Taking Advantage of a Tenant-Friendly Real Estate Market

by CoyDavidson on November 12, 2009

Houston Office Market CBD

For all companies, the effective utilization of real estate is an important factor in determining business success. As both a cost of doing business and an operational asset, real estate ultimately impacts the achievement of business objectives and the performance of business units.

Up until now, most recession-pinched companies have been too pre-occupied cutting employees or dealing with other economy-related problems to focus on their real estate and  were reluctant to make long term office leasing decisions. Preservation of capital and short term lease commitments have been the norm as tenants waited on a better picture of where their business and the economy was headed.

A sluggish recovery of the U.S office market is expected as result as job losses are expected to continue into early 2010, with significant job growth not projected until 2011 by most economists.

We are at the bottom of the recession and slowly starting to climb our way out. Historically the office leasing market typically lags changes in the economy by 2-3 quarters. As a result it could be 2011 or 2012 before we begin to see significant appreciation in rental rates. Of course this can vary from market to market as certain regions have been battered more severely than others.

What is clear now is that Landlord’s suffering from declining or flat lining rental revenues are getting much more aggressive with their economic packages to retain existing tenants and lure new tenants to their projects. Tenant concessions of lower rents, free rent and liberal tenant improvements allowances are becoming increasingly more substantial.

For many companies current market conditions create the opportunity to:

  1.  Reduce Real Estate Costs
  2.  Lock in lower lease rates for the long-term
  3.  Align real estate use with changes in business practices

Real Estate plays a major role in three important business drivers

Finance: Real estate impacts cash flow, operating expenses, profitability, financial ratios and metrics, liquidity, debt and financial reporting

Operational Flexibility and Control: the ability of a company to move expeditiously to expand, contract or take a new product to market is either enhanced or limited by real estate

Productivity: Real estate impacts productivity in terms of: the promotion of employee collaboration, morale, privacy, access to resources, employee comfort, health, safety and recruitment and reflecting the desired company culture.

The office market is out of equilibrium and it is clearly a tenant’s market. Companies with leases expiring in the next 24 months should begin to investigate the possibilities today while this window of opportunity exists. There are several important reasons not to delay this evaluation:

  • The real estate process takes more time than most people realize.  As much as 12 months can be required to: (1) develop the project criteria to ensure real estate use is in aligned with business operations; (2) identify potential matches in the market; (3) perform due diligence on qualified alternatives; (4) establish negotiating positions with landlords; (5) negotiate a lease; (6) review legal documents; (6) execute a lease; (7) complete a space plan; (8) build-out or retrofit a space; (9) coordinate relocation; (10) occupy
  • Even if your lease does not expire for 24 months, it does not necessarily mean your real estate situation can’t be improved. Many landlords are amenable to listening to blend and extend scenarios. When all factors considered re-negotiating or relocating before expiration may be economically attractive.
  • Starting early deprives the landlord of delaying negotiations until it is too late to find, negotiate, lease and occupy alternative space
  • The market is in the tenant’s favor, while nobody is suggesting a quick market recovery; any improvement in the market will make negotiating the most tenant favorable lease more difficult and the liberal landlord concessions will diminish.

Taking advantage of current real estate market conditions is prudent for the forward thinking company. Start the real estate process early and utilize a qualified tenant representation team. Position you’re your company  for improved performance by making real estate a primary contributor to your business success, rather than just a place to do business and a cost of doing business.

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