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Commercial Real Estate

Right or wrong – tenants may not have as much leverage as they think

Writer debut

Justin Bedecarré is an Associate at Cushman & Wakefield one of the most well known commercial real estate firms, working in downtown San Francisco in one of the top producing offices in Northern California. Justin has an impressive roll of tenants he has represented including Citigroup, Sony Music, Wells Fargo, Bank of America, and Hearst Corporation to name a few.

Justin is respected for breaking the boundaries of traditional commercial real estate and was awarded “Rookie of the Year” for C&W. He studied economics and political science at the University of California, Berkeley and previously worked with the Home Builders Association of Northern California. Justin is an up and comer in the industry and is one to watch. We proudly welcome him to Agent Genius and ask you to welcome him in comments!

Leasing makes the world go ’round

Leasing makes the world go ’round (at least the commercial real estate world). Especially in a severe downturn, owners (whether institutional or otherwise) are going “back to the basics.” This means investing in leasing. In this time honored tradition, the battle of tenants versus landlords rages on.  Each side tries to gain the upper hand in every negotiation. Leverage can be obfuscated as the economy emerges from a great recession.

Most people presume leverage has shifted to tenants in today’s market. Unemployment is 9+% nationally, and by some estimates will remain at this levels through 2011. Approximately $350 million in commercial loans will mature annually for the next 3-5 years. The commercial real estate business lags the bottom of the stock market and overall economy by several quarters historically. There seems to be a lot more ammunition for tenants to continue suppressing rents and demanding concessions.

However, this isn’t the case everywhere. There are a lot of mixed messages for companies. Frankly, there is a lot of confusion in the brokerage community as well. I am going to wear my tenant broker hat and show why that is and how to overcome it.

How to overcome

Some sectors of commercial real estate markets are tightening up. There has been a flight to quality as rents dropped, so companies capitalized on the opportunity to upgrade their image with higher quality space. Companies have shrunk and start-ups have been created, so the spaces for under 15,000 sf have become more competitive than before. Technology companies including social media and cloud computing are emerging with velocity and the larger tech firms are getting larger.

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These trends create competition among a specific type of office space. Surprisingly in this market, for some tenants, it will be hard to find space and Landlords will be obstinate on pricing. When a Landlord says they have the only space in town like it, tell them that your client doesn’t need it. The point is to not throw your arms in the air and give in to the high rates or gripe about their irrational rent expectations. Rather, be more flexible to look at alternatives. Companies are more amenable to change than you think.

It is pivotal to understand the complexities of leasing and how the macro economic factors affect the cre market. Companies see that unemployment is high, buildings are being foreclosed, the market is at the bottom. They do not see vacancy rates in Class A vs Class B, view space analysis, or sub-market differentials.

You can explain why a 5,000 square foot creative user cannot find space that they originally envisioned, or why a large law firm may need $150 in tenant improvements and the Landlord just can’t fund it. The major factors that have both saved the commercial real estate market and also kept the Landlords optimistic was the supply constraint (in most markets across the US). Granted, the sublease space that is perpetually coming to the market adds supply and dilutes demand, but the space has to be a specific fit for a company to absorb it.

Brokers are over promising

Too many brokers are over promising, and we have to recognize that companies rely on us for education as much as negotiation. The major markets are mounting a comeback in some sectors but still reeling in others. Whether you represent an international, institutional client or a small local company, the specific market expertise of the cre market play an equally crucial role in the successful management of a real estate portfolio or a one-time transaction. I represent both sides of the spectrum of tenants, and market assumptions need to be met abruptly with real estate expertise and some empathy.

Capricious claims of higher rents and strong market conditions should not be supported with capitulation, unless they are justified by exhausting all alternatives. Companies need to be more creative or better apprised of what to expect, and willing to do something different. Maybe then the once highly demanded feature of a building will become less desirable and more affordable, or maybe the next group will swoop right in and pay the higher rents. All the while, you save your client $100,000 annually on a 10,000 square foot space and they get to invest in more human capital. Now you have played a part in growing the economy while helping your client with their bottom-line and keeping their brand intact.

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CC Licensed image courtesy of The Truth About via Flickr.com.

Written By

Justin Bedecarré is a broker at Cushman & Wakefield in downtown San Francisco representing local and multi-market tenants including Wells Fargo, Marsh & McLennan, Gensler and Broadcom. He is also a blogger and co-founder of the Bay Area Commercial Real Estate Blog (www.bayareacomre.wordpress.com), UC Berkeley alum, avid Cal football fan and fifth generation San Franciscan.

20 Comments

20 Comments

  1. Dan

    June 23, 2010 at 5:42 am

    Hi Justin, welcome to Agent Genius!

    I’m not an agent myself – we’re just minimally involved in a small time commercial leasing arrangement. Will this apply to smaller spaces?

    Thanks

  2. Duke Long

    June 23, 2010 at 6:11 am

    Justin,
    Welcome to AG. Great article. Looking forward to your insights,perspective and opinions.

  3. Erica Ramus

    June 23, 2010 at 7:46 am

    Welcome to AG Justin! I look forward to reading your posts.

    I just dealt with one obstinate landlord who lost 2 tenants within the past month. He didn’t see the economic reality of the market and now he has a huge vacant area in his building.

    One of the tenants found more space for less money. The other one more space and better location.

  4. Jonathan Benya

    June 23, 2010 at 12:14 pm

    Hey Justin,

    Welcome to AG! It’s great to see another writer on board!

  5. Coy Davidson

    June 23, 2010 at 1:22 pm

    Justin, glad to see you on AG bringing perspective to our niche of tenant representation. Managing client expectations regarding what is feasible in the marketplace is always important. With so much negative press regarding the economy, sometimes the perception is market fundamentals are worse than reality. Houston is a good example where negative absorption is less than most major markets and quoted rents are only off about 8% over the last year. There is certainly a bigger spread between and asking rates and where deals are getting signed and Landlords are certainly more aggressive with concessions to attract and retain tenants…..but they are not giving away the farm.

  6. Justin Bedecarre

    June 23, 2010 at 4:06 pm

    Dan,

    It depends on what market you are in. Feel free to give me a call or email and we can discuss. It San Francisco, the smaller spaces are being absorbed by start-ups and tech clients, so it is much more competitive which drives up prices. Thanks for the welcome note and comment. I look forward to talking with you!

    Justin

  7. Justin Bedecarre

    June 23, 2010 at 4:09 pm

    Duke, Erica and Jonathan, Thanks for the comments! I look forward to many more postes and conversations!

    Erica, that is the big risk for Landlords. We have seen them take big risks turning down deals in hopes of a better market. We will see if it pays off, but sometimes a bird in the hand is better than two in the bushes.

  8. Justin Bedecarre

    June 23, 2010 at 4:19 pm

    Coy,

    Thanks for your comment. We have seen large slides in rent over the past year but have slowed their downfall, and the ask and take rates have been closing, which helps manage expectations. Landlords are still offering free rent to keep the “face rates” high, but the competition I discuss in this article is contained in a few office types and economic sectors. In these spaces/buildings, some brokers have promised 10-15% rent hikes, which we think is unwarrented. But when it makes the paper, it must be true! Look forward to hearing from you soon, Coy.

    Best,

    Justin

  9. Dave Lewand

    June 23, 2010 at 4:49 pm

    #CRE | Great article, Justin! – first of many I’m sure. Kudos to AgentGenius and Cushman & Wakefield for their respective parts in making it happen. I look forward to being involved in future feedback surrounding your perspectives!

  10. Justin Bedecarre

    June 23, 2010 at 10:23 pm

    Dave,

    Thanks for your comment and I look forward to collaborating with you. Agent Genius has a lot of potential in the CRE world, and I am glad to be along for the ride and help get it to the next level. Stay tuned…

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