% on their cash flow considering should the tenant move out they would not only have to pay a fee to a new broker but also have to assume the cost of down time and additional tenant improvement costs 

However, today’s economy creates a unique situation where negotiations are based not solely on fair market value for which most brokers are equipped to provide market information but rather complex negotiations which significantly include a mix of the tenants’ business planning, multifarious lease restructuring issues AND fair market value.

While landlords have no issue dealing with tenants directly on renewals if the tenant is not represented, they find it frustrating when addressing today’s more complicated issues. It was not surprising at the reaction I got when I raised the point at the panel discussion that tenants are not real estate people and therefore certainly do not understand completely the finer points of real estate. I noted a 1993 survey I had helped develop for the UCI Graduate School of Business which clearly concluded that while real estate is the second largest line item on the budget, most all companies often shift their real estate management (other than actually located premises) to individuals within the company who are not involved in real estate on a day to day and continual basis. These individuals are often good negotiators in their personal sphere of influence so they therefore believe whole heartedly that the skills are transferable. The reality is that for the most part they manage the real estate process particularly when it comes to acquisition of real estate but their brokers primarily do the negotiations with the landlord.

Conversely, in the case of creative restructuring it gets a bit more intricate. On the tenant’s side there too often is little help that is available to them. The choice is, other than moving forward on their own would be to engage an attorney or possibly the broker who initially represented them in the transaction. Typically there is no commission on such transactions. Most brokers and landlords look at commissions as a onetime fee for completing an initial lease or renewal.  Brokers may likely turn down this type of assignment unless an additional fee is paid. Few brokers have our philosophy that commissions are in actuality a retainer for future services provided throughout the term and that service should be continual through the leasehold or engagement.

The best of both worlds is to engage a broker to address the real estate issues and a good attorney to review the legal portion. About half of the transactions we have completed in the past 8-10 months involved some sort of a restructure. Different times call for different approaches. If you are considering restructuring you need to engage outside advisors. You and the landlord will appreciate the process and the result will be a win-win for all parties.

Guest Post by our Orange County, Ca Member
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