We read lots of headlines on how our real estate market is doing great downtown, but being a numbers guy, I want to the know the facts!  Our good friends at Thornton Oliver Keller and Colliers put out great market research reports, and I take particular interest in the bi-annual publications.  Both 2013 mid-year reports came out in July, and I thought I would share some of the highlights I pulled from the reports.

Interesting Downtown Facts

• Office vacancy downtown is increasing (remember my blog from 3/22/13...I told you this was going to happen).  TOK indicates downtown office vacancy went from 6.4% to 7.4%, while Colliers showed it went from 8.5% to 8.7% (I lump their downtown & downtown periphery together).
• Overall office asking rates are decreasing while Class A asking rates are is increasing.  I think this highlights how older buildings are going to have a tougher time fighting for tenants.
• Both reports show our downtown retail vacancy as being super healthy and it probably lies in the 5.5 - 6.5% range.  Average asking rates ~$16.50/SF NNN.
• Our downtown industrial market (wait, do we have one?!) also has a low vacancy, probably in the 5.5 - 6.5% range.  This number is typically always pretty low because the supply is so low.

Now going forward, what do we see or can we predict anything?  Here a couple things I foresee happening:

• Office vacancy downtown will continue to increase and older buildings are going to struggle to attract tenants.
• Retail is going to remain strong as more great places open.  Our downtown is truly becoming a destination.
• Increased interest in our downtown is going to continue to spur new activity, and I'm hopeful there will be more residential to our downtown and close in neighborhoods.

Do you ever wonder why leasing fees are paid at the front end of a lease?  Do your clients ever ask to pay you the leasing fee over time?  Good leasing efforts should be rewarded with good leasing fees, because it does offer the landlord a better investment...and better investments cost more money.  

Because frequently commercial property is worth more when it is leased than when it is vacant!  I have had numerous occasions when speaking to owners about selling their building, but they are reluctant to do so because the property is leased and is providing a nice income stream.  Then inevitably, I get the phone call a year or two later, and they say, “I can’t believe it, but so and so vacated the building.  Do you think you can sell it for the same price we were talking about two years ago?”  

Unfortunately, there is a good chance that the property vacant is not worth anywhere close to what the property was worth when they had a good tenant in place.  I have seen numerous buildings worth half as much vacant as when they were leased.  There can be definite value to having a tenant(s) in place.

I was recently discussing this phenomenon with a client who has a vacant building.  He had a great, long term tenant in his building paying a great rent for a number of years.  All of a sudden, their business model changed, and they didn’t need his building anymore so they moved out at the end of the lease.  His building has now been vacant for more than 2 years while we have searched for another tenant or buyer for the property.  Upon running the numbers from when the property was leased and what the property would have easily sold for, he realized he instantly lost at least $500,000 when the tenant decided not to renew the lease and vacate.

Why is this?  Well first off, commercial investment properties are great when they are leased because businesses don’t like to move and risk losing clients or customers.  Because of this, and with the added expense of moving, many tenants may pay a little more than market just to stay put.  On the flip side though, when the property does go vacant (and they ALL do at some point), it can be months or even years to find another business to fill that vacancy.

Investors pay less for vacant properties because they have to price in anticipated vacancy (this can be very hard to determine!), holding cost (taxes, utilities, upkeep, etc.), leasing fees, and any potential tenant improvement costs associated with bringing in a new tenant.  Adding these costs to a building that has no income drastically drives the value down.

So if you think selling may be in your future, it may be to your advantage to investigate selling while your commercial property is leased and has a good tenant in place.  If you wait until the property goes vacant, there is a good chance you may be disappointed with the market value of an empty building.

In a world that seems to be moving away from the personal touch and attention to detail, I am predicting a "swing to real" where people interact with people, bigger doesn't always mean better, and quality over quantity will have meaning again.   I have been working with Rizen Creative, and I knew they had figured out Story Commercial when they came up with this ad for me.  Cheers to small time!

5 Good Reasons You Need Representation

1.  Your Landlord wants you to pay more rent.
If you are negotiating directly with your Landlord or their representative, remember that they look after the Landlords’ best interest…not yours.  They will use any information they have at their disposal to negotiate the best deal for the Landlord, which often means higher rent and more restrictive lease terms for you.  Protect yourself and a professional to look after your best interest.

2.  Use market conditions to your advantage.
A commercial real estate professional can help you look at all the options and give you market knowledge.  Most likely there are multiple properties that will suit your needs, why not put multiple offers out there and take the best one?  Even if you intend on staying in your current location, when your landlord finds out you have other options available and an agent working for you, they will be more likely to cut you a better deal.

3.  Negotiate favorable lease terms.
Landlords are not going to offer you the best lease terms, but if you hire a professional to help you, these terms can be negotiated directly into your lease.  Items like renewal options with predetermined rents, right of first refusal, free rent clauses, money for tenant improvements, or buyout clauses are some terms that could be negotiated on your behalf.

4.  Save your time.
Driving around and calling on signs is not the most efficient way to find space.  From a sign, it is hard to tell the size of the space, the price, the landlord motivation, or any other item that a professional may know about the property before calling.   Hiring a professional to assist you will save you time when they do the upfront leg work and present you with the properties that suit your needs, and help you through the contract negotiations. 

5. Peace of mind.
When the deal is inked, it is nice to know your best interests have been protected throughout the real estate negotiation process.  Knowing you are paying a fair rent and have a fair lease, gives you one less thing to worry about.

PS.  When you're looking for someone, you might as well hire the best and get a CCIM to work for you.

In various industries we use acronyms, nicknames, or abbreviations that don’t make sense to someone not in the business.  I decided to give you a cheat sheet of sorts for various commercial lease types common in the commercial real estate world.  It is important to read the lease and ask questions, because these lease types can mean different things to different people.  Not asking the questions, can be very expensive to you (landlord or tenant!).

Various Lease Types

Absolute Net (True NNN)
Tenant pays a base rent plus ALL expenses associated with the property…even capital improvements!  The NNN stands for net-net-net (taxes, insurance, & maintenance). Found most commonly in corporate retail leases and sale-leaseback transactions.

Triple-net (NNN)
Tenant pays base rent plus all operating expenses associated with the property. Typically excludes capital improvements. This means the tenant will be paying property taxes, insurance, and maintenance.  Found in many retail property leases (i.e. Walgreens, O’Reilly’s, etc.), newer industrial properties, and single tenant buildings.

Double Net (NN)
Tenant pays a base rent plus their share of taxes and insurance. This can also be the tenant paying taxes and maintenance or tenant paying insurance and maintenance.  Found occasionally throughout various property types.

Modified Gross (Mod Gross)
This is the most variable type of lease. Tenant typically pays a set rent plus some of the operating expenses.  I see this most often as tenant paying rent plus utilities.  This is a common lease structure for many, mostly smaller, properties from industrial, to office, to apartments.

Full Service Excluding Janitorial (FLSVEJ)
Tenant pays a set base rent plus any janitorial they may desire.  Landlord pays all operating expenses of the property excluding janitorial. Found commonly in smaller office properties.

Gross (Full Service, FLSV)
Tenant pays a base rent which includes all expenses.  Landlord is paying for all building operating expenses including janitorial service.  Most common in larger, newer office buildings.