Browse Tag: Landlord

When High Vacancy Rates Persist Even As The Economy Recovers

Jim Garringer, CCIM, SIOR

Speaking in national terms, employment growth is tepid, and the pace of economic recovery is not what anybody would consider ideal.  These trends apply unevenly across regions and markets, meaning that in some places, recovery is presenting a “new normal” of economic growth that nonetheless includes a commercial property hallmark of economic recession: high vacancy rates.

The disconnect between national trends and some local realities is easily found: national declines in vacancy for office, retail, industrial and apartments are loudly touted  but not as prominent are reports (taking southwestern Florida only as a handy example — apologies to any Gators) of office vacancy rates mired in the high-mid teens. 

Jim Garinger, CCIM, SIOR, and Managing Director of Colliers International SW Florida has thought through what these challenges mean to landlords and tenants. Jim sees employers reducing space outlay per employee — a observation no doubt supported by the explosion in telecommuting and shared-workspace employment expectations of the internet-enabled millennial generation that we’ve written about here plenty of times.  In Jim’s article “Commercial Connections: Companies Are Downsizing For Higher Quality, Lower Cost”, he spells out ways the vacancy realities can and should affect the negotiations over commercial occupancy.

Historically, office occupancy rates have a positive correlation with office sales and leasing activity, but in this economic recovery there’s a twist. After companies have been able to keep their heads above water and generate profits, they are either looking at smaller spaces that are a higher quality, or at smaller spaces to cut overhead costs.

Either situation has companies “increasingly packing more employees into less space, a trend that is helping cause U.S. vacancy rates to linger at high levels even as employers add jobs in the slowly expanding economy,” said the Wall Street Journal in a recent article.

These factors present a unique situation for tenants seeking space, with a significantly lower amount of Class A office space available in Southwest Florida compared to B and C. According to the CoStar Southwest Florida Office Market Report for 2011, of the existing vacant space, 16 percent is Class A, 64 percent is B and 20 percent is C. The national vacancy average reflects the same trend, with 35 percent being Class A space, 49 percent Class B and 16 percent Class C.

[…]

[Landlords should] avoid losing a potential tenant by making an offer to build out dead space if you need to. With companies downsizing not only in amount of employees, but the amount of space each employee gets, consider being flexible with the space. For example, consider building out a space to create two spaces rather than keeping one large area that would only appeal to a large company.

[Tenants should] think creatively and don’t be scared off by unusual spaces that have potential to be used for a different purpose. These landlords are often struggling with finding a tenant or a solution to their space, and will offer an attractive rate for someone willing to reconfigure the space for their needs. For example, Fort Myers Preparatory and Fitness Academy recently leased a former Robb & Stucky warehouse, and while the 65,000-square-foot building required a renovation to create 33 classrooms and a cafeteria, the Landlord was able to recycle and sell a significant amount of shelving which offset some costs.

Check out Jim’s full post here.

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The Stalled Escalator: Rigged LIBOR And Rent Increases

Under Repair

Brokers and landlord reps use of the escalation clause in a commercial space lease is a common one. These clauses provide for increases in rent over a specified period of time. Often, these increases are determined not by actual increases in the landlord’s operating costs, but are instead keyed to an index, such as the consumer price index (CPI) or the London Interbank Offered Rate (LIBOR).

Longer-term office leases so often involve the landlord’s lender that negotiations over lease provisions can seem to be between a tenant and lender rather than tenant and landlord. When a lender is in a position of underwriting the cash flow of a building, it’s that lender’s job to scrutinize closely the creditworthiness of a prospective tenant.

And therein lies the rub these days. The capacity of lenders to scrutinize creditworthiness has been called into very stark question thanks to a continuing series of scandals and financial meltdowns, the latest of which probably directly affects the lease on your table today. The LIBOR number — an interest rate that drives the rent escalation clause math in untold numbers of commercial space leases — looks like it is, was, and continues to be, in a word, rigged by banks. Banks, under investigation for engaging in book-cooking to cover their derivatives traders and to pretend to the wider market that the cost of money is lower than they actually pay, have distorted the LIBOR number to the point that holders of financial transactions that are keyed to it are hurriedly reviewing their portfolios in a hunt for lost money. And there’s plenty to find — LIBOR lives in the beating hearts of $350 trillion worth of contracts according to the Financial Times.

Going Up? No, actually

One argument about LIBOR in commercial space leases is that the bank scandals benefited tenants at the direct expense of landlords using escalation clauses tied to LIBOR. If, as allegations claim, starting in 2007, large banks began underreporting their costs of borrowing in order to stave off a rising sense of panic in the credit markets, that means that during those quarters, commercial landlords using LIBOR indexing in their escalation clauses were left holding the bag on rent — charging tenants less than they would have been due under the lease terms had LIBOR not been corrupted for the purposes of the banks’ charade.

One of the truisms in this business for both prospective tenants and landlords is to protect yourself — to secure your own representation at the deal table or otherwise run the risk of having your interests overlooked. But when our pinstriped friends the bankers are at the same table, offering both sides index numbers that amount to broken instruments designed to cover some derivative trader’s rear end instead of either the tenant or the landlord’s — how do you protect from that?

(Photo credit: Jeremy Brooks)

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Closing The Deal With A Rebate

Illustration of a cash rebate

Do some major commercial deals in New York City represent a coming trend for tenant brokers across the country?

With no set rules, the task of figuring broker and rep commissions on commercial deals is left to the negotiators at the table.  In deals both large and not so large, brokers, tenant’s reps and landlord reps often look to the value of the lease, using that number first in the calculations for commissions.  But outside of that common first step, a deal can take any specific structure, from simple to complex to downright exotic.

When higher-end deals are negotiated, sometimes surprising commission split structures appear. In primary markets, where competition over space and tenants is fierce and the inventory is unique, the surprises can be striking.

How striking? How about rebates?

It may be tough to believe, but the good old-fashioned rebate is seeing use in some of the top-end deals in New York City. Laura Kusisto’s piece in the New York Times spells out the where (150,000 sq. ft and up), why (competition and major tenant leverage) and who (tenant’s brokers getting, landlord’s giving).

As rents rose during the boom years, a growing number of the city’s largest tenants began negotiating deals with their brokers to rebate a portion of their commissions. While it’s rarely publicly discussed, this practice continued following the bust and today big tenant brokers may give as much as 50% of their commissions back, according to multiple real-estate executives.

Typically they’ll do this by applying the commission towards a lower rent or the cost of building interior space. “Here’s the stealth reality: If you represent a major tenant, the landlords are perfectly willing to pay a full fee. But tenants will say, ‘If you’re going to make $20 million, I want you to credit or rebate 50% of the fee,'” says Robert Freedman, chairman of Colliers International’s tri-state office.

Read the entire article here.