Commercial mortgage issue leads to ongoing benefits for tenants

Mortgage rates are the lowest they have been in decades. Unfortunately, commercial landlords may not be eligible, especially if a property is already in trouble. For their tenants, this means the era of exercising caution about leasing from a troubled landlord has not passed. 

A few years ago, many landlords used five-year adjustable rate loans to finance properties. Today, those loans specifically are being targeted as "problematic" by the lending industry, a label that will force many property owners to jump through additional monetary hurdles to secure a new mortgage. Thus, tenants need to remain aware of potential operating complications as a result of properties changing hands. 

(Since the onset of the real estate decline in 2008, the ATR has been firm in reminding its members and member clients about the importance of airtight Subordination and Non-Disturbance and Attornment (SDNA) language in leases. While always an important clause to have in a lease, it has become especially relevant recently.) 

Lenders tend to agree that low cost mortgages have helped landlords hide potential operating issues with properties. This new stance on raising the barriers to refinancing is aimed at exposing them to prevent longer-term losses and damage to real estate markets. Analysts believe that office landlords in second-tier markets will be most affected, as will owners of retail and hospitality properties. 

Even though the pace of defaults slowed during 2011, tenants remained in the driver's seat. The coming year doesn't bode well for dramatic changes, although landlords expect an increase in support from special servicers of troubled CMBS loans. 

However, another looming issue for landlords is the termination of many large, five-year leases signed during the inflation of the bubble. In turn, sizable sublease options may again appear in 2012, further hampering the appeal of first generation space; and landlords are going to remain very competitive with one another, indicating another year of affordable leasing and a new wave of space availability at high-end addresses. 

Give priority to sublease marketing

While subleases are often attractive options for companies seeking temporary or discounted space, provided the fit is right, subleasing takes on a different face when it's your company marketing the excess square footage. 

Companies hoping to fill open offices need to take a very proactive approach to getting them occupied, which means creating a marketing plan. The best first step is to contact your exclusive tenant representative, who can assist you in understanding market conditions and how to communicate with your landlord throughout the process. Also, your tenant rep may very well have another client who could benefit from your surplus space. 

When marketing sublease space, be realistic. The point is to stop some of the bleeding, not all of it. It is certainly possible to get your current net cost per square foot, but highly unlikely. You will want to avoid wasting time on the market with an above-market sublease rate, so it's best to price it aggressively right out of the gate. 

Companies looking to sublease are often small or in a growth stage that doesn't necessarily allow them to take on a direct lease or first generation space. You can make your sublease more attractive by adding incentives like furniture and equipment, provided you have outfitted the space in question. Can you offer network connections, WiFi or reception services? What's your break room like? How about parking? There is no "hard and fast" rule to what you can offer as part of your sublease, as long as you do not over-extend financially with extras. 

Your marketing department and vendors should create proper promotional materials and assist in the sublease outreach efforts. Since a sublease could mean fewer dollars lost every month, it should be given priority in the marketing queue, including ongoing reporting and management. What did your leads respond to? What opportunities exist within the tenant roster of your own building? Is it on your website? 

Companies looking to sublease should exercise caution in their marketing to ensure that a message of "imminent collapse" is not being communicated to customers. If asked about it, explain it honestly, assuring them that a sublease is smart business strategy, not a sign of trouble. 

If you feel a sublease may be a smart business option for you, contact your local ATR member today about how to best get started. 

Wireless access increasingly vital to real estate decisions

It was only a few short years ago that having a WiFi-enabled work environment was considered an office perk. Today, it better be a given, like chairs and free coffee. 

Unfortunately, providing wireless access is not always as easy as plugging in a couple of store-bought wireless routers and providing a password. Older commercial buildings have physical barriers to adequate wireless network coverage. Plus, today's use of the Web is also far more rich-content driven (HD video/audio/social media) than it was only 18 months ago, which puts demands on facilities managers to ensure a space is physically able to sustain the demands of employees. 

The trend toward open floor plans could be in part driven by the need to eliminate physical barriers to wireless access. Additionally, many companies subscribe to or provide for employees 3G or other cellular network options to allow for on-the-go capabilities. These services are often rendered powerless when put to the test in older buildings thick with steel and concrete. 

Back in 2010, Mary Meeker, a managing director with Morgan Stanley, reported that by 2015, access to the Internet on mobile devices will overtake access from fixed devices, like desktops and laptops. Moreover, many of the largest enterprise software companies like Microsoft and SAP are investing billions in transitioning their products to the cloud. Beyond that, according to Ted Rappaport, wireless technology pioneer and client of ATR member firm Mutual Trust Corporate Real Estate of Austin, when you consider that there are 5.7 billion wireless service users in the world (as of today), 730 3G networks and that tablet usage will almost double by 2015, one should quickly realize that an omnipresent Internet connection will be vital to maintaining business productivity in the very near future. 

Today's young talent, regardless of industry, was raised on Web connectivity; it's a part of their lives, not just a recent development. In turn, companies in locations where access is a problem may very well eventually find themselves struggling to secure much-needed talent. 

Thus, commercial office tenants should strongly consider how potential locations will advocate for wireless access to company software and the Web. If wireless and mobile technologies are crucial, then tenants should consider newer space with updated architecture and if possible, in urban markets, where network providers tend to focus resources. 

Also, it is hoped that these developments in mobile technology usage pressures landlords to provide appropriate, ongoing infrastructure improvements. 

2012 offers moderate growth, optimism in some markets

Commercial real estate forecasts are predicting more of 2011 for 2012: slow recovery with pockets of activity worthy of optimism. 

The Urban Land Institute is reporting that much of what will take place in 2012 is the start of a shift toward tighter geographic markets, that is, less sprawl and more urban infill. Transit-oriented development will become a notable market draw and higher end space within those corridors will command the attention of office users. 

One reason for the ignition of this switch is the talent inherent in a younger, more tech-oriented workforce that is demonstrating it eschews traditional, suburban residential. Cities with such infrastructure in place will see boosts in activity in the coming year and less vacancy. 

Smart businesses will focus their real estate efforts on efficiency and flexibility, choosing to forgo higher-end space if it commands significant operational commitments. Efforts to reduce operating costs will drive space management decisions, namely as it relates to energy costs and "green" renovations. Additionally, employees will need reasons to not seek mobile working solutions. Still, what remains in the heavily discounted Class A market is expected to be absorbed at the same pace evident in 2011. 

Europe's economic woes will continue to have an impact on the United States. Investment activity should increase, but not as evidently as it has in the last two years. 

Despite signs of moderate growth and high vacancy, many experts believe that slow construction activity will become a problem beyond 2012, citing that office market metrics can become positive quickly enough to outpace construction. In short, an uptick in office construction in 2012 could have longer-term benefits. 

Without a stable Europe in a globally dependent economy, the U.S. will be hard pressed to witness enough growth to warrant jubilation. Nevertheless, there seems to be little reason to fear another 2008. 

Tenants can control building energy costs

News has surfaced after a recent white paper by The New Building Institute and Ecotope, an energy consulting firm, that commercial office tenants can have a greater impact on their energy costs than previously believed. More so, indicates the research, than initial building design. 

Technical Director of the NBI, Mark Frankel, stated that what we once thought about building design and operative performance is not necessarily correct. "In fact, a significant percentage of building energy use is driven directly by operational and occupant habits that are completely independent of building design." 

The study used a typical mid-size office property of 53,625 sf, analyzing 28 building systems. That building was then placed in 16 distinct "weather" cities (e.g. Seattle, Phoenix, Atlanta, Fairbanks) to gauge the impact of surrounding climate. To measure user and operator impact, the study included "occupant density, schedule, plug and portable equipment loads, maintenance habits and operational practices." 

According to the paper, best practices in major construction systems, like envelope, lighting and ventilation, can increase energy performance by around 40 percent. When poorly implemented, these same systems can increase usage by 90 percent of optimal performance. Since this is most often the case, tenants need to rely on themselves to improve energy conservation. 

The use of submetering was found as one of the best ways for tenants to understand their impact on a building and create better use programs. Energy use dashboards under the full control of individual tenants also helped create a much more efficient building environment. 

This white paper, which can be downloaded at newbuildings.org/sensitivity-analysis, is a worthwhile read for facility managers and other real estate decision makers.