Tenant's Guide | North American Markets | Second Quarter 2010
Bill Goade,
Chief Executive Officer
CresaPartners LLC
Real Estate Market Still Adjusting
The recession has been declared over by most economists, but in commercial real estate, the recovery is uneven with only class A space in select markets seeing recovery. Landlords are still struggling on three fronts:
1) Vacancy continues to rise in many markets. This has caused lower rents and decreased rental income.
2) Building valuations have decreased 30% to 50% due to the lower rent stream combined with higher cap rates. We are back to traditional cap rate levels of 8%-10%.
3) Financing - Once easily available with little equity, it is currently difficult to find. When available, equity of 40% or more is required. The combination makes buildings bought in the last five years difficult if not impossible to refinance. All but the most financially stable are balking. The result is some lenders are simply renewing on a short-term basis rather then writing off the loans, but thousands of properties are at risk of default.
For the tenant, credit worthiness for the landlord is a valid concern. Non-disturbance agreements are essential. Some securitization of improvement allowances also needs to be considered. Job losses have exceeded the increase in vacancy rates, meaning more vacancy is yet to come even if jobs begin to be created. (CoStar predicts national vacancy will go from 13% to 17% over the next 18 months). Real estate is a lagging indicator, so it seems likely that true rent recovery will not occur before 2012. Full market recovery isn’t expected until employment reaches its pre-recession level, which most predict in 2013 or later. However, class A space in some select markets have begun to show recovery.
Trends Across North America
Importantly for our clients, the rental markets have softened significantly in the vast majority of our markets. The rents have dropped by anywhere from 20% to 50%. Landlords are focusing on tenant retention at almost all costs. Rent trends of six months ago are no longer relevant. Transactions over the last six months have been significantly more advantageous for tenants in most cases, but rent recovery has begun in the last three months in class A space in select markets. Virtually all markets have had increased vacancy rates of 5% to 10%, and rents will continue to correct through the end of this year. Many landlords are now willing to do one or two-year extensions in anticipation of a better market in 2012 and beyond.
Opportunities for Tenants
We encourage tenants to be proactive in negotiations before their leverage slips away. Credit-worthy tenants with flexibility to move will find opportunities more abundant. As noted, short-term deals are available, but tenants need to carefully review flexibility versus likely rent hikes in two to three years. When tenants are able to lock into long-term leases of eight years or more, the opportunity increases. Of course, a corporate tenant should only capitalize on this opportunity with a clear view of the long term, allowing the company to create a strategic real estate plan that aligns with its business plan. Finally, we believe it may be an opportune time for tenants to consider buying key real estate assets when appropriate.
Note about CresaPartners
With 50 North American offices, over 125 affiliated offices worldwide and over $160 M in North American revenue, we are the largest tenant representation firm in North America. We hope you experience the difference when working with CresaPartners. We are the real estate firm that cares enough to listen and give you the Tenants Advantage.
For more details on market conditions and how you can maximize your real estate options, contact your local CresaPartners advisor or email thetenantsadvantage@cresapartners.com.
Bill Goade
Chief Executive Officer
CresaPartners, LLC
