Are you really prepared to navigate
the peaks and valleys of commercial real estate? Current and anticipated changes will likely require adjustments in how both tenants and owners
approach the market.
“It depends on the specific geography
you’re operating in or the product type
that you intend to occupy — whether
it’s retail, office or industrial,” says
John Behm, managing principal at
CresaPartners. “But, in general, the statistics are indicating that the markets are
peaking.”
Smart Business asked Behm for more
insight into what to expect over the next
several quarters.
Has the commercial real estate market
peaked?
We believe that the market has actually
peaked. However, it is not a sharp peak
followed by an immediate decline.
Rather, we are looking at the future as
being a plateau, and it may stay flat for a
few years. There are certain markets and
specific properties within these markets
that experienced a rapid increase in
rents, and these have now become difficult to substantiate. A correction here is
inevitable, and we see that happening
over the next 12 months.
What does this mean for tenants?
That there is opportunity as well as
consequences for getting it wrong.
Tenants should see rents that don’t
reflect the same rapid annual increase
that they’ve been experiencing, if they
know where to look. It’s not likely that
all tenants are going to see a substantial
decline in rates, but certain decreases
will be significant if you can identify the
opportunity. However, there’s a catch.
The current reduction in rental rates is
good news, but overall economic stagnation is not. The goal is to develop a clear plan to align the company’s forecasted
needs with the market conditions, and
this requires some careful coordination
involving both the business and real
estate professionals.
Can tenants prepare for the shift?
Yes. Every tenant can have an effective
response to market adjustments. It
sounds unusual, but a good real estate
transaction is one that includes an exit
strategy. This can be the ability to terminate the current obligation, a right to
contract or expand, a right to renew, or a
right to sublease or assign, as examples.
In addition, regardless of whether the
market is peaking or declining, companies with a good understanding of their
business needs will make real estate
decisions on sound metrics, such as real
estate costs as a percent of revenue, revenue generated per square foot, cost per
employee, etc.
Planning into the right commitment
will result in the real estate supporting
the company’s operations and not creating a situation where the business is
needing to support the real estate.
What about businesses that own buildings?
These changes are primarily going to
affect their ability to obtain capital that
will be required for the ordinary operations of those buildings — for the fit out
of new tenancies, needed capital
improvements or unanticipated maintenance items.
What affects these market changes?
There are a number of factors that
affect the commercial real estate market. Employment growth, as one example, has been declining since 2006. The
number of office jobs has also been
declining in the region and nationally
since 2006. As of late, the subprime issue
with its subsequent credit crunch is really beginning to show itself in the marketplace as companies large and small
become increasingly cautious with decisions involving any long-term financial
commitments.
What can owners and tenants do to keep up
with the changing market?
Scenario planning is important. This is
a simple answer that is often hard to
execute. Leases are most often longer-term commitments (three to 10 years)
and, while forecasting operational needs
can be difficult, it is helpful to model a
few different scenarios that overlay business needs with the realities of the real
estate market. This discipline can help
you actually get out in front of markets
and provide an opportunity for savings
or cost avoidance.
JOHN BEHM is a managing principal with CresaPartners in
Philadelphia. Reach him at [email protected] or (610)
825-3939.