Making the Right Call in Today’s Real Estate Market
Too often in commercial real estate transactions the “what ifs” seem to paralyze people into indecisiveness. This inability to make sound decisions in a transitioning market affects everyone involved, including tenants, buyers, sellers and landlords. It is important to remember that when leasing or selling commercial real estate, no two deals are the same. Therefore, it is essential that each transaction is evaluated without emotion and with the advice of a commercial real estate broker who is familiar with the market.
The following are thoughts to tenants, buyers, sellers and landlords.
Do not become paralyzed by the amount of vacant space in your market. The overall vacancy rate is 20-25 percent depending on the locale. Yes, it is time to relocate or renegotiate with your current landlord; rental rates have declined to the point that a tenant can save significantly. Tour all the available options then select a space that has the best interior improvements and location for your needs. You will receive better lease terms the less the landlord needs to invest into your tenancy. Make a reasonable offer that does not offend the landlord, including providing financials that show the creditworthiness of your business. Formulate a plan B as some landlords are still struggling with true market rents and may not accept the reasonable offer being presented.
Understand your seller and don’t be paralyzed by the process. The process of buying a building is not difficult. The difficulty is maintaining the patience to see it through. Today, many of the sellers are either underwater on their loan or the property is a bank REO (Real Estate Owned). In either case it will take time for the seller to settle how to handle the bad mortgage debt on an upside-down property. When you find the right asset for your business, be resolved to know that it is going to take time to solidify the deal. Consider this to be an investment in both time and money for the future of your business.
Don’t be paralyzed by real sales prices. The number one factor in selling any asset today is sales price. If the asking price is perceived too high, many times buyers will not even consider the option as they study the market. Keep in mind, the property must appraise near the sales price regardless of the negotiated contract amount. If you are having financial issues with your property, communicate with the bank often. Get to know the asset manager that has been assigned to your loan. They are the link to approval when the offer to purchase comes. The bank does not want to own your commercial real estate; they would much rather sell than foreclose. Try to determine financial parameters that will be accepted by the bank prior to bringing the asset to market. Buyers should be aware that any offer needs to be approved by your banking institution. If these circumstances are not disclosed until later in negotiations, it can be a frustrating situation and trust will be lost in the transaction.
Don’t be paralyzed by past pro formas and the history of rent for your property. Too often owners are holding out for the higher rental rates of a few years ago and declining deals from tenants who are offering current, lower market rents. It is time to realize that rental rates have declined and our current commercial real estate market has become highly competitive. Be ready to react quickly; negotiate free rent and reduced rental rates and provide reasonable improvements. Today is about cash flow and surviving this downturn. It is acceptable to execute shorter-term leases so you will not be locked into this reduced rent for a significant time.
To capitalize on the current circumstances of the commercial real estate market, seek the knowledge of a well-informed commercial real estate broker in your market who is negotiating deals and understands trends on a daily basis. It is acceptable to ask for the broker’s credentials, such as requesting the number of transactions performed and the volume of deals closed. Choose a broker who focuses specifically on commercial real estate. Attorneys are also an integral part of the process. Choose an attorney specializing in commercial real estate who will represent you fairly and who also has the ability to deal reasonably with the other party.
The basic fundamental for anyone dealing in commercial real estate is to seek wise counsel.
Rob Beckner is a principal with LIGHTLE BECKNER ROBISON, INC. Commercial Real Estate Services.