Monday, October 18, 2010

Why Are the Landlords Too Sticky?

With rampant vacancy, recovery hard to see and empty space losing non-recoverable income why, many people have asked me, are the Landlords so darn sticky about doing a current market deal?  Since it is good to understand how the world looks to the other side of the negotiations, here are some of the perspectives and realities of the Landlord's view of the world – financial, emotional, and externally imposed on them. 

Financial considerations are of course a big deal – people own property to make money (when the markets are not doing their once a decade chaos dips).  You’d think that they want their building full.  Well, sort of.  Here’s the rub – there are two competing priorities; cash flow now vs. capitalized future revenue which determines future valuation of the building.

For current operating costs that rack up regardless of occupancy – loans, taxes, insurance, some base line of utility services – there is tremendous pressure to get deals done and generate cash flow.  Add to that the fact that each month of vacancy is money that cannot be recovered.  It’s a use-it-or-lose-it asset.   So while the vacancy rate is historically high, there are deals being done and a landlord doing market deals can secure tenants.  There are some big costs in securing new tenants – commissions, tenant improvements, often concessions around moving and transition costs – but there are deals being done.

So what about the other landlords?  Some are simply not in touch with the market.  They may be in denial, or so far under that they can’t muster the funds to secure the new tenant.  These are the walking dead. If someone who can’t come up with a reasonable response offers you a good deal to have you take on all the up front costs, beware and be sure to do a title search and get anyone with liens against the property to sign off, or your lease is at risk if they take the property back.

Some building owners have external constraints – lenders or partners that have agreements in place regarding approvals or previously defined limits of negotiation latitude for what the owner can do. In these cases if the person/entity that controls these constraints doesn’t want to do a deal or doesn’t understand the current market environment, the owner (a term loosely used in many of today’s building ownership structures) may feel good about you as a firm and want to do the deal, but just can’t.

The other side of the cash flow goal is the long term value goal – capitalization of revenue.  Without going into sleep inspiring detail, building values are tied to the capitalization of current and anticipated net operating incomes – a multiplier in essence of that net income resulting in a calculated value.  While this isn’t the only component of the value, it is a major component, especially when it comes to loan underwriting, since net income pays debt service.  So the rub is that a discount of a couple dollars a foot to meet the market means a capitalized value decrease of around $25 a foot.  If the basic deal is $20 full service deal, minus maybe $8 a foot in operating costs (mid-rise class B office building example) they can sit on the space for two years to get the extra $2 and still be ahead, assuming they have the cash to carry it.  That’s their dilemma.  If they hold out and eat the carrying costs anticipating the market firming up or a tenant that for whatever reason just really wants their specific space, they come out ahead on multiple measures – but it’s a real gamble.  It’s a gamble many owner’s are losing right now.

As a tenant what this means is to take advantage of the down leasing market it helps to have a broker that has your interest and needs at heart and who understands the landlords perspective and issues to get you as the tenant the deal that best suits your company.

Kevin Grossman represents businesses in their lease negotiations for office, flex-tech, and light industrial spaces in the Seattle, Bellevue and Redmond markets.  For complex projects he represents businesses as far away as Vancouver, Spokane, Bellingham and central Washington.  Clients report Kevin invests the time to listen and really understand their organization, ensuring they make an informed decision and he gets the right deal completed for them out of the process.

Thursday, October 14, 2010

Stay well during the leasing process

Over the years I’ve seen many very capable, smart, driven folks succumb to the malady of “well-being deficit disorder”.  It’s a rarely talked about unanticipated risk of having a full time job on steroids running your business - and then adding the decision making process for a business space lease on top of it. What are the symptoms and remedies, you ask?  Well…

One early sign is an increase in those moments when your brain seems to be taking an unauthorized break from doing what you want it to do.  The basic cerebral processing stalls out, and often all the trying to power-through-it push does is make it worse.  Since it’s an issue with how our brain is designed to a large degree, cut yourself some slack and take a mini-break to allow your brain to reboot.  The barista a couple blocks away would love to see you now, especially if you’re a generous tipper.

When your key managers and stakeholders are concerned about you, don’t ignore them.  They are often a path to dealing with the process in a way that spreads some of the thinking and processing load, and you will likely benefit from their participation as a valuable side benefit.  Building a team helps you make more informed decisions, building ownership by those participants of the final decision along the way, and you get to spread around some of the processing work load.  You really should not be the one getting information on new copiers, moving services and researching the B&O taxes in the various places you may be looking – you have a company to lead.

Another critical indicator to pay attention to yourself in the middle of the chaos is when your spouse, significant other, kids or for some people your dog or cat or best friend look at you like they don’t recall who you are.  Even in the midst of extraordinary hours of work, we need to stay in touch with those closest to us.  I know for me personally that the proverbial “date night” has been a relationship saver.  You have other solutions to keeping your important relationships alive through the trials of adding a major project on top of an already very full set of responsibilities – just don’t forget to schedule them and honor those blocks of time.

Diet and exercise get to be secondary, but your body doesn’t know it’s supposed to just suck it up – it actually believes and acts like it’s really important.  One of the worst “wake up” calls I’ve seen is a serious health issue exacerbated by not taking care of himself.  A client of mine recently was limping pretty badly and it was after he took some pain medicine.  When I asked what was going on, he said he’d done a ½ marathon and for the first time in doing these 13 mile runs he really injured himself.  As we talked a bit further it came out that he’d stopped his regular training out of schedule overload.  Since the training runs both helped him de-stress and kept him prepared for the longer runs, the extreme pain in his lower leg was a pretty uncomfortable way to get his attention, ensuring he takes some time out for himself during the heat of the negotiations process to go for a run.

So, the “take a ways”, as my old econ professor would have said, are:

·         Pull together a good decision team to support you in making an informed decision, of course with a great tenant representative broker as a key member
·         Stay in communication and engaged with your key people - family, business and personal – maintaining your social connections will keep your mind clear and you more content
·         Keep up your activities – it will  pay big physical and psychological benefits (and help you avoid injuries!)

Overall, you’ll need all your attention and intention skills to juggle the extra issues.  Cut yourself some slack by letting others on your team do some of the worrying and together you’ll get what you need to support your organization well going forward.  You’re smart, you’ve heard this all before – sometimes it’s just good to have a reminder.

Kevin represents businesses in their lease negotiations for office, flex-tech, and light industrial spaces in the Seattle, Bellevue and Redmond markets.  For complex projects he represents businesses as far away as Vancouver, Spokane and Bellingham.  His clients report they especially like the time he takes to listen and really understand their organization and help them to get the right deal at the end of the process.