“Driving Value with Corporate Real Estate” – Part 2 of a Three Part Series

by CoyDavidson on April 7, 2010

For all companies effective space utilization of their real estate is a key factor. In part one of this series, I discussed occupancy cost reduction through right-sizing your real estate portfolio. There is a tendency particularly in an economic downturn to look at real estate solely as means for cost cutting initiatives.

As a cost of doing business and an operational asset, real estate ultimately impacts business performance and taking a more long term strategic approach can yield significant financial benefits.

Capitalizing on Market Conditions

As economies in the region and around the world move towards recovery in 2010 and 2011 there is still a lot of speculation about the timing, velocity and depth of the recovery. Commercial real estate’s cyclical nature makes predicting market swings a challenging proposition. Historically the commercial real estate markets lag the general economy by 2-3 quarters. Recent economic indicators would suggest the economic recovery is gathering momentum and that the office, industrial and retail markets have begun to stabilize.

Now, is the time to evaluate all of your real estate assets and lease obligations for strategic opportunities created by the current economic climate.

Early Renewals / Blend & Extend: Lease rates are generally down 10-30% depending on the market.  If your current lease rate exceeds current market rents and your preference is to stay at your current location, the timing could be right to have your broker approach the Landlord about an early renewal or blend and extend transaction. Depending on your Landlord’s asset structure and your negotiating leverage with the building owner, the opportunity to extend the lease with very attractive terms may exist.

For any lease obligations maturing in the near term, be sure to conduct an exhaustive evaluation of the market with your real estate service provider and create stiff competition for your tenancy in order to achieve the best leasing terms.

Evaluate Purchase Opportunities: Like rental rates market values for commercial real estate have decreased over the last couple of years. In addition, interest rates are at all time historical lows. The decision to own your real estate is typically a long-term decision. The correction of values created by the recent recession may create some outstanding opportunities to buy at a much lower cost of occupancy.

As the market improves in the future, the opportunity to monetize purchased assets through a sale-leaseback transaction could yield very favorable returns when property values appreciate to much higher levels.

File for Property Tax Reductions: If you own any real estate assets, the opportunity to appeal your assessed values and reduce your ad-valorem tax liability should exist. Consult with a property tax professional who can identify opportunities and guide you through the appeal process.

Your real estate services provider should be discussing the opportunities that exist in the marketplace created by current economic conditions. Looking at all your opportunities from re-structuring rental rates, locking into lower rates long term, locating suitable property at attractive values and mitigating your property tax liability, are all measure that can have positive impact on the bottom line. These opportunities will diminish as the economy experiences any degree of sustained recovery.

In Part 3, the discussion will focus on refining your long term corporate real estate strategy and processes.

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