Hire Us to Represent Your Property Because We Represent So Many Other Buildings!

“Hire us to represent your property, because we represent so many other buildings…and, we can tell about all of the leads at those buildings…to help you lease or sell your building quicker!”

In this day and age, when transparency and conflict avoidance are top of mind of almost every corporate executive, I am amazed that some commercial real estate brokers still use this tired and lame approach when soliciting property representation engagements.  What is truly amazing is, that given the above, some property owners still buy this line of trash!

Some brokers actually tell property owners that they should hire those brokers because the brokers represent a lot of other buildings and will share with them the leads that the receive on those other buildings.  That is a very common pitch!  Those brokers make claims like:

• You’ll have our complete attention (How is that possible?)
• Because we represent so many buildings in the local market, we see every tenant (Will you share my leads with other landlords?)
• We’ll tell you everything that’s going on in the market (Will your other clients mind?)
• Sign with us, and you’ll have a greater chance of making more deals (More or fewer deals?)

So, let me understand this:  Some property owners are actually comfortable not receiving true representation, the kind of aggressive and objective expertise designed to protect their interests, beat their competition, and help them succeed…the kind of service to which the broker representation agreements the sign actually entitle them?

Instead, they’re ok with their buildings being thrown into a large pool, so when a tenant jumps into that pool, if the property owners’ lucky number just happens to pop up, or if the broker overseeing that pool decides it’s that property owner’s turn, only then would they get a shot at that deal?  Is that really what they’re signing up for?

Do these property owners recognize that while they’re enjoying the supposed benefits of so many more leads that come from throwing their buildings into that very large pool, that some buildings or property owners will drown?  Do they think that brokers offering this service will favor them, and that all of the other property owners who were promised the same access to “all of the leads” won’t be clamoring for the same tenants?

Have these property owners considered that while they’re feeding on all of those supposed leads generated for them by all of those other buildings, that leads for tenants or buyers who may be sincerely interested in their buildings, will also be thrown into that pool, thereby possibly diminishing their likelihood of success?  Do they see that those tenants and buyers may be pulled from that pool and rescued by some other property owner at another building?

Is this true representation?  Isn’t this approach a blatant conflict of interest?  Do many property owners actually accept this approach?  Do the best brokers offer something better?

About Real Estate Strategies Corporation

Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations.  Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.

In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate.  The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery.  Visit www.RealStrat.com.

Read about timely commercial real estate issues at RealStrat’s blog at www.CorporateAdvisor.wordpress.com. Follow RealStrat at http://www.Twitter.com/RealStrat.

LINKS:

RealStrat News
Biographies
Articles
Properties
What Our Clients Say
AndrewZezas.com

For additional profiles, pictures, and more click here or go to http://realstratnews.wordpress.com/media-information/.

Copyright Real Estate Strategies Corporation 2011. All Rights Reserved.

###

Instincts and Communication Win the Day!

A broker friend of mine from the Chicago area recently had a client who was incredibly busy, often too immersed in growing its business to fully focus on its real estate project, even though the client knew that its real estate project was important to its continued success.

Throw in a few everyday business challenges, a horrible economy, and a couple of summer vacations, and you can imagine how tough it might have been for this very attentive and experienced broker to keep his client’s real estate project on track.

As the broker strove to build momentum in the transaction, the client wasn’t making important decisions and milestones weren’t being achieved.  This took place while the project was still in its early stages and even though the client confirmed its desire to complete a deal.

The broker struggled to understand why, after being in the business for over two decades and after advising hundreds of clients, he couldn’t corral this one single client and move this project forward. So many questions entered his mind, including:

• Was the client still just too busy?
• Were they having second thoughts about proceeding with the project?
• Had something drastic happened in their business?
• Was the client’s company being acquired?
• Were they being sued?
• Were they talking to other real estate service providers?
• Had they succumbed to the landlord’s constant attempts to deal with them directly, in order to disintermediate the broker and increase its own profits?

The broker went over and over all of the various reasons why he couldn’t bring his client’s project forward, struggling to understand why.  He reminded himself of the rock solid representation agreement between he and his client, so he wasn’t concerned about other brokers or even the landlord getting in his way. But, what could it be that was keeping this deal stuck in the mud?

And, then it happened…the “aha!” moment. The broker instincts kicked-in when he realized that the executives with whom he was dealing had little experience in completing real estate transactions.  What if they didn’t understand how something, a deal component perhaps, is supposed to work?  What if they misunderstood some of his guidance?  What if they were concerned about risk, excessive costs, or other terms that, because of their inexperience in commercial real estate, they misinterpreted as becoming their burden?  What if they were unaware about how the broker would deal with some or all of those issues, which obligations they’d have to bear, and which would fall to the landlord?  What if, because their project’s foundational objectives were cost containment and reduction, they thought the project would be too expensive because they misinterpreted the details? What if, like too many seasoned and accomplished executives the broker had dealt with in the past, these executives were too embarrassed to say they didn’t understand or were to egocentric to admit that they didn’t know how a real estate project was supposed to work? What if? What if? What if?

Wow! Could it really be that simple! Could it be that the stalling, the delays, the inactivity, and the complete lack of momentum resulted only from simple miscommunication or misunderstanding?

The broker trusted his instincts and called his client. His opening line was: “I’d like to review how the landlord will probably bear most of the financial burden and risk in your proposed transaction.” Was he ever right on target! Despite the detailed written report the broker provided his client that explained how the transaction would be structured, his client incorrectly thought it would have to bear most of the financial burden. And, the senior executive, a bright and intelligent guy, was too embarrassed to ask. Go figure!

Guess what? The project is moving forward now at an appropriate pace. The broker expects to wrap-up a deal shortly that will greatly reduce his client’s costs and improve its operating efficiency, thereby exceeding the client’s original objectives. And, the client will bear few, if any, transaction costs.

It wasn’t the terms or the broker that held-up the deal. It was simply human nature, a missed communication by the client, a a little bit of ego that was getting in the way. Strong instincts, experience, and proactive communications often win the day, and go a long way in successfully advising tenant clients!  In this case, that’s exactly what they did!

About Real Estate Strategies Corporation

Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations.  Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.

In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate.  The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery.  Visit www.RealStrat.com.

Read about timely commercial real estate issues at RealStrat’s blog at www.CorporateAdvisor.wordpress.com. Follow RealStrat at http://www.Twitter.com/RealStrat.

LINKS:

RealStrat News
Biographies
Articles
Properties
What Our Clients Say
AndrewZezas.com

For additional profiles, pictures, and more click here or go to http://realstratnews.wordpress.com/media-information/.

Copyright Real Estate Strategies Corporation 2011. All Rights Reserved.

###

Do Tenants Really Need Brokers When Negotiating Lease Renewals?

Do Tenants Really Need Brokers When Negotiating Lease Renewals?  Short answer?  OF COURSE THEY DO!  

Less sophisticated landlords have difficulty with the concept that a tenant, a company who has occupied space in a landlord’s building for 3, 5, or maybe even 10 years, would wish to engage a commercial real estate broker when it comes time to renew their lease, expand, or engage in some other transaction.  

So, riddle me this:  How is a renewal transaction so different from an initial transaction, such that in a renewal the tenant would not require the same intelligence, market and transaction knowledge, experience and expertise that can be provided by a tenant advisor?  Especially, nowadays, when corporate executives are held to very high standards of ethics, transparency, and disclosure, when boards of directors and other stakeholders demand that companies seek the best alternative transactions and select only those that are most beneficial, how could any company agree to renew a real estate lease without being properly advised by a qualified third-party professional?   

Don’t lease renewal transactions contain the same components as initial leases?  Don’t decisions have to be made about important questions like: 

• How much square feet does the tenant really need? 
• What kind or configuration of space in what location would best serve the tenant’s business needs? 
• Will the tenant’s space need to be modified to support changing business criteria? 
• How much will interior improvements cost and who should pay for them? 
• Should the tenant secure expansion or consolidation rights? 
• Are other rights or options required? 
• How will operating expenses and real estate taxes be addressed? 
• What length of term would provide the tenant with the right balance of cost, flexibility, and overall value? 
• What is the optimal rental structure that would support the tenant’s needs? 
• How might free rent play into renewal negotiations? 
• What other concessions and incentives should the tenant seek? 
• How will competitive market conditions affect negotiations and the terms the tenant could ultimately achieve? 
• What is the building’s real occupancy and vacancy ratio?  How does that stack-up against other comparable buildings? 
• How has the building’s tenant mix evolved during the initial term, and how might that affect the tenant if it renews? 
• What is the financial condition of the building and its landlord? 
• How seriously should the tenant consider relocating to other buildings?

 ….and, that’s just the beginning!

So, do tenants require the same expertise and insight when contemplating lease renewal vs. relocation?  You bet?  Is it in the landlord’s best interest to circumvent the tenant’s real estate representative and attempt to deal directly with the tenant?  Not really.  Most corporations prefer to be objectively advised by a service provider whose role is to protect the interests of the corporation.  And, frankly, a landlord who will profit from a transaction with a tenant just can’t do that.  Moreover, when a landlord attempts to by-pass tenant’s real estate advisor, tenants don’t appreciate it and often view that landlord negatively. 

What do you think?

Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations.  Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.

In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate. The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery. Visit www.RealStrat.com.

Acquire new ideas about commercial real estate at RealStrat’s blog at www.CorporateAdvisor.wordpress.com.   Follow RealStrat and Andrew Zezas at http://www.Twitter.com/RealStrat.

Check out The Executive’s Guide to Understanding Corporate Real Estate Transactions.

Where is Andrew Zezas?

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved. 

###

Would a Landlord Really Kill a Deal Over Broker Fees?

I recently had lunch with a fellow commercial real estate professional who lamented  about how some old-fashioned commercial landlords he’s encountered will let a real estate transaction die, or actually kill it themselves, rather than pay a real estate commission on terms that they don’t deem appropriate.  I was amazed to learn that there still exists some of those landlords.  I thought they all had died off.  What these landlords, the type to which this real estate broker referred, often consider acceptable is a substantially lesser commission amount than requested by most real estate professionals, and one that they can pay via an extended series of payments over a very long time period.

The idea behind the long-term payment schedule is most often two-fold:  One is purely cost and cashflow management (Some will say it’s merely a way to make life difficult for brokers – I’m not that cynical!) .  The second is a means of sharing with the broker the risk that the tenant may not perform (pay rent!), default, or breach the lease.

Mind you, the real estate professional with whom I was chatting is no slouch.  He’s not one of those whiney “How come I don’t make enough money? – The world owes me a living! – All landlords are out to get me!” types.  He’s a respected, accomplished pro, who knows his stuff and works for a nationally recognized commercial real estate brokerage company.  In fact, a large part of his company’s practice includes representing commercial landlords.

I found it very interesting, based on what this broker told me, that in the year 2010 some landlords would rather put a transaction at risk, possibly lose a deal, before they agree to pay a market rate commission.  And, why?  The best landlords see real estate professionals as beneficial to transactions and seek to compensate them fairly.  The most successful landlords quickly dispense with  issues as minor as commission payments and agree to reasonable terms that are in-keeping with local customs.  Those landlords, the intelligent ones, recognize that losing 100% of a good deal never makes sense, especially if the reason is because of too great a focus on commissions, which in almost every case, represent  a very small percentage of transaction costs.   The best landlords by-pass that stuff and almost immediately train their energies on making the deal by negotiating favorable terms with prospective tenants.  Isn’t that what it’s really about anyway?

Let me clarify one thing.  Unlike many other commercial real estate brokers and advisors, I am not of the mindset that every landlord, every tenant, and every transaction must include real estate professionals.  If a landlord or tenant has the resources and the inclination to negotiate on its own behalf without engaging representation, then it should  do so.

And, another thing!  As for dealing with brokers and other real estate professionals, this is America, pal…land of the Free!  Despite many opinions about the current federal government becoming socialist, this is still a free country!  And, any landlord, company, or individual is free to conduct their business as they see fit.  A business person is allowed to agree or not agree to do business with whomever she chooses.  She can choose to pay any price for any service, so long as someone will sell it to her for that price.  That goes for landlords, tenants, brokers,  and commissions, too.

While we were at lunch, my friend commented that some landlords, no matter how outdated their approach may be, will often do almost anything they can to pay lower commissions, to pay those commissions over extended time periods, and to put those commissions at risk in the event tenants default.  I guess it is a landlord’s right to do that…isn’t it?  But, suggest to some of those very same landlords that they should pay commission rates that are higher than what may be customary, and watch the fireworks!  Can they have it both ways?

I get that some landlords believe tenant brokers don’t work for them and that those brokers should be paid by their tenant clients.  I’ve written about this topic many times.  My answer to that is:  When all the landlords and tenants get together to change how brokers’ compensation works, and when tenants elect to take-on the obligation to compensate their real estate advisors, I’ll be out in front of that discussion.  If that change ever occurs, landlords and brokers will finally get past this issue, certain landlords will stop pressuring tenant brokers, and the entire commercial real estate industry will be more in balance, will operate more efficiently, and will be able to focus on structuring more creative transactions.  Until that time, let’s stop wasting time…we’ve got clients to represent!

Since America is a free country, isn’t it also true that real estate professionals can choose who they do business with, how much they get paid, when, and what risks they’re willing to accept for the services they deliver?  The answer is a resounding “Yes!”, so long as the real estate professional acts in accordance with his client’s knowledge and approval, and so long as he adheres to the terms of his State’s licensing regulations and requirements of conduct.

So, why would any landlord…any intelligent business person…risk 100% of any transaction because of a commission…a small percentage of any transaction?  I never have figured that one out.  There has got to be more to this story!  What am I missing?

What do you think?

Follow me at http://Twitter.com/RealStrat

Where is Andrew Zezas?

Check out ‘2010: More Business, Now!’

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved.

Short or Long Term Leases…Which Make More Sense In The Current Economic Climate?

Uncertainty about the economy, about business and sales, about the real estate market, all suggest that companies should enter into short-term leases as a means of protecting their ability to remain flexible.  For some companies, short-term leases are the right approach.   However, when seeking to renegotiate leases as a means of extracting liquidity and mitigating risk, short-term extensions offer little value to landlords.  Consequently, in those instances, short-term leases would similarly provide little value to tenants.

Like the Phoenix rising from the ashes, uncertainty and chaos breed opportunity.  The greatest elements of wealth are often created in down markets.  Those who carefully plan, are prepared to take action, and then execute intelligently, tend to achieve beneficial outcomes while others scramble to survive.

Given the extreme lack of demand for leased office space in most U.S. commercial real estate markets, landlords are keenly interested in attracting tenants, and retaining those they already have.  With the right advanced planning, most landlords can be inspired to structure creative transactions that permit them to capture new tenant leases and restructure existing leases, thereby increasing the occupancy and cash flow in their buildings, while supporting the business and flexibility needs of those tenants.

Remember that everything has a cost.  The benefit to a tenant of a short-term lease strategy is the flexibility that results from not being bound to a lease term beyond a particular horizon.  Flexibility can be extremely valuable in business, but costly.  The price?  With short-term leases, it can often be difficult for tenants to secure low occupancy costs.

When prices are low in any commodity, the smart money stocks up and buys more for future use.  That’s true in commercial real estate, too.  By executing longer term leases, tenants create their own benefits, while providing landlords with the fuel they need to accomplish their financial objectives.  With longer term leases, landlords can, in turn, provide benefits to tenants that make such transactions profitable for both parties. 

So, what’s the cost of a longer term transaction, where a company would likely achieve lower occupancy costs?  In a traditional long-term lease, that cost might include less flexibility.  Most companies don’t really need the complete and total flexibility they seek, and usually end up overpaying for the privilege.  

Which makes more sense…long or short-term leases?   There is not one correct answer.  It really depends on the needs of both tenant and landlord.  Advanced and intelligent business planning and a keen understanding of commercial real estate markets, as well as, knowledge about the unique challenges faced by commercial landlords, is the best approach for companies asking themselves whether short or long-term leases make more sense in this challenging economic climate.

What do you think?

Follow me at http://Twitter.com/RealStrat 

Where is Andrew Zezas?

Check out ‘2010: More Business, Now!’

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved.

Who Really Pays Commercial Real Estate Brokers’ Commissions?

Traditionally, commercial landlords have cut commission checks to real estate brokers when lease transactions are completed, whether those brokers represented the landlords or the tenants.  Landlords proclaim that because they cut commission checks, using their own funds (or, funds provided by their lenders), that they pay commissions.   That’s a logical argument.  Many landlords believe that because they don’t receive value from brokers or advisors who represent tenants, that tenants should pay the commissions due their representatives.

In contrast, many tenants believe that because landlords only cut commission checks when tenants sign leases, and that since landlords expect to be reimbursed for commissions through tenant rental payments, in actuality it is the tenants who really pay all commissions, not just those due their representatives.

So, who is right?

Follow me at http://Twitter.com/RealStrat 

Where is Andrew Zezas?

Check out ‘2010: More Business, Now!’

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved.

Landlords Don’t Need Tenant Representatives!

“Boil them in oil!” “Bring me their heads!” “Hang them from the gallows!” “Don’t pay ’em a dime!”

Given the often fiery relationships that exist between landlords and tenant real estate advisors, one can envision high-powered landlords sitting behind large desks waiving their cigars and pounding fists in the air, decrying the fate of their arch enemies, those lowly tenant representatives.  While some landlords wish for all tenant representatives to sink to the bottom of the ocean on that same ship where many suggest we should put all the lawyers, the best landlords recognize the value a good tenant representative brings to a lease transaction.  Of course, some landlords, not the best-in-class, prefer to have no one between them and their prey, so they can feast on their opponents and extract maximum benefit on their own behalf.

However, the most successful landlords recognize that they actually need tenant representatives in order to achieve their own objectives.  They know that many companies are now operating with smaller management teams and the need to remain transparent.  For most tenants, it would be unacceptable to negotiate a real estate transaction directly with a landlord, their transactional opponent, without the benefit of objective third-party advice.  This is especially true, given that most companies, whether public, private, or owned as part of a portfolio, are operated for the benefit of others…owners, investors, stakeholders, beneficiaries, charities, and so on.  As such, given the fiduciary responsibilities most management teams must bear, being objectively advised before they negotiate, what are most often, multi-million dollar real estate transactions, is the only way they will proceed.  And, seasoned, quality landlords get that.

Professional landlords recognize that a great tenant representative will guide its client through the thinking and planning stages prior to engaging in discussions or negotiations with the landlord.  The result is most often a significant savings of the landlord’s time and resources in having to educate the tenant as to market conditions, transaction structure, how to distill operating needs into real estate transactions, and more.  The approach taken by professional tenant representatives actually increases the likelihood that landlord will make quicker deals. 

By the time a tenant who is advised by a tenant representative engages the market, the tenant can be expected to have completed its planning, will better understand its objectives, and will be better able to make internal decisions.  Accordingly, as a result of the information gathered under the typical tenant represent process, landlords are most often better able to satisfy the needs of prospective tenants and can better arm themselves to negotiate terms and successfully complete transactions.

While many landlords blame tenant representatives for lost transactions, increased cost, decreased revenue, and more, the most successful landlords realize that they benefit when tenant’s engage their own representatives.  They also know that, while engaged to protect the interests of tenants, tenant representatives indirectly create value for landlords, as well.

Follow me at http://Twitter.com/RealStrat 

Where is Andrew Zezas?

Check out ‘2010: More Business, Now!’

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved.

We Have Tenants and Buyers for Your Building…So, Hire Us As Your Agent!

“We have tenants and buyers for your building….so, hire us as your agent!”  That’s the kind of low-level pedestrian trash that some commercial real estate brokers still sling when pursuing opportunities to represent properties for lease, sublease, sale, or otherwise.  What’s really amazing is that some property owners and sublandlords actually still buy that load of garbage!  Professional landlords most often see right through this lame old excuse for a pitch.

It is most unfortunate when brokers use this approach, because it perpetuates many of the stereotypes of the commercial real estate brokerage industry, including those about brokers being liars, cheats, and thieves.

When approached by a broker making such claims, property owners may wish to turn and run, or at least ask the following questions:

• Since we would pay you a commission whether you represent us or your tenants, why haven’t you brought us your tenants already?
• Are you holding your tenants hostage until we hire you?
• Are your buyers so focused on you that they won’t even visit buildings until you get hired by those buildings?
• Will your buyers only acquire buildings when you represent their opponents?
• If you represent tenants and then you get hired by us, wouldn’t that pose conflicts of interest and create a serious impediment to your ability to protect either of us?

Forget this tired approach!  When seeking to engage a real estate professional to lease or sell your buildings, find the service provider who can prove that they:

• Have recent success in leasing / selling buildings like yours
• Have completed multiple transactions (sublease, lease, sale, other), similar to what you seek to achieve
• Understand how your building can effectively compete in the local market
• Recognize how to price your building against comparable buildings to ensure a timely and profitable transaction(s)
• Are sufficiently versed in current issues about leases, capital markets, lending, and more
• Can uncover value and exploit the unique benefits of your building to accomplish your objectives
• Can devise and execute a marketing approach that will place your building ahead of its competitors
• Will dedicate the needed resources to execute your project in a timely and profitable way
• Will communicate with you, and to others on your behalf, frequently and effectively
• Will work diligently and honestly to achieve your objectives
• Are respected in the local market
• Can and will guide you about how best to achieve your objectives

Forget the BS.  Select a representative who is competent, who knows your type of property and your market, who can prove both their previous successes and how they will work hard to accomplish your objectives.  It’s that simple!

And, for those times when a broker says that the reason you should hire him is because he’ll share with you the leads he gets on other buildings he represents…see last week’s post!

Follow me at http://Twitter.com/RealStrat

Where is Andrew Zezas?

(Watch for news on a series of 12 webinars on timely commercial real estate topics that we’ll present in conjunction with NAR Commercial, beginning on February 24, 2009!)

When Will Commercial Leasing Recover?

Again and again, we’ve been asked “When will commercial leasing recover?” Brokers, investors, developers, lenders, and reporters, are all desperately searching for the answer.  While this is a reasonable question, especially given how much of the global economy depends on the success of commercial real estate, the answer is uncertain.

A better question would be “When will the economy truly recover and achieve balance?”  Because commercial real estate is so dependent on economic drivers (purchasing, hiring, growth), the answer to the real question can be found in the speed and depth of the economic recovery.

Job growth directly correlates to demand for office space.  Specifically, experts anticipate increases in demand for commercial office leasing to occur when companies stop laying-off employees and other companies begin hiring again.

Demand for leasing of distribution and warehouse space will occur along with an increase in demand for consumer and business goods.  When businesses and consumers begin to spend on a consistent and growing basis again, the need for distribution and storing of those goods will increase. Correspondingly, demand for distribution space will also grow.

Spending will certainly have a positive impact on retail real estate leasing, as well.  Although, some believe that the retail real estate market in some parts of the country, as a whole, may have excessive over-supply, such that it may not be absorbed for a long time after a recovery takes place.

Consumers will increase spending when their jobs appear to be more stable, when their futures begin to look bright again, and when the economy shows signs of consistency and stability, again.

So, it’s really all about jobs, isn’t it?  A lot must take place in order for companies to begin hiring again.  Important issues like the availability of capital and credit, the interplay of global economies, taxes, healthcare, geopolitical matters, and more, must show light at the end of their respective tunnels before confidence can returns to companies, investors, and consumers.

 “When will commercial leasing recover?”  Simply put, commercial real estate continues to be a lagging indicator of economic conditions.  As such, we expect increased demand for commercial real estate leasing to occur three to nine months, or more, after the overall economy strengthens in earnest.

What do you think?

Copyright Real Estate Strategies Corporation 2009.  All Rights Reserved.

Should Real Estate Brokers Be Responsible to Validate Tenants’ Risk and Creditworthiness?

In today’s tumultuous economic times, landlords need to accurately determine the creditworthiness and risk profile of new and existing tenants.  Whose responsibility is it to make such a determination…the landlord or the tenant’s broker?

In previous blog posts I’ve discussed the issue of landlords seeking to pay commissions at rates and on terms deemed to be less than favorable by many brokers, especially when those landlords perceive tenants as not being creditworthy.  A reader commented that, as part of the reason for receiving commissions, commercial real estate brokers should be responsible for evaluating the creditworthiness of the tenants they represent.  At first, I was a bit surprised by that one.  Given that this particular reader was from an institutional type of commercial landlord, I understood his mindset, nonetheless. 

The reader’s desire was to secure third-party analyses of the creditworthiness of prospective tenants for his buildings. However, his idea of forcing that responsibility onto commercial real estate brokers is a dangerous one.  Real estate brokers as credit analysts?  Moreover, I saw his comment as a landlord’s desire to transfer its obligations and risk to another party.  Of course, if a broker were to take on such a responsibility, you can bet your hat that a landlord would also place the liability of accuracy on the broker, too!

So, should commercial real estate brokers be responsible to validate their tenants’ creditworthiness?  Here’s a better question: 

Are commercial real estate brokers QUALIFIED to evaluate their tenants’ creditworthiness, financial viability, risk, and ability to perform under their leases?

Credit analysis is not an easy task, especially when it comes to privately-held and private equity owned portfolio companies.  But, brokers as credit analysts?  Placing such an important component of deal making as risk analysis in the hands of commercial real estate brokers would be an extremely dangerous move for all involved, and would not likely minimize risk for landlord or tenant.

There exists an entire industry dedicated to analyzing companies and their ability to sustain and perform their financial obligations.  Perhaps landlords should rely on these qualified independent third parties to analyze the credit of prospective tenants.  Those experts are versed and capable of conducting such risk based assessments and properly reporting their results.

New insurance based third-party analysis and credit guarantee products are beginning to emerge in the marketplace as a means of evaluating tenant creditworthiness.  These combination services and products promise to provide commercial landlords with the qualified risk analysis they desire along with alternatives to security deposits and guarantees.

Demanding third party credit and risk analyses can be a slippery slope for landlords, as tenants may demand similar analyses of landlord creditworthiness.  This could pose particular challenges for landlords, given the financial struggles that many landlords are experiencing in the current economic climate. 

So, should landlords be entitled to accurate assessments of tenants’ risk before entering into transactions?  You bet! With an entire financial services industry dedicated to risk analysis, should commercial brokers provide such services?  Absolutely not!

What do you think?

Copyright Real Estate Strategies Corporation 2009.  All Rights Reserved.