The Tenant Advocate

Commercial mortgage issue leads to ongoing benefits for tenants

2012-01-30T18:45:00Z

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

2012-01-17T18:11:00Z

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

2012-01-10T18:19:00Z

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

2011-12-21T20:02:00Z

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

2011-12-07T18:00:00Z

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.

When your building is being sold …

2011-11-28T18:39:00Z

The sale of an office property mid-lease is not unusual. However, tenants are right to grow frustrated when landlord communications, renegotiations or outstanding construction or repair projects are affected by the current owner's effort to make their property as attractive as possible to the investor market.

For example, your pending renewal could be subject to a landlord's unwillingness to be flexible on items like lease audit timetables and your ability to use commission-based lease auditors. Lease terms pertaining to operating expense and tax pass-throughs may also be less favorable when a building is on the market or preparing to be, as these items pose an economic burden to a property, thus affecting its position in the market.

Tenants in a property being readied for market will also be called upon to produce estoppel certificates in a timely manner. It's important for tenants to have time to review them prior to their final certification and hand-off. Landlords, focused only on keeping momentum during the sales process, may demand unreasonable deadlines for an estoppel certificate.

Landlords will also avoid extending offset rights to tenants, which allow tenants to deduct from their rent any amount the landlord may owe them. This is because any reduction in rent directly impacts a property's income stream, the primary selling point for an income property.

In challenging market conditions, especially those exemplified by the most recent recession, many landlords become quite motivated to sell their office properties. Certainly tactics will vary, but it is certainly worthwhile for tenants to be monitor changes in their landlord's management strategy.

Moving from sublease to direct lease

2011-11-25T13:37:00Z

Not along after the recession hit in 2008, subleases became a very viable occupancy scenario for commercial office tenants. Companies large and small had to abandon space as the economy tumbled, creating affordable office space opportunities in every major market.

Now a few years later, office tenants may be reaching a point where they want to convert their subleases into direct leases. If this scenario sounds familiar, here are some things for you to consider. (It is assumed that you have already worked with your exclusive tenant representative in surveying the market to ensure that the space is indeed best suited to your company's needs.)

A new lease is exactly that: a new lease. That means your company will be subject to new terms, language and provisions. The lease's content may be similar to what your sublandlord had in place, but it is critical to examine the lease carefully for any surprises.

Treat a new, direct lease as a separate business transaction. This means you should act as you would have if you were relocating from across town. The landlord will certainly do the same. For example, your financials and business practices will be scrutinized to whatever extent the landlord feels will define your solvency. And by all means, you should do the same with the landlord.

Your sublandlord may have signed its lease during a more stable economic period. Since then, landlords have struggled filling their properties and suffered under the weight of growing debt burdens. Take the time to examine the stability of your landlord and have your tenant representative negotiate to have SDNA language (subordination, non-disturbance and attornment) included in the lease, which will protect your occupancy should a bank or new landlord abruptly take over ownership of the property.

Among other things, ensure you can work professionally with your landlord and its representatives on maintenance and accounting issues, whereas previously you may have dealt directly with your sublandlord.

In summation, treat the process of transitioning from a sublease to a direct lease like you would the origination of a traditional occupancy scenario.

Thank You from ATR

2011-11-22T18:34:00Z

In the spirit of the pending holiday, the Alliance of Tenant Representatives would like to sincerely thank all of its clients, partners and advocates for yet another terrific year of service, patronage and industry insight.

Member firms of the ATR network across the country to share ideas and develop best practices for the sole purpose of allowing office and industrial property tenants to make the most of their space. It is our goal to ensure that our clients are provided an advantage when making critical business real estate decisions. It is not enough to make sure the playing field is just level with landlordswe want our clients to experience the best possible outcome every time our services are engaged.

Leasing commercial space is an intensive, introspective business process that often takes many months to properly formulate and creates an impact on every facet of business. It is our jobs to make that impact a positive one. And we are thankful for every opportunity we've had to do that in 2011.

Thank you for your business.

Office space discounts may be diminishing

2011-11-18T18:27:00Z

Office tenants in search of space may soon find that the market of six months ago is not the market of today. In a surprising turn, given the stagnant economy, office space absorption has increased for the fourth straight quarter.

This means that the market so many believed at one point would remain intact for the next several years may be changing much earlier than predicted. As it turns out, the discounts and deals are doing what they're supposed to do: fill space.

Real estate data analyst Reis, Inc. reported that the average net effective rent for the country (the final dollar figure per square foot after concessions are figured) has increased to $22.39 per square foot. Also, landlords filled just over 6 million more square feet, marking another increase from last quarter.

At this point, the growth is centered on technology corridors like Silicon Valley and Boston. But that's where it typically starts before catching hold across the country over time.

For tenants, this means an ever-tightening window to secure the best savings most markets have experienced in decades. There is, obviously, room for these metrics to again decline and for the deals to stick around. Yet, these recent increases are evidence that companies are making smart moves about real estate even when mired in economic uncertainty, thus demonstrating the operational benefit of smart real estate decisions.

The city of Houston reported office rents in some submarkets are as high as they were during the peak in 2007. These instances have been isolated, however, to the market's most sought-after properties.

Member firms of the Alliance of Tenant Representatives around the country are actively working with tenants to create occupancy strategies that will leverage the still very attractive conditions. Real estate plans need to consider a number of long-term economic factors, and these recent positive movements in average effective rent and absorption signify that it's time for action if savings are part the plan.

Buildings with LEED rating make happier workers

2011-11-11T18:25:00Z

A building in San Francisco has earned the world's highest rating from the Leadership in Energy and Environmental Design (LEED) from the U.S. Green Building Council.

The building is 101 California St., and was originally built in 1982. It is 48 stories and first earned LEED certification in 2009 under the "existing buildings" category. Its owners then dedicated another ten months to advance it to Platinum status and by doing so, also reached the highest score in the world, 94 points, for a building in its class.

This landmark green rating is a good sign that landlords across the country are respecting the wishes of their tenants, which often include ways to save on energy costs. The property, according to its developer, now costs $1.45 less per square foot to run than the average office property.

Naturally, a prospective office tenant is more likely to agree to terms in a property that can demonstrate a commitment to energy conservation, and not just because it will save them money. Having an address synonymous with environmental initiatives and sustainability can bolster a company's brand and attract top-level talent.

A national real estate services company tracked activity in 150 buildings over three years, finding that those with LEED ratings have a 3.1 percent higher occupancy and rental rate. While higher per square foot costs may deter potential tenants from leasing, it should be noted that operating expense savings would offset the cost disparities. Additionally, the study noted that employee productivity was higher in such buildings, as was overall morale.

The San Francisco market has traditionally been a leader in such efforts, but that doesn't mean that other landlords around the country are not paying attention. As the overall office market remains controlled by tenants, it should be only a matter of time before environmental ratings like LEED become a building owner's top priority.